McCalmont

Rent reviews became common in commercial property leases during the 1960s and 1970s as a mechanism for adjusting existing leases to current market levels. They were devised specifically to protect the value of landlords' interests in an inflationary environment while enabling tenants to secure traditionally favoured long-term leases.

In today's market, rent reviews typically occur once every five years and it is unusual to come across leases that provide for a three, seven or even longer period review pattern. The majority of rent reviews are now "upward only", meaning that the rent paid by the tenant cannot reduce at review time, even if the open market rent at the relevant review date is deemed to be lower than the rent passing.

This structure of long leases with upward only rent reviews is a major contributor to the attractiveness of the UK market to commercial real estate investors. On the obverse, however, tenants are often left exposed in a falling rental market with over-rented premises that can prove expensive and potentially difficult to dispose of.

Rent review negotiation is a complex process, requiring an exhaustive understanding of the lease contract - in particular the provision for rent review to include the relevant lease assumptions and timetable for the rent review operation. It is especially important to determine whether "time is of the essence", as the consequences of missing a specific lease date can be financially catastrophic.

When rent reviews fall due and landlord and tenant are unable to agree the new rent between them, then most leases will include dispute resolution arrangements. These typically involve the appointment of an independent expert or arbitrator who is authorised to settle the matter.

Rent reviews undertaken by McCalmont-Woods for corporate clients include:

• IFRS Foundation: Rent review on 5,768 sq ft at 30 Cannon Street, EC4
• Cazenove Capital Management Ltd: Rent review on 34,000 sq ft at 12 Moorgate, EC2
• JP Morgan Cazenove: Rent review on 8,500 sq ft at 9 &10 Tokenhouse Yard, EC2
• JP Morgan Cazenove: Rent review on 16,000 sq ft at 1 Harbour Exchange Square, E14
• Marketform: Rent review on 20,000 sq ft at 8 Lloyd's Avenue, EC3
• The Newspaper Society: Rent review on 5,590 sq ft at 18/20 St. Andrew Street, EC4
• Trinity Mirror plc: Rent review on 251,000 sq ft at One Canada Square, E14

 

Rent review case studies

Cazenove Capital Management 12 Moorgate, EC2

Background

Cazenove Capital Management occupied c. 34,000 sq ft at 12 Moorgate, EC2 under a 25-year lease dating from 1998. Prior to selling the freehold in the property, landlord New Star Property Asset Management sought an increase in the annual rent passing at review from the existing £47.00 per sq ft office rent to a new rent based on a highly optimistic £60.00 per sq ft headline rent.

Objective

McCalmont-Woods was referred by its existing client JP Morgan Cazenove and was subsequently instructed by Cazenove Capital Management to negotiate the upward only rent review and mitigate any increase in rent payable as at the 24th June 2008 review date.

Services provided

• Consideration of existing lease contract and provisions for rent review
• Analysis of City offices market encompassing thorough study of any relevant comparable evidence as at the valuation date
• Preparation of initial report to client outlining McCalmont-Woods' recommended strategy
• Inspection of suitable premises and relevant comparables
• Negotiations with landlord's agent to include submission of a 'Calderbank' offer

Result

McCalmont-Woods negotiated an 83% saving for Cazenove Capital Management on the increase proposed by the landlord, resulting in a minimal uplift of 1.5% on the rent passing. The settlement was reached by negotiation between the parties without the need for independent arbitration.

JP Morgan Cazenove Exchange Tower, 1 Harbour Exchange Square, E14

Background

JP Morgan Cazenove occupies c. 16,000 sq ft on the 3rd floor of 1 Exchange Tower, E14 under two separate leases expiring in March 2015.

The 16 storey office tower at 1&2 Harbour Exchange was originally acquired by Hammerson in 1999 for £77m but was then sold in September 2010 to MGPA Europe Fund III for c. £134.6m - an 8.1% yield. The building comprises 485,000 sq ft of office space let to a range of tenants.

The new landlord, MGP Harbour Exchange II S.a.r.l. sought an increase in the annual rent passing at review from the existing £21.00 per sq ft office rent to a new rent based on a highly optimistic £32.50 per sq ft headline rent.

Objective

McCalmont-Woods was instructed by JP Morgan Cazenove to negotiate the upward only rent review and mitigate any increase in rent payable as at the 29th September 2009 review date.

Services provided

• Consideration of existing lease contracts and provisions for rent review
• Comprehensive research into, and analysis of, comparable evidence in the Docklands offices sub-market as at the valuation date
• Preparation of initial report to client outlining McCalmont-Woods' recommended strategy
• Negotiations with landlord's agent to include submission of a 'Calderbank' offer
• Preparation of Statement of Agreed Facts and Statement of Agreed Evidence as a prelude to a full Arbitration

Result

McCalmont-Woods negotiated a saving for JP Morgan Cazenove on the increase proposed by the landlord, equivalent to almost £1m in rent over the 5 year lease term remaining.

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