Risking a bad review

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Risking a bad review

The current market provides a tenant with a welcome opportunity to renegotiate lease terms at renewal since his bargaining power is far stronger and he has the prospect of gaining more than a reduced rent, says Deian Evans, an associate director in LSH’s Lease Advisory Department

Warehouse tenants will in these difficult times be carefully analysing their overheads and attempting to identify opportunities to reduce outgoings. As property related expenditure often forms an important part of any business’ costs, the opportunity to reduce this liability is extremely welcome.

Rent review provisions of many leases often only allow for rent to be increased. Many tenants fall in to the trap of assuming that since their lease only permits “upwards only” reviews, they can ignore a notice from their landlord which proposes an increased rent on the assumption that there has been no rental growth. The reality may be that the property experienced significant rental growth in the early years of the current review period which may not have been nullified by the recent downturn.

Another pitfall facing an unsuspecting warehouse tenant, who believes his landlord has no evidence to support an increase, can be very stringent review provisions in his lease, which require him to serve prescribed counter notices within a time limit in order to avoid being deemed to have accepted the landlord’s proposal – irrespective of the property’s true rental value. A tenant is encouraged therefore to seek advice from a Chartered Surveyor in respect of any rent review notice he receives from his landlord.

A warehouse operator with a lease which is due to end within the next 18 months should take advice from his surveyor. He should do so even if no notices have been received. Our policy at Lambert Smith Hampton (LSH) is to encourage clients to take a proactive approach where they face a lease renewal. This is because of the prospect of achieving a reduction in rent. The rules were changed in 2004 and a tenant now has the right to make an interim rent application under the Landlord & Tenant Act 1954. It is important that before doing so the tenant is aware of the relationship between the current rent and that being paid under the existing lease. The timing of a notice to implement the renewal proceedings is crucial and careful consideration must be given as to when renewal proceedings are instigated.

It is important for the tenant to establish whether his lease is contracted out of Sections 24 – 28 of the 1954 Act. A lease which is outside this Act does not provide the tenant with any security of tenure and he needs to adopt a proactive approach to avoid being held to ransom.

The current market provides a tenant with a welcome opportunity to renegotiate lease terms at renewal since his bargaining power is far stronger and he has the prospect of gaining more than a reduced rent. Acting for warehouse tenants, LSH has achieved far more flexible leases at a renewal, as well as attractive incentives such as rent free periods or discounted rents. These are in addition to rent reductions and variations in the frequency of payment.

If there is one piece of advice I would give a warehouse operator who is facing a rent review or a lease renewal which is to take advice from a Chartered Surveyor and to do so early.

Deian Evans BSc (Hons) MRICS, is an Associate Director in LSH’s Lease Advisory Department based in the West End of London. Tel: 020-7198-2174. Email devans@lsh.co.uk