Rent review - open market

Preamble

The BBP recognises that the starting point of any rent review should be reality and that provisions which amend the form of the hypothetical lease on rent review to include (or exclude) green lease drafting which is not in the actual lease should be avoided.  Departing from reality and amending the standard assumptions and disregards may have unforeseen consequences and detailed input from the parties and a rent review surveyor is required.  

The BBP considers an assumption that the Premises “may lawfully be let” (meaning that the rent cannot be discounted if the Premises are substandard within the context of MEES) to be the industry standard and so uncontroversial.    

Where the lease gives either the Landlord or the Tenant the right or obligation to carry out works aimed at improving Environmental Performance, questions arise as to the treatment of such works on rent review.  If the parties do not have a right to do the work (or the right is qualified by the need for consent) how the works will be treated on rent review may be an important factor in whether or not consent is given and any agreement documenting the consent may need to include amendments to the existing rent review provisions.  These discussions should include who will pay for the works.  Where the cost can be recovered from the Tenant either directly or via a service charge the Tenant should not be required to pay twice, once for the works and once via any uplift in the rent because the Premises have been improved.  

The BBP recognises that the rent review treatment of improvements to the Environmental Performance will be a matter for discussion between the parties but considers that the following principles represent a fair position for both parties:

a) Any works voluntarily carried out by the Tenant at its own expense, provided they are carried out in compliance with the lease, should be disregarded. This would normally be the position in modern rent review clauses in any case and is the position in the MCL; 

b) Where the Landlord carries out works it has a right to carry out at its own cost and those works reduce utility bills or Improve the Environmental Performance of the Premises or the Building, any benefit which such savings would have on the open market rental value of the Premises should be taken into account on review. For the avoidance of doubt this drafting should only capture increases in open market rent and should not seek to rentalise the Landlord’s capital expenditure. Nothing in the MCL contradicts this position; 

c) Any increase in the open market rent because of works carried out by the Tenant pursuant to an obligation to the Landlord in the lease, should be rentalised which is the usual position for such works and the MCL is consistent with this. 

d) Any works carried out by the Tenant which adversely affect the Environmental Performance and reduce the open market rental value of the Premises should be disregarded on rent review, so that the Tenant cannot use the works to argue for a lower rent. This would normally be the position in modern rent review clauses in any case and is the position in the MCL.

Where the parties are happy with this position then no amendment is required to the Rent Review Schedule of the MCL. If agreement is not reached on these principles the BBP would still recommend the inclusion of the draft clauses “Extending the Landlord’s right to do works” and “Extending the Tenant’s ability to do alterations”  as it recognises that there may be scenarios where the Landlord’s desire to ensure that works are done to Improve the Environmental Performance of the Premises means that it is willing to depart from the position set out in b) and c). In that event the drafting which follows seeks to address how that could be done. 

Where the Landlord has an absolute right to carry out works which Improve the Environmental Performance of the Premises (at its own cost) and these works increase the rental value of the Premises but b) above is not agreed and so the works are disregarded on rent review.