Rent Review Clauses in Commercial Leases-What You Should Know

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Do you occupy a retail, industrial, or office premises?

If you do you will probably have you a commercial lease?

If you have, it will almost certainly provide for a rent review.

And you could be in for a very nasty shock.

Let me explain.

Over the last few years, since the property crash at the end of the Celtic Tiger years, quite a few commercial property owners were just happy to get their commercial premises let.

Any rent is better than an empty commercial unit or office.

Many of the leases granted then were on initially favourable terms for tenants, simply to get them let.

However, many of these leases are coming up to their first rent review, typically 5 years after commencement. The big problem for small business owners is that these rent reviews provide for “market rental value” which is causing a nasty shock, and in some cases unaffordable rents, for small business owners.

Because in some cases they are seeing their rents double, or more.

What is the legal position?

Is there anything you can do about it?

How does a rent review work?

Let’s take a look.

The purpose of a rent review clause is

  1. to protect the value of the landlord’s property
  2. to reflect the changing value of the property during the term of the lease.

What will normally happen is the landlord will serve a notice on the tenant seeking a significnatloy higher rent. Generally, time is not of the essence in relation to the service of notices by either landlord or tenant.

The tenant should then write back indicating his disagreement and asking what is the basis for the figure sought, and how was it arrived at.

Landlord and tenant will then instruct representatives such as valuers/surveyors/auctioneers to engage with the other side and attempt to agree the new rent.

Reviewing the Rent

The rent review clause will normally provide for the rent to be reviewed by an independent expert if the landlord and tenant cannot agree on the new rent. This independent expert will either act as an arbitrator or expert; in practice, the difference is not hugely significant.

Generally, the appointment of the expert will be the prerogative of the landlord if the landlord and tenant cannot agree on who to appoint.

If the landlord fails to make the nomination the tenant may be able to nominate, or the rent review clause may provide for appointment by the President of a professional body such as the Law Society or the professional bodies for Chartered Surveyors or Auctioneers/Valuers.

If there is a delay in agreeing the rent the tenant will be liable for the back-dated rent, plus interest at a “base rate” provided for in the lease.

The basis for reviewing the rent will almost certainly be to “current market rent” or “market rent”.

Up to the passing of the Land and Conveyancing Law Reform Act, 2009 rent review clauses provided for “upward only” rent changes.

However section 132 outlawed “upward only” rent reviews in leases created after 28th February, 2010.

Therefore, it is possible, albeit unlikely, that the rent can be decreased to reflect market value. This was never the case with leases before the passing of the 2009 Act.

The critical date is 28th February, 2010; leases before this date can have “upward only” rent review clauses. After this date such clauses are of no effect.

Assumptions and Disregards

The basis on which the new rent will be determined will be on the basis of certain assumptions and disregards:

  1. that the premises will be let as a whole
  2. what it would fetch on a free and open market
  3. with vacant possession, that is, as if the premises was being let with full vacant possession as it was at the granting of the lease
  4. for a term of the greater of 15 years or the residue of the lease
  5. on the same terms and conditions as the present lease, including with a rent review clause
  6. that the tenant has fulfilled all his repairing and decorating obligations as provided in the lease, and has fulfilled all covenants in the lease
  7. no work has been carried out on the premises that diminishes its rental value.

Also, the following will be disregarded:

  1. any effect on the rent of the fact that the tenant has been in occupation and disregarding any goodwill he has built up and is attaching to the premises
  2. any effect of improvements or works carried out on the premises by the tenant.

In summary, the lease to be valued at rent review time is a hypothetical lease identical to the existing lease so that the rent will be calculated on the same basis as the existing lease.

Conclusion

Leases can be confusing, technical documents which require careful drafting and interpretation. Mistakes and oversights can be made in drafting them, including in relation to the rent review clause.

If you are facing an eye-watering increase in your rent on foot of a rent review it would probably make sense to have your solicitor take a close look at the lease.

Leasing a Commercial Premises? 10 Key Questions and 4 Vital Tasks for Your Solicitor

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Leasing commercial premises requires caution

Thinking about leasing a shop unit?

Coffee shop?

Office?

Other commercial premises?

If you are thinking about leasing a commercial shop unit in Ireland there are a number of key areas you need to consider before going ahead.

Set out below is a non-exhaustive list of issues that you will need to be satisfied about before investing your cash in a full repairing and insuring lease (FRI lease).

At the end of the piece I also deal with some common questions I am regularly asked by people looking to start or grow their business by taking on a commercial unit.

But before we look at the important questions there are 4 vital things to be taken care of-the conveyancing aspects of the lease. I have encountered a frightening number of tenants who entered into a lease for a commercial premises without using a solicitor.

A host of problems can then arise in relation to rent reviews, sub-letting, assigning the lease to someone else, etc. which the tenant may not have received any professional advice about when taking on the lease.

