Rent Review Research Articles

Urban ground leases: a cross-country comparison

ABSTRACT The ground lease is a form of land tenure where the property rights are split between the lessor (landowner) and the lessee (land user). Additional ground lease features, such as the obligation to pay ground rent, depend on factors including the legal framework and lessor requirements. Ground lease features can lead to interpretation problems for ground leaseholders and even valuers, such as misunderstanding the extent of ground rent review. This paper examines location-based differences in order to highlight ground lease variability across countries. The term ‘ground lease’ is effectively a catch-all term for a tenure type that can display considerable differences depending on the location. Recognition of potential ground lease pitfalls and how ground leases differ across jurisdictions is necessary in an increasingly connected world. This paper advocates for uniform international ground lease terminology that more completely explains the extent of tenure rights of each ground lease.

The response to freehold growth information when estimating ground leasehold value

PurposeThis paper is concerned with behavioural responses to reviewed ground rents in New Zealand. The focus is on how freehold growth information is interpreted when considering reviewed ground rents on ground leasehold value.Design/methodology/approachSemi-structured interviews were conducted with ground leaseholders to inform the design of a controlled experiment. The interviews revealed that (a) purchasers tended to directly compare freeholds to ground leaseholds and (b) used rudimentary valuation methods. In the experiment, 40 property investors were requested to estimate the ground leasehold value close to the ground rent review time. Thereafter, 20 of the investors reassessed their ground leasehold value estimate using a projection of the future ground rent and a statement as to freehold growth (treatment). The control group of the remaining 20 investors received the estimate of the future ground rent only.FindingsThe tendency for higher treatment group valuations indicated the growth information was too available. Comparing ground leaseholds directly to freeholds, rather than thinking about the cost implications, is attributed to a manifestation of the availability heuristic.Research limitations/implicationsThe study involves a typical ground lease arrangement (as verified by experts) in the New Zealand market where there are few protections for ground leaseholders. These findings justify prohibiting new ground leases where the ground rents are set by reference to freehold land value.Originality/valueThis paper extends behavioural theory (availability heuristic) to explaining human interaction with ground leaseholds.

Examining the Variation Between the Conventional and Contemporary Valuation of Residential Investment Properties in Lagos

Due to the interplay between the forces of demand and supply in the determination of residential property investment valuation, there is continuous increase in rental value and rent review pattern and as such, conventional valuation of residential property investment has become inappropriate as it cannot handle the problems of rental values, rental growth, impact of inflation and rent review pattern experienced in the Nigerian property market. The objectives were to determine the annual rental growth rate pattern for residential properties from 2014–2020 and ascertain the level of variation in the use of conventional and contemporary investment methods in determining the value of such real estate assets in Lagos State, Nigeria. Appropriate descriptive approach was adopted and the result showed that rental values increased within the period, rental growth followed a similar trend, rent review pattern was mostly three years, and practitioners were aware of discounted cash flow. Valuation results revealed 6.67% variation for discounted cash flow, 0% for real value model and 25% rational approach. The use of a constant income annuity in perpetuity for conventional investment method of valuation as a single income stream would result in erroneous valuation as conventional technique relies fully on comparable evidence. The contemporary techniques on the other hand integrate property as part of the larger investment community which enables estate valuers to make qualitative market valuation where there is no comparable evidence. This study therefore recommends that contemporary valuation techniques are appropriate in the market valuation of residential property investments, particularly in the market valuation of reversionary freehold.

Government holds talks with NHS landlords over pharmacy rents

The government has held discussions with the NHS’s property management arm over its approach to conducting rent reviews for some pharmacies located in health centres, the former pharmacy minister has said. In answer to a written question on 7 July 2022, Maria Caulfield, then pharmacy minister, said the discussions had been held with NHS Property […]

