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COMMERCIAL LEASES LECTURE 5

Jennifer Slade. COMMERCIAL LEASES LECTURE 5. Commercial Leases: Lecture 5 Today’s topics. Rent Rent review. Commercial Leases: Lecture 5 Rent. Amount Payment dates Rent suspension/abatement Payments defined as “Rent” Interest. Commercial Leases: Lecture 5 Rent Review. Purpose

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COMMERCIAL LEASES LECTURE 5

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  1. Jennifer Slade COMMERCIAL LEASESLECTURE 5

  2. Commercial Leases: Lecture 5Today’s topics • Rent • Rent review

  3. Commercial Leases: Lecture 5Rent • Amount • Payment dates • Rent suspension/abatement • Payments defined as “Rent” • Interest

  4. Commercial Leases: Lecture 5Rent Review • Purpose • Periodic reassessment of rent • Valuation exercise – determined by provisions • Open Market Rental Value (OMRV) • RPI • Turnover rent • Upwards only rent review?

  5. Rising market Falling market

  6. Reviewed rent Rising market Reviewed rent (upwards only) Falling market

  7. Commercial Leases: Lecture 5 Rent Review • Rent review provisions = directions to valuer • Use of “comparables” • “Hypothetical lease” is subject of valuation • Based on actual lease • Assumptions and Disregards introduced to • Eliminate contingencies of actual letting • Create “level playing field” • Produce fair valuation?

  8. Hypothetical letting: lease provisions

  9. Hypothetical letting: lease provisions Take actual clause Widen (i.e. less restrictive)

  10. Hypothetical letting: lease provisions Take actual clause Widen (i.e. less restrictive) Lease more attractive to hypothetical bidders More/higher hypothetical rental bids

  11. Hypothetical letting: lease provisions Take actual clause Widen (i.e. less restrictive) Lease more attractive to hypothetical bidders More/higher hypothetical rental bids Rent inflated at review (landlords’ objective)

  12. Hypothetical letting: circumstances

  13. Hypothetical letting: circumstances Take actual circumstances of letting/market Increase competition for hypothetical letting/adjust circumstances

  14. Hypothetical letting: circumstances Take actual circumstances of letting/market Increase competition for hypothetical letting/adjust circumstances More/higher hypothetical rental bids Rent inflated at review (landlords’ objective)

  15. Commercial Leases: Lecture 5Rent Review: assumptions • (a) no works … that have diminished the rental value • (b) if destroyed… Premises rebuilt • (c) L and T covenants have been performed • Is this fair to T?

  16. Commercial Leases: Lecture 5Rent Review: assumptions • (d) willing landlord and willing tenant… with vacant possession • Is VP always realistic? • (e) fully fitted out

  17. Commercial Leases: Lecture 5Rent Review: assumptions • (f) Hypothetical Lease contains same terms as [actual] Lease save for Initial Rent… and… any rent-free period [for fitting out] • Rent-free’s and other inducements: • Broadgate Square v Lehman Brothers • “headline rent” vs “effective rent”

  18. Take a five year lease – “rent” is £100K p.a. 3 1 2 4 5

  19. Take a five year lease – “rent” is £100K p.a. Rent-free of 12 months 3 1 2 4 5

  20. Take a five year lease – “rent” is £100K p.a. Rent-free of 12 months £100K £0 £100K £100K £100K 3 1 2 4 5

  21. Take a five year lease – “rent” is £100K p.a. Rent-free of 12 months £100K £0 £100K £100K £100K 3 1 2 4 5 Headline rent = £100K p.a. BUT Effective rent = 400/5 = £80K p.a.

  22. Commercial Leases: Lecture 5Rent review: assumptions • (f) (continued)… including provisions for rent review • (g) term of hypothetical lease • (h) (i) 1954 Act renewal / VAT recovery

  23. Commercial Leases: Lecture 5Rent review: disregards • See s34 LTA 1954 • (a) occupation • (b) goodwill • (c) improvements

  24. Commercial Leases: Lecture 5Rent review: mechanics • Experts vs arbitrators • Formalistic reviews • Time of the essence

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