Pub rent reviews, although often complex and daunting for tenants, can be approached with confidence and success through careful preparation and strategic planning. To assist tenants in navigating the rent review process, we present a set of practical steps that can be easily followed, to help secure a favourable outcome.
Rent Review Basics
Within every lease or tenancy agreement, the rights of both the landlord to raise the rent and the tenant to contest such an increase are explicitly stated. To prevent any potential misunderstandings, it is crucial for tenants to allocate time to familiarise themselves with the rent review provisions outlined in their agreement. By doing so, tenants can ensure clarity and be better prepared to exercise their rights effectively.
As part of the rent review provisions, the lease will usually contain a range of assumptions and disregards that are intended to make comparisons with similar properties easier when determining the open market rental value. It is important to note that the landlord is bound by the terms of the lease and must not overlook any of these assumptions or disregards, particularly concerning tenant improvements or goodwill.
When it comes to rent review, it’s important to determine what qualifies as a genuine improvement, and whether it stands to be disregarded from the rent review. This is usually outlined in the lease or a separate agreement that was made with the landlord when seeking consent. For example, a new kitchen fit-out may not be considered an improvement in this context, but improvements such as reconfiguring the trade area or creating additional space that positively impacts the business should be taken into consideration. It’s important to note landlords may attempt to include tenant improvements into their rent proposal, even if they are not supposed to.
When a lease has an ‘upward only’ rent review clause, the rent cannot be decreased at the rent review, even if the open market rental value is lower than the current rent. This means that the rent can only increase or remain the same.
In contrast, an open market rent review clause that allows for upward or downward adjustments means that the rent can either increase or decrease depending on market conditions at the review date. It’s worth noting that majority of tied leases allow for rent reductions at the rent review, despite the presence of an upwards-only rent review clause.
The landlord must inform tenants of the rent review in writing. Typically, pub company landlords contact tenants at least six months before the review date, but in some cases, up to twelve months in advance. It is essential that tenants check the lease or tenancy agreement for specific deadlines related to the rent review process. Certain leases contain provisions whereby if there is a failure to meet these deadlines, it could result in the tenant unintentionally accepting the landlord’s first offer due to a lack of response.
Be Prepared
Tenants should make sure that their stocktaking and accounts are up to date. Gathering information at least twelve months before the rent review is recommended. Tenants should also revisit the lease agreement and company code of practice, where available, to verify if there are any specific time frames that they need to comply with.
The rent review process typically begins with the landlord informing the tenant of their intention to conduct a rent review. It is important to note that open market rent reviews for tenancies usually take place every three years, while lease agreements are generally reviewed every five years.
To prepare for the rent review, allow sufficient time to research both the local and national market and develop a strategy. Be prepared for the landlord’s initial proposal, which is likely to involve a rent increase. Anticipate this offer and gather evidence to support your arguments for why the landlord’s assessment is incorrect.
Rent levels are determined by what a hypothetical REO (Reasonably Efficient Operator) tenant would expect to achieve from the business. If a tenant can demonstrate that their success is a result of their personality, business skills, goodwill, and acumen, then they should not readily accept a significant rent increase. It is important to gather evidence such as trading information from previous years, which clearly shows that increases occurred during their tenure. However, tenants should be prepared for the landlord’s argument that they merely realised the premises’ potential, which was under-traded before their tenancy. It should be noted that quantifying goodwill can be challenging, and it is generally ignored by landlords.
Gathering Evidence
Consider researching your competitors to understand their pricing and offerings. Create a price matrix to compare where you stand set against your competition.
Gather data on similar pubs in the area to compare their trading and rent levels. If you have good relationships with other pub tenants in the area, consider contacting them or arranging a visit. You may be surprised by the willingness of local publicans to share information. You can offer to share information with them when they undergo their own rent review process.
Check resources such as the Morning Advertiser or property agent websites for sales information on pubs.
Treat the rent review process as a new business start-up. Consider any changes to the local area that may have positively or negatively impacted your business since the rent last review, such as redundancies at major employers in the area, new housing developments, road closures, licensing restrictions, or the opening of new or improved competitors.
Comparable Evidence
When landlords support a proposed rental increase by citing other pub rents in the area, it is important to be aware that these examples may have been selectively chosen. It is therefore crucial to check that the comparable property rents being used as evidence are genuinely comparable.
Relying solely on comparable evidence to justify a rent increase can lead to an outcome that does not align with the reality of the actual marketplace. Without access to the complete information behind each comparable, drawing meaningful comparisons can be challenging. It is important to consider factors such as the concessions offered to the tenant of a comparable property, any discounts they receive (if they are tied), the extent of their tie (if any), or the terms of their lease (including repair obligations, rent review mechanisms, and rent indexation) as they can all have a significant impact on the level of rent paid in that particular instance.
Arbitrators or independent experts are unlikely to attach as much weight to evidence that is not freely available to a new bidder (i.e the hypothetical tenant at rent review) in the open market. It is sometimes worth reminding your landlord of this where necessary.
