Retailers need not lose out when the rent is up for review, as property consultant Richard L Daniels explains.

Rent represents a substantial overhead for any business. An increase can often cut deeply into profits, particularly where a retail business is trying to maintain a competitive edge on price.

With nearly 2,000 independent UK c-stores closing last year, the remaining 26,873 unaffiliated independents need to constantly minimise their overheads to succeed.

There’s no need to meekly agree to a landlord’s proposal for an increase in rent at rent review, or when a lease expires under the 1954 Landlord & Tenant Act. Landlords are usually seeking to maximise their investment and the onus is on the tenant to ensure an overpayment in rent is not agreed.

Paying an additional £10,000 a year equates to possibly an overpayment of some £50,000 during the period until the next rent review, and it also adds a substantial amount to the property’s freehold value. Overpaying can also render a tenant’s lease untransferable without the payment of a substantial ‘reverse premium’ (ie they would have to agree to pay a penalty as an inducement to a potential buyer).

There are many factors that will affect the rental value of retail premises like c-stores. The floor areas must be accurately assessed and leases analysed, as rent reviews are based on the precise terms of the lease, and those terms can have the effect of increasing rental value or possibly decreasing it. As an example, clauses such as lease length, rent review pattern, repairing obligations, restrictions on user and alienation provisions - such as whether a tenant can sublet or assign - all have a bearing on the final rental value.

In the case of rent reviews, if fair terms cannot be negotiated, there is the opportunity to have the case determined via the arbitration process. That will protect a tenant against a landlord holding out for an unjust rent that’s in excess of the fair rental value.

Both sides are given the opportunity of presenting their respective cases: the vast majority of rent reviews are agreed through sensible negotiations to obtain fair terms, and only a small minority need to be determined through arbitration. Lease renewals are more complex and action has to be taken to protect the tenant’s interest under the 1954 Act.

Unlike rent reviews, where the new rent is rarely lower than the existing or passing rent, in the case of a lease renewal there is the opportunity for a tenant to agree a rent lower than the previous rent, depending on the circumstances - if they can prove their case.

A new lease can represent the opportunity to negotiate not just a new rent at possibly lower than the previously payable rent but other terms such as lease break clauses and whether reviews should be upward only or, as the government would prefer, downward as well.
Negotiations often take many months and the planning of tactics and a strategic policy needs to be carried out early on, while there’s plenty of time to take the correct action. Tenants should start to consider the likely impact of a rent review or lease renewal not less than 12 months prior to the operative date.

The preliminary work carried out in the early stages can reap rich rewards later when the negotiations are under way.