Rent Review​ & Lease Renewal

Rent reviews allow the periodical adjustment of rent to the market level at the date of review.

The rent review clause contained within a lease sets out when each review will take place, the review method, any assumptions and any disregards to be considered when valuing the premises for the purpose of rent review, the process to be followed, and provisions for dealing with a dispute concerning rent in the event it cannot be agreed by negotiation.

A rent review offers both landlords and tenants the opportunity to negotiate their rent paid/received at agreed intervals to reflect the trading conditions at the review date.

Landlords traditionally rely on rent reviews as a means of protecting themselves against inflation during the term of a longer lease.

For instance, if a landlord leases out a property to a tenant for 20 year term at an annual rent of £25,000, the market value of the property may fluctuate significantly during that time. Without a rent review clause, the landlord may rent out the property at level rate that is below the current market value. The clause allows the landlord to periodically review the rent amount and adjust it accordingly.

Rent reviews can occur at any mutually agreed time between the landlord and tenant. Typically, rent reviews happen every three to five years, with longer leases having longer gaps between reviews. For the review to be effective, the lease should include either the review dates or the mechanism for setting them.

The following are common types of rent review.

• Upwards Only Open Market Rent Review

• Upwards or Downwards Open Market Rent Review

• Fixed Increase

• Index Linked (RPI/CPI/CPIH)

An RPI rent review relates to a lease clause allowing for annual adjustments to the rent payable. The clause is drafted on the basis the rent will change in accordance with the Retail Prices Index (RPI). Sometimes a different index can be specified, such as Consumer Price Index (CPI) or Consumer Prices Index plus Housing Costs (CPIH).

A cap and collar relating to RPI, CPI or CPIH linked reviews is a common lease term that sets a maximum and minimum increase on each annual index linked review. A collar of 2% and a cap of 5% ensures the rent will increase between 2% and 5%, each year, on each review, even if the index has increased by more or less than these percentage amounts.

An upwards-only open market rent review is a lease clause that stipulates that the rent cannot decrease at the review date, even if the open market rent is assessed to be lower than the current passing rent. An upwards-only open market rent review lease clause does not imply that the rent must only increase. Instead, it ensures that the rent cannot be less than the current rent.

An upwards or downwards open market rent review allows the rent to increase or decrease at the review date depending on market conditions.

Note that many tied leases, regardless of the rent review clause terms, can be reduced at the rent review.

If you are a tied pub tenant and your landlord insists on enforcing an upward-only rent review clause, please contact us.

A fixed rent review increase or stepped rent is a pre-agreed, fixed increase in rent at specified intervals, usually negotiated and agreed upon between the landlord and tenant during the heads of terms negotiation. For example, a £5,000 increase each year.

All pub rents are reviewed upward or downwards at lease renewal.

A review of the rent will take place when a lease is renewed under the Landlord & Tenant Act 1954. This statutory rent review, unlike a contractual rent review in accordance with the terms of your lease, can be upwards or downwards.

An open market rent review sets the new rent based on what could reasonably be achieved on the open market if the property were let to a willing tenant by a willing landlord on the terms set out in a hypothetical lease. The review is conducted by assuming that a new hypothetical lease will be entered into, based on substantially similar terms as the existing lease. The rent will then be assessed considering certain assumptions and disregards.

While this approach aims to ensure that the rent remains fair and current, the actual figure determined will often fall within a range and need to be negotiated by expert valuers. One issue with relying on a hypothetical lease at that moment in time is that it may not consider any changes made by the parties or the legal and political landscape. Therefore, it is ordinary to include in the lease certain assumptions and disregards that must be taken into account when determining the rent at the review date.

When assessing the open market rent, certain hypothetical assumptions and disregards are to be considered for the purposes of the valuation.

This hypothetical lease is based on substantially similar terms as the existing lease, however, this approach may result in an artificially high or low rent. For instance, if the tenant has allowed the property to fall into disrepair, the achievable rent on the open market would be lower.

To ensure a fair review of rent for the hypothetical lease, certain items must be assumed or disregarded (as appropriate), that may or may not have occurred under the lease.

Standard assumptions include:

• The premises are vacant.

• The premises are fit and ready for immediate occupation.

• No premium has been paid, or a rent-free period (or other such concession) has been granted.

• The tenant has complied with their obligations under the lease (specifically repair obligations).

• The lease term's length (i.e original term length or just the remaining term. See below example).

In addition, certain matters stand to be disregarded, such as:

• The tenant's occupation of the premises

• Goodwill generated by the tenant's use of the premises

• Improvements made to the premises by the tenant

Here is an example lease clause;

Open Market Review – means the annual rent that could be reasonably obtained at the relevant review date by a willing landlord from a willing tenant for the property in the open market on a lease for the remainder of the term existing at the relevant review date (or ten years if longer) and with vacant possession. On the assumption the property is fit and ready for immediate occupation and use with no fitting out costs, but disregarding goodwill and any increase in rental value attributable to authorised improvements carried out by and at the expense of the tenant during the term.

The lease may specify additional assumptions and disregards applicable at rent review, and these assumptions and disregards should be carefully considered to determine their influence on any rent review before being included as part of a new lease.