Negotiation
The negotiation stage is crucial for tenants to reach a new rent agreement with their landlord. To ensure a productive meeting, tenants are advised to schedule it at a time that suits them and not feel pressured to attend during opening hours or if they are unable to give it their full attention.
While having an accountant or qualified surveyor/valuer present may be helpful, tenants should be aware that it might make their landlord reluctant to speak freely in the early stages of the rent review process.
Tenants are advised to play their cards close to their chest, carefully consider the landlord’s opening offer, and not feel pressured to provide a response during the first meeting.
During the meeting, landlords may try to gather information including up-to-date menus and drink pricing. Tenants should be cautious about implementing any price increases before the meeting. It is better to accept a temporary loss of profit than to end up paying excessive rent for the next several years. If possible, tenants should delay any price increases until a new rent has been agreed upon. If the tenant has recently raised prices, they should make this known to the landlord, as it may be difficult to implement another increase so soon. In price-sensitive areas, increasing prices further may negatively impact overall sales and the landlord should be made aware of this.
Tenants who choose to conduct their own negotiations should ensure that all discussions are held “without prejudice.” This should apply to all meetings where the details of a potential settlement are being discussed. The purpose of this is to encourage both parties to negotiate freely and reach a compromise. It means that anything said between the parties cannot be disclosed in the event of the dispute being referred to a third party, such as an arbitrator or independent expert.
After each meeting, it is important to follow up with a clear written record of what was discussed and any important details. This record should be shared and agreed upon by both parties to avoid misunderstandings in the future.
It is recommended that tenants keep as much correspondence in writing as possible. Key details can be forgotten, and it is difficult to refer to previous discussions if there is no written record to refer to.
Landlords often have greater experience dealing with rent reviews than tenants, so tenants should consider their approach to negotiations. Tenants should pay attention to the landlord’s tactics and determine whether they are dragging their feet or in a hurry to resolve the matter.
Although landlords may schedule multiple meetings and informal conversations, tenants should think carefully about the landlord’s intentions. During a meeting, the landlord may try to pressure the tenant into agreeing to a settlement that is more beneficial to them.
The landlord’s initial rent proposal typically reflects their aspirational rent and may not be realistic. Pub Company landlords often seek board approval before accepting any offer made by the tenant. As such, tenants should be given the same opportunity to consider the landlord’s offer before accepting or rejecting it, and should not feel pressured to respond unless there are time constraints involved.
During the rent review process, tenants may negotiate for better terms, such as improved discounts on certain products (if they are a tied tenant) or the removal or capping of index-linked rent increases to limit the impact of inflation on their business. These negotiated terms should be appropriately documented as part of the rent review settlement either as part of a deed of variation or side letter.
Negotiations can vary in length, and it may take up to a year to reach an agreement, especially if there is a significant difference in rent opinion. If a dispute arises, negotiations may be paused for a few months and then resumed. The lease will specify the dispute resolution provisions, which typically involve the appointment of an arbitrator or independent expert.
Rent Dispute Resolution
If negotiations fail, tenants and landlords may resort to arbitration or other rent dispute resolution schemes to settle the matter. Typically, the lease will specify that a third party should resolve the dispute and outline the procedure to be followed.
The cost of arbitration varies and may include a fixed fee or other charges. The process can be highly procedural and technical, with time limits in place. Some tenants choose to represent themselves, while others engage their own expert to present their case. The process may take anywhere from several months to a year, and costs may be awarded against the losing party depending on the route taken.
It’s important to be cautious of your landlord’s preferred expert or arbitrator. While independent experts and arbitrators are meant to act impartially, landlords may have experience with those who are inclined to decide in their favour. If you cannot agree on an appointment, an independent appointment must usually be made by the President of the Royal Institution of Chartered Surveyors. As before, the lease usually specifies the procedure to be followed in such a situation.
In case of a rent dispute, an arbitrator’s decision is based on the evidence presented by both parties. The arbitrator also decides on how the costs and fees should be split between the parties. The losing party, if found to be unreasonable, may be ordered to pay the full costs.
On the other hand, an independent expert’s decision is based on their own knowledge and investigations. They may not consult with either party in the same manner as an arbitrator. Typically, both parties split the fees equally and pay their own professional advisor costs, regardless of the outcome.
The major drawback of going to a third party is the cost, which is usually agreed upon when the third party is appointed. Additionally, it can take a significant amount of time. It is important to consider whether the cost of the third party is worth it, especially if the rent in question is low.
Once a decision is made by the third party, any overpaid or underpaid rent owed must be paid immediately. The new rent is backdated to the rent review date, and interest may also be payable.
Take Advice
If you are facing a rent review or have concerns about the process, we're here to help. Our team of experts is well-versed in navigating rent reviews and ensuring fair outcomes for tenants like you. Don't let uncertainty or confusion hold you back. Take control of your situation by getting in touch with us today.