The pandemic has struck just as downwards rent reviews fall due

THE renewed shutdown of most business premises underlines one of the biggest challenges ever faced in commercial property; what is the rental value of a property that you can’t use?

That conundrum is fuelling a baptism of fire for the first test of the upwards and downwards rent review provisions.

Most leases provide for a rent review every five years.

Legislation from February 2010 outlawed the “upwards only” rent review clause, and leases since then must allow for the rent to go upwards, or downwards, on review.

The new rent is based on the evidence of new lettings of comparable properties at the time the review falls due.

The first test of this new regime was in 2015, but because we were in recession in 2010 and rents were at rock bottom levels there were no reductions in 2015 as the economy had recovered and rents were rising.

With the possible exception of retail property, that would have been the case for the 2020 reviews but the closures caused by the pandemic have thrown the system into some chaos.

The big question is-if your property’s rent review date falls during a period of enforced closure, what is its rental value?

Disputed rent reviews are usually referred to an independent chartered surveyor who acts as an arbitrator or expert and decides the new rent.

But it is an evidence-based system; the best evidence is new open market lettings and the closer to the actual rent review date the better.

So a tenant whose rent review fell due in January or February when there was no expectation of lockdown will end up paying a rent based on the strong market conditions then, even if the arbitrator is assessing the rent now.

Conversely, tenants, and particularly in retailing, are arguing that if their review falls due during a lockdown, the rental value should be zero.

Now, that’s not realistic as the tenant is in possession and will have the ability to re-open but it’s a good starting point in negotiations and

rental values in the era of a pandemic will hardly be as high as before the restrictions.

Thus, arbitrators are faced with a huge problem which is exacerbated by the fact that, as a function of the pandemic, there will have been very few new leases signed during the lockdown which would serve as evidence.

I spoke with chartered surveyor and rent review expert Conor Ó’Cléirigh and he pointed out that the conundrum is amplified by a strong wave of lettings at relatively high rents coming through from 2015.

His analysis of the Commercial Leases Register shows

The number of commercial lettings to date this year is down 40pc

that there were 30pc more new lettings agreed in 2015 than the previous year, reflecting the growing economy.

The number of new lettings has fallen slightly in all but one year since then.

Alarmingly, due to the pandemic, the number of new commercial lettings to date this year is down 40pc on last year.

There are a couple of months left to go, but in a lockdown, that proportion may not change significantly.

Most new deals are likely to show a decline in rents.

Conor O’Cleirigh reminded me that it takes about nine months from the date of a disputed rent review until the arbitrator’s decision is known.

As a result of this, we will not see the fallout from this pandemic in the commercial property market until early next year.