Rent review brewing? Here's what you need to know
Peter Taylor, Director, explains the process of a rent review and what the options are if it's not all plain sailing.
While the question of the Market Rent Only (MRO) option for the pub industry appears to have taken a back seat, there is still a large number of licensees facing the prospect of a cyclical rent review or a lease renewal. For many, this can be a daunting prospect.
The basis of the review will be set out in the lease and generally assume that the tenant has complied with their obligations and that the property is in good repair. Whilst there will be variations from lease to lease, the majority will provide for a review of Market Rent subject to assumptions and disregards.
The methodology of pub rent reviews may appear to differ from that of mainstream commercial property rent reviews which are generally approached on a rate per square foot by reference to comparable lettings, whereas the traditional approach to licensed property reviews, particularly fully fitted public houses, is the “profits method” whereby the Fair Maintainable Trade and Operating Profit in the hands of an average competent operator is assessed and a rental bid is made in respect of the divisible balance of the net profit – after allowance for tenant’s investment in stock and F&F.
Unless the rent is acceptable to the tenant, negotiations will commence. Should the tenant wish to undertake their own negotiations, they should ensure that discussions are said to be on a “without prejudice” basis. This means that anything that is said between the parties cannot be disclosed in the event of the dispute being referred to a third party i.e. an Arbitrator or Independent Expert. The purpose of this is to encourage the parties to freely negotiate and attempt to reach a compromise, without those discussions subsequently being used as evidence against them.
Should a tenant disclose their trading accounts? The general guidance is that unless the lease specifically provides for the tenant’s accounts, they are under no obligation to do so. The review is based on the Fair Maintainable Operating Profit in the hands of the competent operator, not the actual tenant. The absence of the tenant’s accounts places responsibility on the parties to introduce a greater degree of objectivity by reference to comparable transactions.
The exception to this may be where the landlord has waived their right to an upwards only rent review. Many pubco leases contain upwards only reviews; however a number of pubcos have waived this provision. The tenant should check whether they are required to demonstrate that trade has fallen, and the reasons for that reduction, by disclosure of accounts.
What happens in the event of the parties failing to agree the rent? The lease will provide for referral to an Arbitrator or an Independent Expert. In a nutshell, an Arbitrator will weigh up the evidence put before them and arrive at an “award” of rent based on the weight that they attach to the evidence. This does not necessarily represent their opinion of rent and places the responsibility on the parties’ experts to provide well reasoned and supported cases for the rent they propose. An Independent Expert may receive evidence from the parties or their experts but is unfettered by these and will arrive at their own opinion.
An Arbitrator has power to award his costs and those of the parties, dependent on the results. Thus it may be possible for the “losing” party to pay his own costs, the other party’s costs and those of the Arbitrator. Clearly, a tenant needs to be sure of their case and to have a fighting fund before he goes down this route. The tenant can however attempt to reduce the risk by asking the Arbitrator to limit recoverable costs.
An Independent Expert generally has the power to allocate their own costs between the parties and they each bear their own costs.
A third option which is not available to all tenants, but is generally available to tenants of pubcos, is the Pubs Independent Rent Review Scheme (PIRRS) which offers an accessible, independent, low cost rent review resolution service where fees are capped.
The good news is that a relatively small number of reviews are determined by a third party: the majority of reviews are settled by open and positive discussions between the parties.