Facing a rent review? Law firm, Charles Russell, provides practical retail advice

Kent: be informed

Kent: be informed

Harvey Nichols’ dispute with landlords over the rent review for its London flagship following a sale and leaseback deal, highlights the need for retailers to be informed about their rent review provisions and market trends, argues Debra Kent, head of occupier services at law firm, Charles Russell

Harvey Nichols has once again been in the news, this time for the rather provocative advertising of its latest sale. However, of more interest to retail companies and those in the property industry is the outstanding rent review for this iconic store.

The property was the subject of a leaseback to Harvey Nichols in May 1996 when the company took a 35 year lease at a basic rent of £3.27m per year, subject to the usual five yearly rent reviews.

It reportedly received around £75m and Cadogan Estates bought the freehold in 2000 for £81m, according to the Land Registry. While Harvey Nichols must have been very pleased with its sale and leaseback at the time, the drawback of being a tenant under a lease is those rent reviews do seem to come around fairly quickly.

It is unsurprising the landlord (Cadogan Estates) is seeking to increase the rent for this prize piece of commercial real estate, and in an area which is unlikely to have suffered from falling rents. 

Like other luxury brands’ areas, such as New Bond Street, the price tenants need to pay on both lease premiums and rental just seem to keep going up due to the continued demand for space by these companies.

The slight lull in the luxury goods market which has been reported on recently does not seem to have dampened their enthusiasm for flagship stores in high quality destinations. In the circumstances, what landlord would not want to take advantage of the regular rent review process to achieve a possible rent rise – especially given the positive effect on the investment value of the property.

Harvey Nichols’ lease has a fairly standard rent review clause requiring review to open market rent for the whole of the property for its permitted use as a high class department store or (for the 5th and the lower ground floors) as a restaurant.

If the parties cannot agree the rent, then either of them can refer the matter to the decision of “a professionally qualified chartered surveyor or valuer having experience in valuing premises used for the same purpose or purposes for which”  the store is used at the relevant review date.

The use clause also allows the building to be used as a hotel or for residential purposes or (partly or as a whole) for offices as long as the landlord’s consent is obtained.

The President of the Royal Institution of Chartered Surveyors decides on the valuer or surveyor if the landlord and tenant cannot agree. The valuer or surveyor is to act as an arbitrator – unless the landlord requires they act as an expert.

This is all fairly standard but given the size of the building and the lack of equivalent comparable evidence on which the surveyor or valuer can base his or her decision, it is difficult to predict the outcome of the determination. The main evidence on rents will be nearby retail units of a much smaller size and not just other department stores in the area, each being unique.

In May 2012 surveyors Lunson Mitchenall reported a trend for rental growth on department store assets after carrying out a number of independent expert and arbitration referrals on House of Fraser and Debenhams stores.

There is danger to both parties in not agreeing the rent and letting a third party decide. You cannot predict the rental decision to be made. Also, opportunities to appeal are rare.

Implications for other tenants and landlords?

Landlords and tenants in the area will be watching this with some interest. A significant increase in the Harvey Nichols’ rent is likely to have a knock on effect on shop units in the vicinity – even when taking into account some rental discounting for the size of the store.

What should tenants and landlords in the area do?

The first step is to check when your next rent reviews are due, dust off the lease and have a good, hard look at the rent review provisions to see any advantages or disadvantages. It always makes sense to take advice from an expert and all major surveying firms have experienced  advisers who could give an indication on likely rents.

Rent review clauses are usually upwards only. Tenants (both new and old) and property owners might wish to do their deal before any decision is made given the likely effect on rentals for their property. Others may wish to wait and see the outcome. It’s best to take an expert’s advice on which way to proceed for your store.

What if there is rental dispute?

Unfortunately there is usually little choice in how to deal with rental disputes as the disputes procedure will be set out in your lease. Is it preferable to have an arbitrator or an expert deciding the matter? There is a generally held view that an expert is better for the landlord in a rapidly rising market, and a tenant in those circumstances might prefer an arbitrator. Sometimes it is up to both parties to agree that an expert is to be appointed and, in such circumstances, a tenant might be well advised to refuse to agree to this.

Either way, being well informed on the rent review provisions in your lease and market trends will mean you can make a sensible decision on how to proceed with your rent review.