Rent and rent review
Rent is usually payable quarterly in advance, however it is becoming increasingly commonly for rent to be payable monthly.
- The level of rent that is to be paid is generally a commercial matter and if advice is required organisations may seek professional advice, especially where the proposed rental is significant. [Principles of negotiation of new leases]
- However, where the lease is from a local authority or an organisation established to promote community or public benefit, the charity may bring the social impact value of their activities into the negotiations.
- Nearly all leases require the tenant to pay Value Added Tax on the rent, or if it becomes payable because the landlord has opted to charge it, or does so during the course of the lease term. [Value Added Tax]
- A tenant can disapply that option to tax by serving a notice specifying that the property is to be used for a relevant charitable purpose or a use similar to a village hall.
Where VAT is not yet payable on the lease the landlord may (especially where the lease term is fairly short) be prepared to agree that the rent is “inclusive” of VAT, in which case if the landlord does decide to charge VAT, it will come out of the landlord’s own pocket rather than that of the charity.
- Alternatively, if the tenant is taking premises where the landlord may charge VAT in the future, the tenant may seek to negotiate a break right that will be exercisable and take effect before any obligation to pay VAT arises.
- Where VAT is already payable on lease rents, and the charity is not using the property for a relevant charitable purpose, and the tenant cannot recover VAT this is a significant additional expense for the charity. All the charity can do is to see if the landlord will be generous and mitigate at least some of the effect by agreeing a lower rent.
- In the case of longer leases, rent may be subject to increase under “rent review” provisions. There are two types of rent review provision: open market rent review which is intended to increase the rent in line with the local rental market; and indexed rent review which is intended to increase the rent in line with general inflation.
- An indexed rent review may on the face of it seem to be sensible, but it depends on the index chosen for increasing the rent being linked to an index that is fair in the circumstances. The commonly used indexes relate to retail prices, and it is questionable whether this is always sensible, as it will, for example, take into account changes in the locality over the term of the lease that might depress rents generally in the area.
- Open market rent reviews usually involve comparison with other local rents in the area as if the property were let at the time of the rent review. This type of rent review can be complex and can include traps for a tenant, so it is unwise to take a lease with open market rent review without professional legal advice.