Paul McNeive: 'Advice of a good agent is invaluable in rent reviews'
The right moves
The world of rent reviews is an interesting specialty, and generates good regular income for agents, as the five-yearly rent review cycle repeats.
That's provided that the rental value of the property has gone up or down enough to warrant a negotiation. There's nothing worse for agents than a stagnant market, where landlords and tenants simply agree to leave the rent unchanged for another five years.
However, the recovery in the market has seen rapidly rising rents in some sectors, and landlords and tenants should be paying more attention to reviews.
And the booming offices sector is a good example of how tenants can walk themselves into long-term extra overheads by not taking expert advice.
A typical example of this in the current market is a managing director or financial controller of a company who is reading every week of record levels of rents being set from €600-€650 psm in their area. The firm is currently paying €480 psm but the review is due and the landlord is looking for €580psm. The company agrees to this because it seems good value, and the firm doesn't want the hassle and expense of engaging an expert and contesting it.
But the rental value may be only €500 psm, and the firm has just tied itself into an unnecessarily high, long-term overhead. I am certain there are lots of reviews being agreed where the tenants are paying too much.
The problem is that they are not comparing "apples with apples". There are three things which should be analysed on review:
1. The lease
2. The property, and
3. The comparable new lettings in the market.
Our errant tenant doesn't realise there are "Assumed Terms" defined in leases. His lease may be longer than other leases, and thus his rent should be lower.
Probably even more overlooked are the "assumed specifications provided with the property and its condition on taking the lease". The specifications provided in an office building 15 years ago are not comparable with today's premises, and the rental value is less.
Another factor requiring analysis is the comparable evidence being cited by landlords, but where the "headline rent" makes no allowance for a rent free period granted to the tenant in a new deal.
This somewhat lax attitude taken to reviews by some office occupiers is because "rent" is a small part of their overheads compared to staff costs, whereas the opposite is true of retailing.
There is less activity in retail reviews due to weakness in the market and a lack of new stock. Rents generally are back to about 65pc of their 2007 peak, including prime locations like Grafton Street and Henry Street, and the only location that has surpassed that peak is Dundrum Town Centre.
As a sign of the difficulties suffered by many tenants, reviews of retail properties are becoming more complicated. There is an increasing incidence of break clauses for tenants, and more linking of rent to turnover or to indices like the Consumer Price Index. This greater variety of lease terms is causing some uncertainty, and the rate of referral of retail reviews to arbitrators is higher than in other sectors.
Rent reviews are in a phase of change since the banning of "Upward-Only rent reviews", and more than half of all prime properties are probably still on the old leases.
Another sign of changing rents is that approximately 10pc of all reviews cannot be agreed, and are being referred to arbitrators for decision, and that proportion is increasing.
The Commercial Leases Register is proving helpful as a source of comparables, but should always be double-checked as entries are not always accurate.
And a debate is developing over whether the more detailed information, such as rent free periods, is admissible in arbitrations, with some landlords claiming it is "privileged" information between landlord and tenant. One for the courts, I suspect.
So, whether landlord or tenant, always consult an expert.