While assumptions and disregards are generally similar for most commercial property leases, slight variations can exist and have a significant impact on the rent calculation during a review.

Section 34 of the Landlord & Tenant Act 1954 provides that in the case of lease renewal, the new rent should reflect what could reasonably be obtained on the open market, without taking into account any effect on rent resulting from tenant improvements. To be disregarded, an improvement must have been carried out during the current tenancy or within the past 21 years, with the necessary consent from the landlord, and not as a pre-existing obligation.

While the wording of rent review clauses may differ, they frequently follow the same principles as the Landlord & Tenant Act 1954. Conflicts often arise over the disregard of improvements, so it is critical to demonstrate that any alterations made enhanced the property.

The Royal Institution of Chartered Surveyors (RICS) says: “In assessing market value the valuer may decide an in-coming operator would expect to improve trading potential by undertaking alterations or improvements.”

For instance, a hypothetical tenant/operator might be expected to remove an internal wall to open a section of a pub or extend to create a restaurant or function room, increasing the number of covers.

Rent review or lease renewal can prove to be a difficult time for any licensee or tenant. Suppose a rent review is yet to be settled using one of the routes detailed below. In that case, it is recommended that the tenant or licensee seek appropriate professional advice before preparing their case.

Rents are usually settled and agreed upon through discussion and negotiation with your Pub Company. Tenants or lessees may wish to handle negotiations themselves. However, most licensed trade surveyors or valuers will be able to assist with negotiations if required, especially in circumstances where a compromise or agreement seems unlikely.

If the tenant or lessee cannot agree to the new rent, tied or MRO, through negotiation, dispute resolutions are available. Majority of leases will confirm the dispute resolution options in the event the rent has not been agreed between the parties. So, what are your options if you cannot agree on the rent? Common routes for rent resolution include:

1. The Pub Independent Rent Review Scheme (PIRRS); or

2. Independent Assessment (for those considering MRO under the Pubs Code); or,

3. Arbitration.

For tenants and lessees disputing the level of tied rent, they should consider PIRRS​. The scheme aims to offer an independent yet low-cost rent review resolution services for tied pub tenants and lessees based in England, Wales and Scotland.

PIRRS will refer the case to an independent valuer chosen from a panel of experts and both parties will be asked to provide relevant information and submissions, presenting each of their cases. The rental figure is then determined and presented to the parties in a final report by the independent valuer.

The scheme is offered on a fixed fee basis, which is payable to the chosen valuer at the start of the case. Details concerning fees are available on the PIRRS website.

Arbitration is a legal process that can be relied on to determine rent reviews for various types of commercial property, including public houses. It should be noted that arbitration can be both time-consuming and costly. The process is often extremely technical and procedural, so it is strongly advised that the tenant or licensee takes up the advice of an experienced and specialist valuer to ensure that their case is best represented.

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It is important to note that the arbitrator can order parties to pay all, or part, of the costs incurred as a result of arbitration, including the fees incurred by the other side. This route is considered a last resort, the alternative dispute resolution services covered in this write-up offer similar functions at a lower cost to the tenant or lessee, these should be exhausted first.

There has been great focus on the Pubs Code in recent years, which applies and regulates Pub Owning Businesses (POB’s) with over 500+ tied premises in England & Wales, and the Market Rent Only option (MRO).

For those considering MRO, where a tied pub tenant serves an MRO request notice, the POB has to provide a compliant MRO full response, detailing their proposal. Once the mode of delivery and terms of the new MRO agreement, or lease, have been agreed upon, the parties are required to negotiate the level of MRO rent.

The tied pub tenant has the right to refer the MRO rental to an Independent Assessor for determination if they do not agree with the proposed MRO rent, this process is rather complex as it involves a number of crucial time-dependent deadlines. The parties must seek to jointly appoint a suitable IA within 28 days from the tenant’s referral setting out their intentions of progressing to independent assessment or informing the PCA of their failure to appoint.

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In cases where the parties have been unsuccessful in agreeing to the joint appointment of an IA, the PCA will need to be notified and within 14 days they shall appoint an Independent Assessor on behalf of the parties. Again, this process is extremely strict on the associated time frames and particular forms submitted, expert support is required so as to preserve your position and ensure your efforts are not wasted.

Pub companies currently regulated by the Pubs Code are:

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• Marston’s PLC

• Admiral Taverns Ltd

• Stonegate Group

• Greene King PLC

• Star Pubs and Bars (Heineken UK)

• Punch Taverns PLC

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The Independent Assessor fee is currently based on the current annual rental value of the pub:

• Rental value is £25,000 or less the Independent assessor will charge no more than £3,000.

• Rental value is between £25,001 to £50,000 the Independent assessor will charge no more than £4,000.

• Rental value is between £50,001 to £75,000 the Independent assessor will charge no more than £5,000.

• Rental value is £75,001 or greater the Independent assessor will charge no more than £6,000.

The rent review dates are usually specified in the lease agreement. However, the review date is not necessarily the date on which the new rent will come into effect. Instead, the lease may allow for a period of negotiation after the review date, during which time the existing rent will continue to be payable.

