Rent and rent reviewReserving rent

The amount of rent must be 'certain'. This does not mean that the lease must state the actual figures for the whole of the term. However, there must be a mechanism (usually a rent review clause) allowing the rent throughout the term to be ascertained with certainty.

No particular form of words is required to reserve rent, although the formula 'yielding and paying during the term' is widely used.

Although in itself a strong indicator that the parties intended to create a tenancy, rent is not required for a tenancy to exist. If the other 'hallmarks' identified in Street v Mountford [1985] 2 All ER 289 are present (ie exclusive possession of defined premises for a term), then a tenancy can exist even if no rent is reserved or payable.

Commercial rents are usually paid in advance by equal instalments on the quarter days (25 December, 25 March, 24 June and 29 September) or on other dates specified as rent payment days. In the absence of an express agreement that rents are payable in advance, it will be payable in arrears.

Where rent is payable quarterly in advance, the whole instalment is payable on the quarter day (eg, the instalment due on 25 December is the full sum to cover 25 December - 24 March, inclusive). This point is particularly significant where a tenant seeks to operate a break clause with a termination date that falls between quarter days. If the break is conditional on payment of all rents, and it is not clear on the face of the lease that the final instalment is to be a sum apportioned up to the break date, then the tenant must have paid the full instalment for the quarter in which the break date occurs.

Deductions from rent

Where property is let by a non-UK resident landlord the UK letting agent, or the tenant where there is no such agent, must deduct basic rate tax from the property income (net of allowable expenses paid by the agent or tenant and net of VAT on the rent where it has been charged). The withheld tax must be paid to the Revenue within 30 days after the end of each calendar quarter. The agent or tenant must give the non-resident an annual certificate showing the tax deducted. The landlord is required to pay any excess of tax due over the tax deducted at source (or claim a refund) under the self-assessment provisions.

Alternatively, a landlord may apply to receive his rental income in full, under the non-resident landlord scheme. The landlord must undertake to complete tax returns if required and pay any tax due on time. Any claim by a non-resident landlord to receive rent without deduction must be carefully checked.

Set-off

The tenant's right to set-off rent against any claim it has against the landlord (eg for disrepair) can be excluded only by clear words. Use of the words 'without set off' excludes equitable as well as legal set-off.

Rent Review

'A rent review clause is designed to deal with a particular commercial problem, namely that of the tenant who wants security of tenure for a lengthy term, and the landlord who, in times of inflation or a rapidly changing property market, does not want to commit himself to a fixed rent for the whole of that term.' - (Hoffmann J in MFI Properties v BICC Group Pension Trust [1986] 1 EGLR 115).

Methods of rent review include:

• Indexation: the rent is linked to a particular index, such as the Retail Prices Index (RPI) or Consumer Prices Index (CPI)

• Turnover rent: based on the tenant's turnover or profit, this type of arrangement is typically found in the retail and catering sector

• Royalty rents: these are common in mining leases where a rent is linked to the volume of minerals extracted

• Geared rents: these are common in development leases where the landlord (typically a local authority) grants a long lease at a premium to a developer and retains a financial interest in the success of the development by reserving a rent which equates to a percentage of the sublease rents. Geared rents usually operate either on a 'rents receivable' basis (where the developer/tenant assumes the risk of voids) or a 'side by side' basis (where the percentage is calculated in terms of the rents actually received by the developer/tenant)

The most common approach is for the rent to be reviewed by reference to the market rent for comparable properties at the review date. Market rent reviews take place at 3 or 5 year intervals. They require the parties (or the valuer appointed to determine the rent if the parties cannot agree) to assume a new lease of the property on the relevant review date by a willing landlord to a willing tenant. The starting point for valuation will be the actual property and the terms of the existing lease, but the valuer will be required to make various assumptions (for example, that the property is in good repair) and to disregard some matters (such as improvements made by the tenant). For commercial leases the process is entirely contractual, and so a significant body of case law has built up to explain and regulate the operation of rent review clauses. Key issues include:

Machinery of Rent Review

Many older review clauses (which may well be carried into leases renewed under the Landlord and Tenant Act 1954) require the landlord to 'trigger' the review by serving a notice proposing the new rent. The tenant must serve a counter-notice if the landlord's proposed figure is not agreed. Time is not generally 'of the essence' for rent review clauses, but that presumption is rebutted if the clause not only requires the tenant to serve a counter-notice, but specifies that the new rent will be the landlord's figure if the tenant does not respond in time. If the procedure of 'machinery' provided by the lease fails or becomes unworkable, then the court may impose an alternative procedure.

Presumption in favour of reality

Unless the rent review clause unequivocally directs otherwise, the valuer is required as far as possible to determine the rent for the actual premises, on the terms of the existing lease and in the market conditions prevailing at the review date. The court has leaned strongly against landlords' attempts to obtain a 'headline' rent by directing the valuer to ignore rent free periods or other inducements available on new lettings - Broadgate Square v Lehman Bros [1995] 1 EGLR 97.

The court is also reluctant to find that the term of the hypothetical lease is anything other than the remaining term of the actual lease. Faced with very clear drafting the court must accept a longer hypothetical term. However, where market conditions have shifted significantly since the clause was drafted, a requirement to assume a term longer than the remainder of the actual lease can be disadvantageous to the landlord - Canary Wharf Investments (Three) v Telegraph Group [2003] 3 EGLR 31.

Rent and SDLT - what is chargeable?

Stamp duty land tax on the grant of a lease is calculated by reference to the 'net present value' of rent. There is a potential tax trap where the lease reserves a single 'inclusive' rent without specifically identifying and apportioning any non-chargeable items. Those non-chargeable items are set out in Finance Act 2003, Schedule 4 which includes:

• any undertaking by the tenant to repair, maintain or insure the demised premises

• any undertaking by the tenant to pay any amount in respect of services, repairs, maintenance or insurance or the landlord's costs of management, and

• any other obligation of the tenant to bear the landlord's reasonable costs or expenses of or incidental to the grant of a lease

Without specific apportionment the whole sum must be treated as rent to calculate SDLT liability.

Rent review and SDLT

When assessing the amount of SDLT due in respect of a lease any known or ascertainable rent increases must be included in the calculation and reported in the initial land transaction return.

Where rent is to be reviewed on a basis that cannot be quantified at the start of the term, special rules apply. Where a review occurs within the first five years of the term then an additional land transaction return must be submitted as soon as the rent actually payable for the first five years has been determined. Rent reviews occurring after the first five years of the term must be reported (and any additional SDLT paid) only if they produce an 'abnormal' increase - Finance Act 2003, Schedule 17A

Rent reviews assessed by reference to RPI are specifically excluded from the requirement to submit further land transaction returns once any increase has been determined. However, because the concession refers only to RPI it is likely that further returns would be required where the rent is reviewed by reference to an index other than RPI - Finance Act 2003, Schedule 17A, paragraph 7(5).

Code for Commercial Leases - 2007

The Code for Commercial leases remains voluntary but recommends a move away from upwards only rent reviews. Instead, the Code requires landlords to keep up to date valuations of its properties for the purposes of rent review. It is also recommended that landlords consider requests from tenants for upwards/downwards rent reviews or other alternatives as well as the ability for either the landlord or the tenant to initiate a rent review. The landlord is expected to provide reasons for rejecting alternatives to the standard upwards only rent review and, unless clearly set out in the heads of terms, the basis of rent review will be the open market rent.