If you have or are about to take a lease at a science park, your mind will no doubt be focussed on the financial impact of that lease, especially around headline rent and service charge. But leases contain a plethora of lesser-known financial obligations or pitfalls.
In this first in a series of four blogs, we will explore pitfalls in the common area of rent review and why a tenant needs to examine the lease carefully in this area in particular.
Typically, the rent in leases for more than five years will be reviewed every three to five years, usually without a cap on the revised rent. An increase of rent in line with RPI can be agreed, but “upwards-only to open market” is the most common basis for review and the lease defines how the open market rent will be calculated.
An open market review works on the basis of a hypothetical lease of the premises between a willing landlord and a willing tenant, with certain matters assumed to be true and certain facts disregarded. This aims to strike a fair balance between the landlord and tenant to achieve the true open market rental value without unfair distortion. Many of these “assumptions” and “disregards” are standard. For example, tenant improvements should be disregarded so the tenant is not penalised for improving the premises, e.g. by replacing low grade laboratory equipment originally provided by the landlord with a high-grade equivalent.
But some assumptions and disregards are less clear-cut, such as the assumption of lease compliance. Landlords usually draft for assumed compliance by both parties with their lease obligations. Assuming compliance with the tenant’s obligations is fair – if the tenant has failed to keep the premises in repair (for example), causing the rental value to fall, it should be precluded from claiming a reduced rent on that basis. But is it fair to assume compliance by the landlord?
A lease of part of a building, such as a first-floor laboratory, should make the landlord responsible for keeping the building’s structure and common parts in repair. If in reality the roof collapsed a year ago and this still hasn’t been fixed, the real-life rental value of the premises will be substantially reduced. Ignoring that reality would unfairly distort the reviewed rent upwards. For this reason, tenants should seek assumed landlord compliance except in the case of material or persistent breach or, even better, no reference to landlord compliance at all.
Unless you have no rent review, or the revised rent is subject to a cap, you will likely be facing an unknown increase in your financial liabilities during your lease term. The assumptions and disregards built into an open market rent review process should be carefully examined to ensure that your future rent will not be unfairly inflated.
Author: Giorgia Clements, Senior Associate, Penningtons Manches Cooper LLP. For more information contact: firstname.lastname@example.org