Restricted occupation rent reduction

by Readers Question

15:05 PM, 8th April 2014
About 6 years ago

Restricted occupation rent reduction

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Restricted occupation rent reduction

I am very new to this. I am negotiating a rent review and my tenants agent says that as the occupation of the flat above the shop is restricted to the shop trader there is a convention in such circumstances that the rent attributable to this part of the accommodation under the principle lease should be at 50% of that which might be achieved for same accommodation if let on Assured Shorthold Tenancy. Restricted occupation rent reduction

Is that true and is 50% reduction negotiable ?

Thanks

Colin



Comments

Mark Alexander

15:08 PM, 8th April 2014
About 6 years ago

Hi Colin

That's a new one on me.

If I were you I would go back to the agent and ask him to quote the specific piece of legislation to which he is referring or the relevant clause in the lease.

I am not saying that such a law doesn't exist, just that I've never heard of it if it does. That said, I don't own any flats above shops either.

If the agent replies, please post his response here.
.

Brian Phillips

15:27 PM, 8th April 2014
About 6 years ago

I have managed these types of mixed tenancies for a very long time. Generally speaking its a matter of negotiating the best terms for yourself, there is no legislation covering the, or any, reduction. That said, if its a combined letting of shop and housepart, usually on a full repairing and insuring lease, then it is normal to reduce the housepart from what would otherwise be a much higher rent (if let separately) since the combined type of letting will absolve you from any repairing obligations, thus saving you money and making the tenant spend more than he would otherwise. If, by chance, its NOT a FRI letting, then any reduction should be quite small, certainly not as much as 50%

Freda Blogs

15:32 PM, 8th April 2014
About 6 years ago

Are we talking about a commercial property (shop) lease with residential accommodation on the upper floor, which is held on a single lease? If this is the case, the tenants agent may have a point but ideally should be able to provide evidence and/or point to relevant provisions in the lease. If occupation is restricted (and maybe the accommodation doesn't have independent access but only via the shop), logically that will not enable any tenant to occupy, and hence the market/rent payable would be limited.

If you are inexperienced in these matters you should ask a Chartered Surveyor to represent you. The value you will obtain will almost certainly outweigh the fees.

colin crozier

15:48 PM, 8th April 2014
About 6 years ago

Reply to the comment left by "Freda Blogs" at "08/04/2014 - 15:32":

Hi thanks for your reply.Yes basically it is a ground floor village shop with 2 bed flat above. but the kitchen is downstairs. this was purpose built as a village corner shop in 1930,s ,so there is access to the flat and the shop (internally) via private door then hallway and separate access to shop thro normal shop entrance. I know the tenant has no desire to sub let the flat and have told them I would have no objection in principle, if that were the case . colin

colin crozier

15:54 PM, 8th April 2014
About 6 years ago

Reply to the comment left by "Brian Phillips" at "08/04/2014 - 15:27":

Hi thanks for your reply. It is as you have stated, and I understand the principle of a reduced in rent, but 50% seems way to much . what would you suggest to be a reasonable percentage reduction especially as my tenant has no desire to sub let even tho I have told them I have no objection in principle to that. colin

Brian Phillips

16:40 PM, 8th April 2014
About 6 years ago

it is what the market will dictate, and what the tenant will pay. Freda is right, though - it sounds like you need to pay for some professional advice from someone who knows the rentals in your area

colin crozier

19:23 PM, 8th April 2014
About 6 years ago

Reply to the comment left by "Brian Phillips" at "08/04/2014 - 16:40":

thanks again. My main reason for trying to understand this is the fact that the tenants agent is trying to get a rent reduction back to the December 2006 agreed rent. In December 2010 myself and the tenant agreed an increase between ourselves. His agent is now saying there should not have been any increase, but my argument is that, it was mutually agreed and should therefore be regarded as "open market rent " for that review date. Rents have not gone down in the last 4 years so a reduction now should be out of the question.

Freda Blogs

19:48 PM, 8th April 2014
About 6 years ago

I am guessing you didn't prepare and get signed a Rent Review Memorandum to record the revised rent in 2010? This would provide irrefutable evidence of the agreed increase. Nevertheless, if the tenant has paid rent at the increased level you could argue specific performance, but this is where you get into potential legal territory.

Clearly I am unaware of the specific provisions in your lease, but I think it is very dangerous for you to use terms such as "open market rent" which often have very specific definitions in a lease and it may not be in your interest to assert that this is what was agreed back in December 2010.

Furthermore, if you are dealing with an agent acting for the tenant, he sounds rather more versed in the vagaries of commercial leases which can be a minefield for the unwary, and by your own admission, you are inexperienced. Many of the clauses can impact the level of rent that should be paid.

In addition, you cannot expect this review to be settled by general statements such as "rents have not gone down". You should expect to support your views as to rental value by reference to new lettings, lease renewals or rent reviews of other comparable properties within the vicinity. Please take advice at an early stage rather than later when you find you cannot agree the new rent with the tenants agent and you find yourself at a third-party determination. If you bring in an advisor at that late stage, you could seriously compromise his or her ability to negotiate on your behalf.

Finally, if the rent review is in December, which is what is suggested by your post, why are you looking to negotiate it now? It seems to me a little premature, given the direction of the market and you may find that you could achieve more by waiting a few more months until nearer the rent review date.

I hope this helps.

colin crozier

10:40 AM, 9th April 2014
About 6 years ago

Reply to the comment left by "Freda Blogs" at "08/04/2014 - 19:48":

Hi thanks again for your comments. The reason for doing review now is because lease ends this December so we have to renegotiate everything ie term etc which has to be done within certain time frame. The previous rent was mutually agreed and has been paid regularly with no problems. Why would it not be viewed as open market rent? Colin

Freda Blogs

22:05 PM, 9th April 2014
About 6 years ago

Hi Colin

Several observations.

1. Open market value - whilst at first sight its meaning may appear obvious, to a surveyor it is very specific terminology and is defined in the RICS valuation 'bible', the Red Book, (although the most recent version omits the word 'open').

Also, you may find the term specifically defined in your lease as to the assumptions that should be made in assessing the OMV at your property and the things that should be ignored, the 'disregards'. The planning consent, user clause, alienation provisions and more could all have a bearing on the defined OMV at your property.

2. Do you know whether your lease is contracted in or out of the security of tenure provisions of the Landlord and Tenant Act 1954? This will influence how you tackle the lease renewal. If the lease is contracted in, there are some prescriptive legal mechanics that should be observed including the service of a S25 Notice in good time, and I strongly recommend you get a commercial property solicitor to advise you. He or she would work hand in hand with your surveyor if you appoint one. The solicitor and surveyor should be familiar with all that I am saying to you here.

You say that you have to observe a certain time frame to deal with the lease renewal. It still seems a little early to me to be doing all this and more often than not renewal negotiations run over the end of the contractual lease term without a problem. However, do not stop your discussions until you have consulted someone about it, just in case ‘time is of the essence’ (this is very important). If you are advised that it isn’t, it may work in your favour and give you a better negotiating position to slow things down a bit, and if so, please ask about an ‘interim rent’ application to cover your position meantime. As (I assume) you will have a rent set for 4 years, it is worth spending a bit of time to get the best deal you can.

3. Finally, your opening post revolves around the % deduction on the rent for the residential accommodation. In a substantial number of mixed use properties such as this, the major portion of rent payable is attributable to the GF retail area. If this is true in your case, I hope that you are also focusing on this part of the rent too to maximise what you can achieve?

Good luck.

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