Leases: Handling your rent review

Leases: Handling your rent review

Pricing office rents in Sydney CBD: testing the water on automated rent reviews

PurposeAutomated valuation models (AVMs) are statistical asset pricing models omnipresent in residential real estate markets, where they inform property tax assessment, mortgage underwriting and marketing. Use of these asset pricing models outside of residential real estate is rare. The purpose of the paper is to explore key characteristics of commercial office lease contracts and test an application in estimating office market rental prices using an AVM.Design/methodology/approachThe authors apply a semi-log ordinary least squares hedonic regression approach to estimate either contract rent or the total costs of occupancy (TOC) (“grossed up” rent). Furthermore, the authors adopt a training/test split in the observed leasing data to evaluate the accuracy of using these pricing models for prediction. In the study, 80% of the samples are randomly selected to train the AVM and 20% was held back to test accuracy out of sample. A naive prediction model is used to establish accuracy prediction benchmarks for the AVM using the out-of-sample test data. To evaluate the performance of the AVM, the authors use a Monte Carlo simulation to run the selection process 100 times and calculate the test dataset's mean error (ME), mean absolute error (MAE), mean absolute percentage error (MAPE), median absolute percentage error (MdAPE), coefficient of dispersion (COD) and the training model's r-squared statistic (R2) for each run.FindingsUsing a sample of office lease transactions in Sydney CBD (Central Business District), Australia, the authors demonstrate accuracy statistics that are comparable to those used in residential valuation and outperform a naive model.Originality/valueAVMs in an office leasing context have significant implications for practice. First, an AVM can act as an impartial arbiter in market rent review disputes. Second, the technology may enable frequent market rent reviews as a lease negotiation strategy that allows tenants and property owners to share market risk by limiting concerns over high costs and adversarial litigation that can emerge in a market rent review dispute.

Synthesis of Short-Cut DCF Appraisal and Spreadsheet Iteration of Freehold Rental Growth Rates Across Specific Valuation Epochs

Abstract While the use of simple deterministic models to calculate rental value growth (RVGrowth) rate of reversionary freeholds across epochs prior to upward rent review appears illusive, literature evidence of the synthesis between short-cut DCF valuation and Solver tools in a spreadsheet does not constitute an exhaustive list of solutions. This study examined alternative spreadsheet and iteration tools that can determine RVGrowth rate of freehold investment properties across rent review epochs. With recourse to a hypothetical case of a freehold investment property, this experimental study identified the mathematical composition of RVGrowth in an explicit DCF framework, performed short-cut DCF Valuation and equivalent yield calculation at specific epochs prior to and including the full reversion; as well as using Goal Seek to calculate RVGrowth across all epochs prior to- and including the full reversion. Excel® Solver and Goal Seek, as well as the graphing/root-solving tool in Kyplot® were found to feasibly produce identical results for RVGrowth rate. This is among the limited studies that identified and researched the veracity of alternative tools for RVGrowth rate iteration. The value of this study is the awareness of alternative analytical tools avail freehold investors who desire knowledge of RVGrowth rate when making purchase-, hold-, and sales decisions.

Impact of COVID-19 Pandemic on Tenancy Agreement: The Lesson from an Emerging Rental Housing Market in Nigeria

Abstract The study aimed at evaluating the contents of tenancy agreement entered into between lessors and lessees in Osogbo, Owode-Ede and Ede Metropolis in Osun State (Nigeria) from 2011 to 2020 in order to determine its adequacy in the face of the Post-COVID-19 pandemic in Nigeria. A questionnaire survey approach was adopted to achieve aim of the study. Findings of the study revealed steady dwindling of rental market transactions with deteriorating landlord/tenant relationship caused by disagreement on tenancy agreement related issues leading to default in rent payment, rent review period and renewal. Findings also indicated a low ebb experience in the rental market due to the economic downturn resulting from, among other factors, the lockdown policy, which impoverished Nigerians to the extent of struggling to make ends meet. The study further found that 86.3 % of the tenancy agreements were inadequate in content and execution as basic tenants’ remedial provisos were not included in most of the agreements. The study provided pertinent information that could be used as baseline information for tenancy agreement preparation, enhancing landlord (lessor) and tenant (lessee) relationship, and guiding rental real estate investment decisions in Nigeria.

Spreadsheet Iteration of Reversionary Leasehold Rental Growth Rate Within The Framework of Explicit DCF Appraisals

Income growth rates are required to justify decisions and strategies for property investments. Although existing studies addressed this phenomenon in freehold investments, a relative question regarding the determination of rental growth rates of leasehold investment properties valued part-way through rent review periods has not been addressed before now. This study examined the spreadsheet-assisted scenario analysis tools and techniques that are required for the determination of rental growth rates of leasehold investment properties valued part-way through rent review periods. A precursor to the scenario analysis was the development of a hybrid leasehold DCF valuation model arising from the equation of the formula for reversionary leasehold equivalent yield valuation to the formula for reversionary leasehold growth explicit DCF valuation model; thereby culminating into the identification of four unknown variables comprising the all risks yield and the implied growth rates of leasehold cash inflows and cash outflows which were subsequently derived using the solver tool of Excel®. From a total of eleven scenarios generated, the 9th successive scenario produced optimal results indicating zero slack between iterated and calculated values for the growth rates of leasehold cash inflows and cash outflows respectively. With recourse to the hybrid leasehold DCF valuation model, the spreadsheet-assisted scenario was found to produce mathematically valid growth rates that justify the valuation of leasehold investment properties part-way through rent review periods. The value of this research is the analytical tools and rigour it avails investors seeking income returns and growth from reversionary leasehold property as an instance of terminable investments.

