Zevi Prager, Associate, Fladgate LLP (firstname.lastname@example.org)
When a commercial tenant no longer requires their premises and they want to dispose of the property to a third party they can either assign (sell) their interest in the lease or grant an underlease. There are many factors which should be taken into consideration when deciding how to dispose of the lease and in every case, the consent of the landlord is likely to be required. This article will look at one of these factors, namely what to do in the event of an outstanding rent review on an assignment of the lease.
When dealing with the assignment of a lease the parties should check if there are any outstanding rent reviews which have not been formalised. For example, if a lease is to be assigned on 10 November 2018 and the rent review date in the lease is 10 November 2017, there may be a year’s worth of increased back rent to be paid. It could be the case that the landlord considered the rental market at the time of the rent review (10 November 2017 in our example), came to the conclusion that there would be a nil increase in the rent and so decided not to implement the review. Alternatively, the landlord may simply have forgotten to deal with the rent review and may only get around to it at a later date. Unless the lease states otherwise, rent reviews can be carried out at any time and will be based on the valuation of the property at the rent review date.
Another possibility is that the assignor (seller) has been negotiating with the landlord but they have not been able to agree the new rent by the time of the assignment. Negotiations for rent reviews can take months and even years to agree; they are very rarely agreed on or prior to the review date. The risk for the assignor is that they want to be rid of all obligations under the lease (specifically the rent payments), which is why they are assigning the lease, yet they will likely end up being responsible for any increased rent due prior to the date of assignment of the lease, unless the parties to the assignment agree otherwise. The assignor may therefore want to ensure that any rent review is carried out prior to the assignment so that their liability crystallises.
The risks for the assignee (buyer) are significantly higher. The assignee will want to be certain of what the rent will be when they take the assignment of the lease. They are buying the lease based on the lease terms and specifically the rent payable under the lease. If the rent will be higher due to a backdated rent review this may make the lease unaffordable for the assignee. They will need to seek advice from a surveyor as to the likely uplift in rent following review. Another risk factor is whether the assignee believes it will be able to collect any back rent from the assignor once the review is concluded. If the assignor is a poor credit risk then a retention may need to be considered. The reason for this is that, although the assignor remains liable for the rent due before the assignment, the landlord retains the right to forfeit the lease for non-payment of rent, whether before or after the assignment.
The ideal scenario is likely to be that the assignor and the assignee together agree the rent review with the landlord at the same time as obtaining consent to the assignment. The assignee will not want to leave these negotiations to the assignor, as the assignee may end up with a higher rent than anticipated. Conversely, the assignor has an interest in taking part in the negotiations and not leaving them until after the assignment since it will be liable for a proportion of whatever the assignee agrees. By jointly negotiating with the landlord, the rent review memorandum can be agreed on or before completion of the assignment and the assignee can ensure that the assignor pays the increased back rent on completion.
To conclude, the uncertainty of an outstanding rent review could potentially become a deal breaker and so the parties should consider whether they should try to settle it before completion or, if that is not possible or desirable, the assignor should ensure that it has input into any settlement of the review by the assignee and the assignee should consider whether or not a retention is required from the assignor.