APC Series: How to summarise a lease for a rent review

Reading and summarising leases is an essential skill for all surveyors, and a key part of the competence you will need to build up for APC. Apart from landlord and tenant work, other instances of where you may need to summarise a lease include in property management, leasing/letting, purchase and sale, and investment management. While it may look like an easy skill, knowing what to look out for and how to summarise the key information in an easy-to-digest manner can be challenging. Surveyors also need to take what they have summarised from a lease and be able to use it in their reasoned advice (level 3 in the APC). This could be reading the rent review clause and advising a client on the impact on rental value of any atypical or onerous clauses. In this article, we look at a “hypothetical” rent review scenario and how you could summarise and advise on the lease for a client. Assume you have already accepted the instruction and undertaken your pre-instruction checks. We will not look at inspection, measurement and valuation, so think about what you would do in respect of these steps after reading this article. The scenario Your client owns a regional branch of letting agents and has approximately 30 branches across the South East. You are, therefore, acting on behalf of the tenant. Your client contact is a non-surveyor with some property experience, so it is essential to ensure that your advice is clear and concise. As a result, you will need to explain technical issues without using too much jargon. Your contact reports into the board of shareholders, so you will also need to provide an executive summary of any advice to secure approval to proceed. The property is a corner retail unit within a local shopping centre, anchored by a number of national retailers. What would be the first question to ask your client? You need to ask your client for copies of the following: Floor plans; Copy of historic correspondence; Any correspondence from the landlord in relation to the current rent review, including notices; Copy of the lease and any relevant licences, deeds, side letters, personal concessions or other legal documents; Contact details for the landlord and/or their agent; Copy of the last rent demand (to check the current rent against that stated in the lease). There is no last rent review memorandum to review as this is the first and only rent review within the subject lease. After you receive a copy of the lease electronically, it is always a good idea to check that you have all the pages. Simply count the page numbers on the document and check that there is nothing missing – this can be a very easy and trivial way to miss key lease terms (and there is a very detrimental impact on your advice if you missed, for example, a break option). You will need to read the lease alongside any other legal documents, such as a deed of variation that alters lease terms, or a side letter. In this case, there are none so it is only the lease that you need to summarise going forward. You note that the lease is dated 5 May 2020 and runs for a term of 10 years from this date. It, expires, therefore, on 4 May 2030. What do you use to record lease summaries on in your role? You record the lease summary on a previously created pro forma template. If you do not use anything currently, then why not make your own based on the lease summary table above? The level of detail that you include in a lease summary will depend on your own style, your client’s requirements and the instruction you are working on. For example, for a lay client and a rent review, you would try to keep the detail clear and concise and add in extra detail on the rent review aspects. By contrast, for a lease renewal, you may not need so much detail on the rent review basis. In the table above you will find the summary of this lease, with key lease terms highlighted. When advising the client, it would be prudent to point out the following: The passing rent is £20,000 pa, with a basis of rent review that is upward only to the greater of the market rent or a fixed uplift of 2.5% pa – so in your assessment of market rent you need to then compare this to the fixed uplift provision. The rent cannot go below a 2.5% pa increase. In a rent review, you are not valuing in the context of the actual lease – you are valuing within the hypothetical lease terms set out within the rent review clause. In this scenario, this is for a five-year unbroken hypothetical term with no atypical assumptions or disregards. The rent is that payable after a rent-free period for fitting out only – so the comparables need to be analysed on a like-for-like basis (typically amortising three months for fitting out, but this will depend on market conditions and the market norm). Time is not of the essence so there are no requirements for triggering or settlement of the rent review within a specific time period. It can, therefore, be agreed at any point in time, even after the review date has passed. There are no formal requirements for service of notice. The best way to open negotiations would be to contact the landlord or its agent for an opening proposal, including their floor areas and supporting comparables. If the rent review is not settled by negotiation, then the lease makes reference to expert determination. This third party can be appointed by either party no earlier than three months before the review date; this would usually be via a DRS 1 form submitted to the RICS. The parties will typically submit a Calderbank offer prior to submitting the application to ensure that all costs are at risk. The expert has power over their costs and the application fee, but the parties must otherwise bear their own costs. This cost position needs to be reflected within any Calderbank offers, which would differ to the wording used if the lease alternatively referred to arbitration. Penal interest is payable at base rate – this is the amount of interest payable between the review date and the date on which the rent review is settled. As the base rate is currently fairly high, then settling a rent review as soon as possible can help to reduce the back rent (plus penal interest) payable after the rent review has been settled. It is also important to note the other key lease terms highlighted in the lease summary. Some will be important to highlight to the client in terms of their overall property holding, ie that they have security of tenure and an effective full repairing and insuring lease. However, the nature of the hypothetical lease will mean that the basis of review could be different to the reality, eg the property is assumed to be in a reasonable state of repair, when in reality it could be in disrepair. A full lease summary should be included as an appendix to your rent review report, with a summary on the main pages. What key terms would you include in the executive summary or report contents? Your advice to the client can then be set out after you have assessed market rent and considered the relevant comparable evidence. Being able to provide a clear lease summary is a key skill for any surveyor. It is very easy to miss or misinterpret leases, particularly if they are older leases or not drafted clearly and concisely. You need to ensure that you read the lease from cover to cover, noting any key terms and anything unusual or atypical. This will allow you to provide a high standard of professional advice and achieve level 3 in your APC. Jen Lemen BSc (Hons) FRICS is co-founder and partner in Property Elite Image © imageBROKER/Shutterstock