Minimum Energy Efficiency Standards and steps to improve energy inefficient properties

The much-anticipated Minimum Energy Efficiency Standards (MEES) came into force on 1st April, 2018. This paper looks at the implications the regulations may have on the property market and whether the regulations can be the catalyst for improved energy efficiency that so many have hoped. While it was intended that the regulations would ensure that poor performing properties are brought up to standards, the unintended benefits may be even greater. The regulations will impact many aspects of the property market including rent reviews, lease renewals and service charge. The potential benefits to a landlord in having a highly-rated Energy Performance Certificate (EPC) could drive a ‘rush to the top’ as landlords seek to achieve a rating that goes well beyond the minimum requirement set out in the regulations.

Rent review: dark art or rainy sky?

Purpose – The purpose of this paper is to consider the impact on rent review clauses of a recent UK Supreme Court ruling on the interpretation and application of contractual provisions. Although the ruling in Arnold v. Britton (2015) UKSC 36 concerned service charge provisions, the court’s approach has significant implications for rent reviews where a fixed or indexed increase is intended. Design/methodology/approach – Review of the Supreme Court’s approach and findings in a case concerning clauses that provided for fixed percentage increases in long leases. Findings – It is no part of the court’s function, through the process of contractual interpretation, to rescue a party from a bad bargain. Research limitations/implications – Supreme Court ruling in Arnold v. Britton was considered in the context of recent rulings on rent review clauses. Practical implications – When drafting for a fixed or stepped increase at rent review, parties must ensure that any formulae or other provisions governing calculation produce results that are fair and in line with the parties’ actual intentions. The court will not use the process of contractual interpretation to rescue a party from a bad bargain, and will not intervene to override clear wording. Although the court has power to decide in favour of commercial common sense where a clause is ambiguous or unclear, there is a limit to the “red ink” that the court can apply, and no room for remedial interpretation where a clause is clear. Social implications – Where contract provisions are clear it is not open to the court to intervene, by means of contractual interpretation, to protect or to rescue a party who has been disadvantaged, however seriously, if the clause is clear. Where such cases arise in a contract covered by English law, or in similar common law jurisdictions, any protection must be found in statute. Originality/value – Practitioner’s review and comments on recent Supreme Court authority.

Rent review 2014

Purpose – The purpose of this legal update is to examine the recent case law relating to rent review in England and Wales. The paper argues that as rent terms have reduced in length, and as market conditions have tended to produce nil-uplifts, there have been relatively few review cases before the court. Cases that reach court tend to fall into two broad categories: contractual interpretation and challenges to third-party determination. Design/methodology/approach – Review and analysis of case law in England and Wales. Findings – There are no special rules for interpreting rent review clauses. The court's approach to contractual interpretation follows House of Lords and Supreme Court rulings culminating in Rainy Sky SA v Kookmin Bank (2011). There are also very limited circumstances in which the court will set aside an arbitrator's award, informed by a policy that favours upholding arbitration awards as a quick and cost-effective way to settle rent review disputes. Practical implications – Rent review clauses must be interpreted in accordance with the normal rules of contractual interpretation. The court is unlikely to be swayed by submissions asserting the “general purpose” of rent review. Originality/value – This is an original analysis of case law.

Rent reviews and unforeseen circumstances

PurposeThis paper aims to examine the English court's approach to the interpretation of rent review provisions in circumstances where the words used by the parties may produce a commercially unforeseen or undesirable result. It emphasises that, while the court has wide discretion to adopt a purposive approach, and to interpret an agreement in a way that produces a result in accordance with “business common sense”, there must first be some ambiguity in the wording. The court cannot rewrite a contract where the parties simply failed to foresee or to provide for unexpected market conditions (here, a “double‐dip” fall in rental values).Design/methodology/approachThe paper examines the Court of Appeal ruling in Scottish Widows v. BGC International [2012] EWCA Civ 607 as an example of the limits of the court's ability to arrive at commercially sensible results through purposive interpretation.FindingsIt concludes that where a clause has been drafted by experienced and skilled solicitors, the court is unlikely to intervene unless it is clear that there is a mistake in the language or syntax. The court will not rewrite an agreement where the parties did not anticipate adverse market factors.Practical implicationsThe paper identifies the key factors taken into account when the court is considering either interpretation or rectification of a clause that has produced a commercially undesirable result. It also discusses the extent to which pre‐contractual negotiations may be relevant to interpretation or rectification of a contract.Originality/valueThe paper sets out the author's reading as a commercial real estate practitioner of key judicial dicta on the interpretation and effect of rent provisions.

