1. Examples of Rent Review Dafting*
* Client: Is that a typo or is it meant to say that?
Surveyor: I'm not sure. We'd better ask a lawyer.
Note – 3D supergraphic ‘mask’ is now a selectable object in foreground of slide.
ARBRIX Open Conference
Nicholas Cheffings
17 November 2016

2. Stop, Look, Listen
Hogan Lovells

3. I'm not explaining this Dutot formula (1738)
PD(p0,p1) ≡[∑m=1 M (1/M) pm1]/[∑ m=1 M (1/M) pm0]
= [∑ m=1 M pm1]/[∑ m=1 M pm0].
Hogan Lovells

4. They're not explaining this
Ground rent of £250 "…during the first 10 years of the New Term hereby granted and the annual rent during every successive 10 year period of the New Term twice that which was in the previous 10 year period".
160 year term
Hogan Lovells

5. What if they did explain it?
Years
Yearly Ground Rent
£250
£500
£1,000
£2,000
£4,000
£8,000
£16,000
£32,000
Hogan Lovells

6. And kept on explaining it?
Years
Yearly Ground Rent
£64,000
£128,000
£256,000
£512,000
£1,024,000
£2,048,000
£4,096,000
£8,192,000
Hogan Lovells

7. What is it about lawyers and numbers?
"The rent will be subject to 5 yearly upwards only increases in line with RPI capped at 3%"
Is the 3% pa cap applied to each annual increase in the RPI or cumulatively to the 5 year increase in the RPI?
"Paying the Base Rent and a sum equal to 15% of the Notional Rent being a sum calculated by reference to the Base Rent but not exceeding an amount which is 85% of the Base Rent."
WHAT?!
Hogan Lovells

8. So maybe we're better with words
"For a term equal to the full term hereby granted"
Term granted 21 years ago for 25 years
That will be 25 years then, yes?
No, it will be 4 years. Why would you think otherwise?
Hogan Lovells

9. Ah, but that's the judges' fault
"The Premises may be used for the Permitted Use."
"The 'Permitted Use' means as showroom offices and ancillary storage"
so is that showroom or offices?
or is it showroom and offices?
and if the latter, are the offices ancillary?
"Not to use the Demised Premises other than as a retail shop or store for:
trade as a franchise of [RETAILER], or
in substitution of (a) for such other use as the Landlord may first approve in writing"
so what if it hasn't first approved anything ?
Hogan Lovells

10. I need a drink
"So long as a Justices Licence is held in respect of the demised premises not to use the same for any purpose other than for the sale of intoxicating liquors."
held by whom? The actual tenant or the willing tenant?
and what if the landlord holds it?
or what if there isn't a licence in place?
Hogan Lovells

11. Please give me a break Lease of 25 years with 5 yearly reviews
Tenant's break on 5th, 10th and 12th anniversaries
Review at year 10 on "same terms" as the actual lease. Does that include one, two or three breaks?
But what if the actual breaks are on specified dates and two have passed?
What if the lease is on "similar terms" not the "same terms"?
What if the lease is not residue but for the same term as the original term?
What if the actual tenant gets a rent free for not exercising a break coinciding with the review date?
What if we do the thinking when we draft not when we fight?
What if we just start saying what we mean?
Hogan Lovells

12. What did you say?
"Upon the assumption that the Landlord's supplies under this Lease are and will remain throughout the term of the hypothetical lease exempt supplies for the purposes of VAT."
Ah, I see! You meant:
"Upon the assumption that the willing tenant can recover all VAT paid in respect of rent as input tax."
D'oh!
Hogan Lovells

13. Are you altering these? No, I can't improve them
Take this one, for example. It looks innocent enough…
Disregarding "improvements carried out by the Tenant at its own expense with the consent of the Landlord"
What if they were carried out and/or paid for by a subtenant?
Does the consent have to be in writing?
Does it have to be given in advance of the works?
Does it apply to improvements for which no consent is required under the lease?
Hogan Lovells

14. Is drafting with clarity a premium product then?
"… on the same terms in all respects (other than the payment of the said sum of £140,000 paid on the grant of this Lease) PROVIDED ALWAYS that no value shall be attributed to the buildings forming part of the premises."
so is that a nominal ground rent on the assumption that the premium has been paid?
or is it a full market rent assuming no premium was being paid?
Lease granted "in consideration of the payment of £7.5 million" and hypothetical letting "containing similar covenants, conditions, provisions, agreements and declarations."
so does the willing tenant pay £7.5 million as well?
Talking of ground rents… do we assume the buildings are there and to be valued?
No? OK – so what about the obligation to build then?
Hogan Lovells

15. But these are isolated examples, aren't they?
66% of you have been unsure about the operation of break clauses and 69% about the assumed user
80% of you have been unsure about the valuation (or not) of improvements
86% of you have been unsure about length of term
All of you have been unsure about something at some point
91% of you have had to take legal advice at some point
Hogan Lovells

16. Does it really matter though?
Yes, it does
time
costs
relationships
market credibility
customer satisfaction
the law of unintended consequences
Hogan Lovells

17. Shall we just blame the lawyers then?
Yes
"The open market rent shall be the annual amount that a reasonable landlord would expect to receive and a reasonable tenant would expect to pay in the market for the premises if they were available for letting by a lease granted and commencing on the relevant review date (a) [on terms similar to those contained in the Model Commercial Lease] (b) in full repair (c) with no works having been carried out during the term which have enhanced or diminished their rental value (d) with vacant possession (e) as offices and (f) for a term of 10 years without breaks and with an upwards only review at the end of the fifth year."
And No
Hogan Lovells

18. So what do we do about it then?
That's up to you to decide:
a) Nothing; or
b) Something?
Hogan Lovells