Sandi Murdoch

The influence of procedure on rent determination in the commercial property market of England and Wales

This paper examines the effect which the rent assessment process has on the level of rents and rental values in the commercial property market in England and Wales, by asking: is there an accepted definition of open market rental value which is consistently adhered to, irrespective of the context in which the rent is assessed? How, in theory, do the procedures by which an assessment of open market rental value is arrived at differ as between a new letting, a lease renewal, and a rent review? Is there any evidence to suggest that any theoretical differences in the operation of the various rent assessment procedures are borne out in practice? In particular, is there any evidence that in new lettings and lease renewals lease terms are changed after the rent has been finalised? Is there any evidence to demonstrate that there are different levels of rent which are sufficiently consistent to be referable to the context in which the rent was assessed? If so, does this produce difficulties in the valuation process which may not be presently fully appreciated? In addition to a review of the relevant literature, the primary research undertaken for the study was a survey of surveyors and solicitors involved in commercial lettings and rent reviews and the compilation of a database of rental valuations and transactions.

Exit Strategies for Business Tenants

Adaptability is critical to success in business. Yet, many businesses in the UK occupy premises on fixed term leases, which run for several years, a feature that has great appeal to investors. However, during this time property requirements can change. This research critically examines the three main mechanisms by which tenants can bring their leases to an end, breaks, assignment and subletting. We examine the legal rules governing these devices and undertake analyses of lease data and interview and questionnaire surveys. The research finds that break clauses are an increasingly common exit mechanism agreed in the leases of office and industrial property tenants but are less frequent in retail markets. However they are not usually operated, raising questions about their purpose and timing. Breaks cannot give the more general flexibility of assignment and subletting, although these latter clauses are not often part of lease negotiations. Landlords have legitimate reasons for preventing some assignment and subletting but can be unnecessarily restrictive on some aspects. Addressing the disparate concerns of both sides of the landlord and tenant relationship on lease flexibility is a challenge to the property industry and to policy makers.

Flexible Property Leasing and the Small Business Tenant

Small businesses and commercial property leasing are two important policy areas for the UK Government. Hence, it has been promoting flexibility and choice in commercial leases as part of a wider enterprise and productivity agenda, and attempting to improve the awareness of small business tenants on property leasing issues. This article addresses issues of flexible leasing specific to small business tenants. Through an analysis of lease data from Investment Property Databank and a questionnaire survey of tenants in England and Wales, it examines the negotiation process, outcomes, and trends stemming from that process. There are major differences between small business leases and those for medium and larger sized companies. Small businesses have shorter leases, fewer rent reviews and earlier breaks. There are also differences in the negotiation process, most noticeably as between the very small micro business and other small businesses. A significant number of very small tenants take no commercial advice when negotiating leases even though many of them have no prior experience of taking leases; the smaller the business the less likely they are to take advice. While flexibility and choice in leasing has improved in recent years, the awareness of small business tenants on leasing issues is less good. Part of the problem may lie in the difficulties of dissemination to a diverse group. However, if voluntary mechanisms cannot demonstrably improve information flows to micro businesses, the small business issue may yet be the catalyst for legislation on all business leases, legislation the UK property industry has fought desperately to avoid for the last 13 years.

Capital Valuation Implications of Rent‐free Periods

The treatment of rent‐free periods and other inducements is currently an area of debate within the valuation profession. It has been argued that in determining the real rental value from a headline rent, the valuer must devalue the impact of the inducement. While recognizing the problem, there appears to be little agreement within the profession on either the appropriate methodology or the time period for this calculation. A further problem has arisen due to the near impossibility of divorcing over‐rented property valuations from the determination of real rental values. However, the current debate has centred on rental implications and has not attempted to quantify the effect which the capital valuation has on the letting market, even though it is the effect on the freehold capital valuation which may drive the deal on letting incentives to a far greater extent than any trade off of present rental holiday against higher rent in the future. Addresses the capital valuation question after a review of the bas...

Basis of rental value for performance measurement systems

This paper examines the use of the UK Red Book definition of open market rental value in the context of the provision of rental values for performance measurement purposes; specifically the bases and interpretations used in the construction of actual property-based commercial rental value indices such as the Investment Property Databank (IPD). Previous research has identified a number of possible interpretations of rental value based upon effective or headline rents, rents obtained upon new letting or provable at rent review and rents reflecting assumed or actual lease terms; it is this work that provides a basis for a questionnaire survey undertaken for this paper. The survey is of owners, managers and valuers/appraisers and is designed to identify the basis of rental value reported to IPD. Although IPD request that all valuations are based upon the Red Book definitions, the survey reveals that this is being ignored. There is significant inconsistency with owners and appraisers reporting a mixed bag of effective new letting rents, headline rents on new lettings and provable rents at review. The rental value index is therefore being formed from inconsistent data with no one basis appearing to dominate. Solutions to the problem include the provision of a more consistent set of data to IPD; but this has major cost implications since it would often require the supply of two rental valuations for the majority of properties in the database. Accordingly, the preferred solution would be the identification of the particular interpretation used in the data provided; this would allow the development of a variety of rental value indices which would increase significantly the ability of analysts to examine the impact of different rental values on property performance.

The contribution of upward-only rent reviews to the capital value of UK property

The aim of this paper is to provide a response to suggestions that the removal of upward-only rent reviews (sometimes known as ratchet clauses) would reduce commercial property asset values in the UK. The paper also seeks to estimate the amount of the reduction. It argues that the fall in the capital value of commercial UK investment property will be a function of changes in risk/return characteristics which, when set within the framework of the current leasing structure and the expected cash flow determined thereby, manifests itself in changes in investment yields. Because the property market generates fewer transactions than some other capital markets, and because valuations are used as a surrogate for transactions when compiling property market data and indices, the way in which valuers approach investment property valuations in practice will also influence the perceived value loss caused by any change in legislation. This latter effect is modelled in this paper. The paper identifies the likely level of change in investment yields for the major UK commercial and industrial property types, examines the current leasing structure of those properties and investigates the current application of valuation techniques to these structures. This facilitates a valuation of the commercial and industrial property investment market, from which it is estimated that the effect on the value of UK property of the upward-only rent review clause being removed from future leases would be a reduction of 5% for offices, 4% for shops and 4% for industrials, a weighted average (using IPD weights) of 4.3% across all three sectors.

The Legal Implications of Rent‐free Periods at Rent Review

One of the features of the UK letting market has been the practice of giving new tenants a rent‐free period at the commencement of a lease. Such rent‐free periods seem to fall into one of two types. First, it appears that, even in a very buoyant market, most tenants are able to negotiate a modest rent‐free period for fitting out or, where the lease is a head lease, for arranging sublettings. These rent‐free periods (even where they are a slice of a longer rent‐free period) can be seen to have their own characteristics. They can be viewed as a one‐off concession at the commencement of the lease. Second, in a poor market rent‐free periods are used as incentives, in the sense that they are a direct alternative to an explicit reduction in the passing rent, and often form part of a wider package of inducements. These have an obvious and direct bearing on true rental value. Critically examines the various devices which have been used by those drafting rent review clauses to deal with rent‐free periods at review...