Reversionary freehold valuations: over‐rented cash flows by spreadsheet

PurposeThe majority of investment property is valued at a point after the original letting or agreed market rent (MR) at review. This briefing aims to look at the valuation of “over‐rented” property. That is the term used to describe a property where the current rent passing exceeds the current market rent.Design/methodology/approachThis briefing looks at the valuation of over‐rented property by discounted cash flow and provides an example of setting up a flexible template by spreadsheet.FindingsThe spreadsheet template allows the valuer to value the over‐rented cash flow by modified or full DCF.Practical implicationsThe flexibility of the template allows the user to change the length of the lease, the rent reviews and it calculates the term until the rent passing is exceeded by the estimated market rent.Originality/valueThe technique is not original but the spreadsheet template helps to explain the profile of the cash flows derived from over‐rented properties.

Issues that commonly have an impact upon corporate occupiers and how they can be avoided with appropriate foresight and planning

A corporate occupier party to a commercial lease on standard terms can reasonably expect to encounter a wide variety of issues during the life of its tenancy. At the heads of term and lease negotiation stages, matters including protection under the Landlord and Tenant Act 1954 (the Act) and rent review clauses will be considered, together with the relevant implications. As the tenancy progresses, common landlord-tenant exchanges may involve processes such as the application of service charge mechanisms, conduct of rent reviews and applications for landlord consents to alter, assign or sub-let to enable an occupier to deal with a property more freely. Towards the end of a lease, issues concerning business tenancies may once again arise, as parties consider how Act rights should be best utilised or defended. Also of importance may be the exercise of break clauses, an area of practice that commonly creates major disputes. Finally, not all disputes require a landlord and tenant relationship, for example third party neighbour matters such as disputes regarding rights to light and nuisance. This paper considers these issues from a practical, commercial and legal perspective.

What is the meaning of the oft-used words ‘vacant possession’?

A requirement to give ‘vacant possession’ of premises is common in the property world. For instance, a tenant might be required to yield up vacant possession at its lease end or when exercising a break option. Additionally, the hypothetical circumstances assumed at rent review may require vacant possession. The words usually appear in a sale and purchase contract, will often constitute a requirement in a settlement reached between parties to a dispute, or even appear in a court order. What, however, do these words really mean and how does one know that the concept has been achieved? Be it a building surveyor negotiating a dilapidation settlement, a valuer assessing a rental level or a lawyer advising a vendor or purchaser, all have long awaited firm judicial guidance. The Court of Appeal has recently reviewed previous case law and Lord Justice Rimer in particular has given the guidance required (NYK Logistics (UK) Limited v Ibrend Estates BV [2011] EWCA Civ 683). This paper looks at the judgment delivered and at some of the issues it raises.

Law and the Built Environment

Law and the Built Environment is a core textbook for all students undertaking compulsory law modules on construction, real estate and property management programmes. This single text provides an accessible introduction to the many areas of law studied by aspiring built environment professionals. Written by a team of lecturers with many years’ teaching experience in these areas, key principles of English law are placed in their relevant professional context and clearly explained in exactly the right level of detail for success in the modules studied. The book also focuses in greater depth on some specialist areas of built environment professional practice, including construction contracts, health and safety, rent review, dilapidations, and lease renewals.

Rent review update – leases in transition?

Rent review update – leases in transition?

The effect of upward‐only rent reviews on UK prime retail property capital values

Purpose – The purpose of this paper is to consider the likely effect on capital values of prime retail property in major UK urban centres from any legislative ban of upward‐only rent reviews (UORRs) from commercial leases.

Profits method valuation succeeds following further challenge

This paper deals with the assessment of the rental value of shell condition pub restaurants where located on either retail or leisure parks. Should rental valuation be by reference to either direct floor area comparison or by the profits method? In the virtual absence of market lettings of such properties how is the limited comparable evidence from rent reviews to be compared and contrasted? Two disputed rent review cases in the northwest resulted in independent expert valuer determinations. What were the respective Landlord's and Tenant's arguments? How did the experts determine these cases and what reasons were given? What conclusions may be drawn from the outcome of these cases?