Don’t make this mistake. And here are some other issues your solicitor will need to take care of:

Conveyancing Considerations

a) Has the landlord title to grant the lease? Your solicitor should insist on seeing prima facie evidence, for example a copy of the deed to the landlord.

b) Is there planning permission?  Your solicitor needs to see proof that there is planning permission for the proposed use of the premises. He/she should also carry out a planning search.

c) Is the premises mortgaged? Your solicitor will need to check whether there is a mortgage on the premises. If there is the mortgagee may need to join in the lease as a party or give written consent to the granting of the lease.

d) Law Society standard pre-lease enquiries? Your solicitor will need to raise the standard pre-lease enquiries and requisitions with the landlord’s solicitor. These are standard queries-a check list essentially-which should be raised.

Once your solicitor has carried out these vital checks you, as proposed tenant, need to consider the following questions:

1) The term

How long will your lease be? Will you have statutory rights under the Landlord and Tenant (Amendment) Act, 1980? Will you have a break clause? Is Vat payable?

2) Repairs

Who is responsible for repairs? If it is a lease in excess of 5 years you as tenant will likely be responsible.
If it is a lease of less than 5 years you may only be responsible for internal repairs.

The question of whether it is a new building or an older building will also be significant and other issues to be addressed would include latent and inherent defects in the building, what is considered fair wear and tear and what risks are covered by insurance.

3) Insurance

If it is a full FRI lease then you as tenant will almost certainly have to pay the insurance premium held in your landlord’s name.
This will vary depending on whether you are the sole occupier of the building or if it is multi tenanted in which case you will be obliged to pay a proportion of the landlord’s premium.

You will therefore be concerned about the risks that the landlord is insuring against and whether the building is insured for reinstatement value or cost.

As tenant you will also want to insure against public liability, employers liability, plate glass and contents but this will depend very much on the nature of your business.

4) Alterations

You may need to make alterations when you take on the property to ensure that it is right for the purpose intended.
This will generally require the landlord’s consent which cannot be unreasonable withheld or delayed.

5) Alienation of the premises

Alienation is the legal term for your assignment of the lease to a third party; you will need the landlord’s consent to this but the landlord cannot unreasonably withhold or delay his consent.

However the question of reasonableness is one which might be disputed and the landlord may argue that his refusal is in the interests of “good estate management” and is therefore reasonable.

6) Service charges

Service charges may or may not arise in your particular circumstance. If there are service charges in respect of common areas you will need to ascertain exactly what is included and how much your service charges will be.

7) Rent reviews

How the rent will be reviewed will be of critical importance to you; generally rent reviews will take place at 5 yearly intervals and is an area that may require arbitration or some agreement as to how any disputes will be resolved.

8) Guarantee

Will you be obliged to provide a guarantee for rent, rates and other outgoings?

9) Break clause

Is there a break clause in the lease?

10) Stamp duty and VAT

You will be liable for the stamp duty on the lease but landlords also have an option to charge VAT or not. This is another area that you will want to check before investing as it can have a significant impact on your cash flow.

These are just some of the many factors you need to consider and be clear on before leasing a commercial premises.

Here are some questions that crop up repeatedly. If you have any questions simply send them in to me with the contact form below and I will answer them.

Stamp duty on commercial leases

If there is a premium payable stamp duty is payable on the premium at the normal non-residential stamp duty rate on a conveyance/transfer, that is, 2%.

Stamp duty is also payable on the rent as follows:

  • Lease not exceeding a term of 35 years: 1% of the average annual rent
  • Lease with a term between 35 and 100 years: 6% of the average annual rent
  • Lease with a term in excess of 100 years: 12% of the annual average rent

A rent review will also mean a fixed charge of €12.50, and each counterpart of an original lease attracts a fixed charge of €12.50

Commercial Premises F.A.Q.

‘How long should I sign a lease for?’

This very much depends on

  1. What you want and need
  2. What the landlord wants, needs, and is prepared to give you.

So, it depends on good, old-fashioned negotiation between you and the landlord, or his agent.

You need to consider your future needs and potential expansion/growth; however, you must also consider your business failing. It’s not a pleasant thought but you need to consider it. At least one break clause can give you a way out of the lease, and it could be exercised due to the growth and new needs of your business, or the failure of the business.

‘What documentation will I need?’

When you go to take a look at the premises to speak to the landlord and/or auctioneer, you don’t need any. Later on if you are going ahead, your solicitor will require some identification and anti money laundering papers, but initially when negotiating you don’t need anything.

‘What are my legal responsibilities (and the landlord’s)?’

Your main responsibilities will be to pay the rent, insurance, and any service charge. However, the location of your unit-for example in a shopping centre or multi unit development-may place some extra responsibilities on you. These will all be contained in your lease in the form of covenants and conditions; your landlord’s entitlements and obligations will also be found in the lease, and for this reason you need to negotiate a good one at the outset.

‘As the property is not finished it still needs toilets, railings walls plastered, staircases and a number of other unfinished works.  I am unsure as to what I should be asking them to finish as I don’t know what it is they will expect me to finish.’

This too is a matter for negotiation and agreement, and you want to be sure to avoid having to carry out a huge amount of renovations/refurbishments which may only benefit the landlord in the long run.

If there is work to be done, and the landlord undertakes to carry it out, get a surveyor or architect to check the work before signing a lease.

Your solicitor will also be looking for certificates of compliance with planning permission and building regulations from the landlord’s solicitor, but you need to be sure that the work is carried out to a satisfactory standard for your needs.
By Terry Gorry
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