17th August 2010

Rent reviews and break clauses

In the present difficult property market conditions issues such as rent review and the inclusion of tenant break options are matters which regularly require to be considered when negotiating the terms of a new business tenancy.

Traditionally rent review clauses contained in the leases of Scottish commercial property tended to operate on the basis of being upward only with any increase in rent being calculated on an “open market value” basis where the reviewed rent was determined by comparison with the value of comparable commercial premises exposed for let on similar terms and conditions as contained in the lease of the premises where the rent is being reviewed. Given the effect of the recession landlords have found it difficult to obtain rental evidence necessary to achieve an increase in rents and it is therefore becoming more common for landlords to seek to link any increase in rent upon review to the Retail Price Index (“RPI”). The RPI was introduced in 1948 as a measure of inflation and it is calculated by reference to a basket of goods of all descriptions but was never intended for use in the determination of rents of commercial properties and as such its use for this purpose can produce uncertain results. Careful consideration has to be given in every new lease on how any review of rent should be structured and professional legal and valuation advice given to avoid, in so far as possible, failure to achieve any increase in rent upon review.

Turning to the matter of break options, the trend in recent years has been to see the length of business tenancy agreements reduced. Where leases of 20 years were common not so long ago it is now much more likely that commercial leases will be granted for a shorter period of 5 to 10 years. A landlord, having satisfied himself on the covenant of a potential tenant, will seek to ensure that the proposed lease is a long as possible, whilst a tenant might regard a longer period as being necessary to amortise the cost of fit-out, may also seek to negotiate one or more break clauses entitling the lease to be terminated as a defence against changing market conditions. This is of particular importance where a business tenancy agreement is being entered into in respect of a newly established business where longer term profitability cannot be assured. Again professional advice is needed by both landlords and tenants when weighing up the relative advantages and disadvantages of the use of such options.  Recently there have been instances where a landlord has been persuaded to agree forego one or more future rent reviews in exchange for the tenant undertaking not to exercise a forthcoming tenant’s break option.

The terms of a business tenancy agreement are of vital importance to ensure the viability of the lease in changing market conditions and Blackadders can advise on all aspects of commercial leasing whether from the point of view of a landlord or tenant.

Ken Scott, Associate

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