If the parties are unable to agree on a new rent during this period, the landlord may be entitled to backdate the rent increase to the review date and charge interest. This could result in a rental arrears claim being made against the tenant, which could be financially devastating.

To avoid this situation, it is important for the lease to provide for both the landlord and the tenant to request a rent review. This will help to ensure the landlord does not delay the review process and then make an unexpected and unaffordable backdated rent claim.

For instance, a lease could have an annual rent of £15,000 p.a. and state the rent review date was to be 1st of January 2020. The 1st of January 2020 comes and goes, and the rent review was not implemented, which meant the rent of £15,000 p.a. continued to be payable. The landlord decides on the 1st of July 2023 they would like to action the overdue rent review that should have taken place during 2020, and the review resulted in the rent increasing by an additional £3,000 p.a. to £18,000 p.a.

The landlord would be entitled to recover the difference of the rent backdated to 1st of January 2020 (equating to £250 per month and would be for a total of 42 months, giving a rental arrears of £10,500 plus interest). A demand to this level could be catastrophic for a tenant and their business. It is in the tenant’s interest to ensure the lease includes an ability for the tenant, as well as the landlord, to ask for the rent to be reviewed. By doing so it can ensure that the landlord doesn’t hold off implementing the review and then seek to make a huge backdated rent claim.

Equally, the reverse of the above situation is true. If the tenant continues to pay the existing rent of £15,000 p.a., and the rent review was eventually settled at £12,000 p.a – i.e a £3,000 p.a reduction. 42 months later, the tenant would be entitled to claim for the additional back dated rent that they paid.

The open market rental value should represent what would be paid by the ‘Reasonably Efficient Operator’ (REO) and based upon Fair Maintainable Trade (FMT).

Read our in depth articles to better understand the complexities of how pub rents are set.

Rent Setting & Valuation For Pubs

Fair Maintainable Trade (FMT) & Reasonably Efficient Operator (REO)

Generally, the Pub Co/Landlord serves a Section 25 notice a minimum of six months and a maximum of 12 months prior to the end of the lease. A Pub Co can issue a Section 25 notice to agree or oppose a renewal. These notices are often referred to as either ‘non-hostile’ or ‘hostile’ Section 25 notices. The issuance of a Section 25 notice will either set out the agreement of any renewal or the opposition of such renewal.

Licensees can pre-empt their Pub Co landlords by serving their own Section 26 notices to request a new tenancy/lease term. The Pub Co must, within two months of the tenant notice, provide a response in agreement or notice of opposition to an application to the court for the grant of a new tenancy.

With a standard protected tenancy, statutory compensation is only made available if the tenant in occupation is denied the opportunity for exercising the right to automatically have a further term of years.

If a hostile Section 25 Notice (see above) is served on the grounds of disrepair (A), non-payment of rent (B), or any other breach of lease covenant (C), statutory compensation is not payable. These are grounds often considered to be ‘fault’ of the tenant or lessee.

There are two grounds, considered ‘non fault’ and common to the Pubs trade, for claiming statutory compensation and these are:

• That the property is being redeveloped either whole or in part (F); or

• The most common, that the landlord requires the premises for his own occupation and use – (G).

Statutory compensation is then assessed on either one times rateable value for an occupation that exceeded 7 years but was less than 14 years, or two times rateable value if the occupation exceeded 14 years.

‘Non - Hostile’ Section 25 Notices:

A ‘Non - Hostile’ Section 25 Notice will set out the terms of agreement concerning the lease renewal, which is not being opposed.

‘Hostile’ Section 25 Notices:

If the Pub Co landlord wishes to oppose lease renewal, their notice will contain mention of grounds A to G (see below) for which the new lease term is being refused. Otherwise known as a ‘Hostile’ Section 25 Notice.

The Landlord & Tenant Act 1954 stipulates several legal grounds upon which a landlord can oppose lease renewal;

A) If the property is, or has persistently been, in a state of disrepair

B) If there have been persistent delays in paying rent

C) If there have been any other substantial or persistent breaches of the lease during tenancy

D) If the landlord can provide alternative premises for the tenant to occupy

E) If the lease is part of a larger premises where the landlord can obtain better rental return, for example, by letting the premises as a whole.

F) If the landlord intends to redevelop the property

G) If the landlord intends to occupy the property themselves

Section 34 of the Landlord and Tenant Act 1954 sets out the disregards that play a significant part in the rental valuation of public houses.

Items to be disregarded include:

A. Tenant’s occupation;

B. Goodwill;

C. Improvements; and

D. Licence

Disregards A - C are standard in most leases with some slight change in their wording. A disregard of occupation prevents the tenant from having to pay more for their already established business than for an identical property close by. This then links to both the disregard of goodwill and any tenants' improvements.

Disregarding the tenant’s goodwill does not prevent a profits test method of valuation being undertaken. It simply aims to ensure that the rent assessment is based on the fair maintainable trade of the 'reasonably efficient operator', and not the actual accounts, avoiding any over or under performance related to the current tenant.

Read our article 'The Improvement Scam - Licence to Alter'