It will not have escaped the attention of anyone in the real estate industry that today is the March quarter day. For many landlords and occupiers, the immediate focus will be on rent payments due today and the media are already reporting that large numbers of retailers are expected to withhold rent to ease cashflow pressures. However, in addition to the quarter day being a traditional rent payment pay, it is also very common for leases to provide for rent reviews to take place on a quarter day and, as such, it is likely that there will be a not insignificant number of leases out there where the rent falls to be reviewed today. In the case of a typical open market review, this means that the rent is to be reviewed by reference to the rent which the property would command if let on the open market today. Given the enormous impact which COVID-19 has had upon the economy (and society more generally) it seems fair to assume that many properties (particularly in the retail and leisure sectors) would let for much less today than they might have just a few short weeks ago. Given that any rent reviews taking place today are likely to determine the rent for the next 5 years of the lease, that is unlikely to be good news for landlords. However, there are a few points worth bearing in mind:
- in the vast majority of cases, rent reviews will be upwards only and so, whilst landlords may not see an uplift in rent, they should not see a reduction. Given the pressures already prevailing in the retail and leisure sectors, many landlords may have been anticipating a nil increase in any event;
- whilst experts cannot be certain as to how long the current crisis will last, they do agree that it will ultimately be temporary. The open market rent review requires an assumption of a willing tenant who wishes to take a new lease of the property for the hypothetical (usually 5 or 10 years). It is not unreasonable to think that the hypothetical willing tenant would appreciate the essentially temporary nature of the current climate and would make a rental bid which reflects the fact that he is seeking to take the property on a longer term basis. In this regard, landlords are perhaps in a better position than they might have been on a 29 September 2008 (two weeks-post Lehman Brothers collapse) rent review, where the duration of the market disruption was arguably much less certain;
- the courts have consistently made clear that the open market rent review requires an assumption of a hypothetical willing tenant – ie. tenants cannot argue that no one in the market would take the property today and so it is worthless;
- in many cases rent review clauses provide for specifications assumptions and disregards which displace reality. One common assumption is that the premises can lawfully be used for the permitted use. If the lease contains that assumption it will not be open to tenants to argue that the rent review should reflect the fact that retail and restaurant uses are currently unlawful. This will not prevent the rent review being impacted by the overall market sentiment but it does raise an interesting point.. if the hypothetical premises are assumed to be available for lawful use whereas, as a matter of reality, all other similar premises in the market cannot lawfully be used, does this mean that the hypothetical willing tenant may actually pay a premium to secure the one property which can be lawfully used?
Ultimately, these are discussions which landlord and tenants will not want to engage in until the dust has settled. However, where landlords do have rent reviews either today or perhaps on 24 June 2020, they might want to think about agreeing with the tenant to push back the review date in return for any rent concessions or deferrals which tenants may be seeking.
For material that will help you run your business, as well as details of our business continuity planning, our COVID-19 Topic Centre houses all of our resources on the topic – from crisis leadership to supply chain.
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