An unsettled review at sale is a bet on the tenant's surveyor. Price the odds, split the backdated rent and move the risk into a top-up clause.
Price an outstanding rent review on the probability-weighted settled rent, not on the vendor's surveyor's figure, or better, pay on the passing rent plus a top-up when the review settles. On an illustrative £1,200,000 office where the vendor claims £1,320,000, the expected settlement is £1,278,000: paying on the vendor's figure costs £655,431 too much, 3.29 per cent above the expected value, and if the review settles at nil increase the overpayment is £1,872,659.
Worked in full in Real Estate Transaction Due Diligence by Julian R. Sterling, with every figure reproduced in a free workbook.See the book on Amazon →
An unsettled review is common at sale: the review date has passed, the landlord's surveyor has served a figure, the tenant has not agreed, and the vendor would like to be paid now for an uplift the tenant may never concede. Due diligence has to answer three questions: what the review is likely to settle at, who owns the backdated rent, and which contract mechanism carries the risk.
| Input | Value |
|---|---|
| Passing rent before the review | £1,200,000 |
| Vendor's surveyor's figure | £1,320,000 |
| Capitalisation yield | 6.0% |
| Purchaser's costs | 6.8% |
| Months from review date to completion | 6 |
| Months from completion to expected settlement | 9 |
The buyer's own valuer reads the comparables and gives three outcomes: settlement at the vendor's £1,320,000 (50 per cent), a compromise at £1,260,000 (30 per cent), or no increase because the review is upward-only and the evidence does not support one (20 per cent).
Expected rent = Σ probability × settled rent = 0.5 × 1,320,000 + 0.3 × 1,260,000 + 0.2 × 1,200,000 = £1,278,000
Net value = rent ÷ yield ÷ (1 + purchaser's costs)
In Excel, with outcomes in B2:B4 and probabilities in C2:C4: =SUMPRODUCT(B2:B4,C2:C4)/B6/(1+B7), the yield in B6 and costs in B7.
The expected uplift is £78,000 a year, not the £120,000 the vendor is asking the buyer to pay for.
| Rent used | Rent | Net value |
|---|---|---|
| Passing rent | 1,200,000 | 18,726,592 |
| Expected settlement | 1,278,000 | 19,943,820 |
| Vendor's figure | 1,320,000 | 20,599,251 |
The vendor's figure adds £1,872,659 to the passing-rent value; the expected settlement justifies £1,217,228 of it. The difference, £655,431, is what a buyer gives away by taking the vendor's surveyor's letter as the rent. Put another way, at the vendor's price the net initial yield on the rent actually payable today is 5.45 per cent, and 5.81 per cent even on the expected settlement, against the 6.0 per cent the buyer thinks it is paying.
When a review settles late, the new rent runs from the review date and the tenant pays the arrears in a lump, usually with interest under the lease. Those arrears straddle completion.
| Settled rent | Probability | Annual uplift | Seller's 6 months | Buyer's 9 months |
|---|---|---|---|---|
| 1,320,000 | 50% | 120,000 | 60,000 | 90,000 |
| 1,260,000 | 30% | 60,000 | 30,000 | 45,000 |
| 1,200,000 | 20% | 0 | 0 | 0 |
| Expected | 78,000 | 39,000 | 58,500 |
The buyer's 9 months are already inside the capital value: a buyer paying on £1,278,000 is buying that rent from completion. The seller's 6 months are not, and the contract has to say so: the buyer collects the full £97,500 of expected arrears from the tenant and must account for £39,000 to the seller, normally only when and if received. A buyer that pays the seller's share at completion, before the tenant has paid anything, takes the collection risk on money that was never its own. The day-by-day split follows the same rules as a closing proration.
The top-up clause needs the same diligence as the review itself: the yield and costs used to capitalise the uplift, a long-stop date, what happens if the review goes to arbitration, and who runs the negotiation with the tenant after completion. A buyer running a review whose upside goes to the seller has little reason to push.
| Probability of £1,320,000 | Expected rent | Net value | Overpayment at vendor's figure |
|---|---|---|---|
| 20% | 1,252,800 | 19,550,562 | 1,048,689 |
| 35% | 1,265,400 | 19,747,191 | 852,060 |
| 50% | 1,278,000 | 19,943,820 | 655,431 |
| 65% | 1,290,600 | 20,140,449 | 458,801 |
| 80% | 1,303,200 | 20,337,079 | 262,172 |
The yield scales everything: at 5.5 per cent the uplift claimed is worth £2,042,901 and the overpayment £715,015; at 6.5 per cent, £1,728,608 and £605,013.
Reading the vendor's surveyor's figure as evidence. It is an opening position served on the tenant, and an upward-only review can only disappoint downwards to the passing rent. The buyer's valuer should read the same comparables independently, and the result belongs in the price or in a top-up clause, not in the cover note. For the value of the upward-only protection itself, see what an upward-only rent review is worth.
Weight the settlement outcomes, capitalise the expected uplift, split the backdated rent at completion, and prefer a top-up on settlement to a guess at completion: £655,431 is at stake on this case. Real Estate Transaction Due Diligence turns each finding into a price adjustment, a retention, an indemnity or an insurance, and the free workbook for the book prices each of them.
Normally the seller keeps the uplift for the period up to completion and the buyer the period after, with the buyer accounting to the seller only when the tenant pays. In the illustrative case, expected arrears of £97,500 split £39,000 to the seller for six months and £58,500 to the buyer for nine.
Deferred consideration paid when an outstanding review settles: the capitalised value of the uplift on the same yield and costs used for the price. Here the buyer pays £18,726,592 on passing rent and then £1,872,659, £936,330 or nothing, so neither party carries the review risk.
No. An upward-only review settles at the higher of the passing rent and the open market rent, so the downside for the landlord is no increase. That is the 20 per cent outcome in the illustrative case, where a buyer who paid on the vendor's £1,320,000 figure would have overpaid by £1,872,659.
This article is one calculation from Real Estate Transaction Due Diligence. The book takes the same case from first principles to the decision, chapter by chapter, and every figure it prints is a live formula in the free companion workbooks.
Get the book on Amazon →Free companion files
Also on Amazon UK · Amazon Germany · Amazon France · Amazon Canada
Reading guide: real estate investing, finance and fund management → · All 1501 articles →
If this book helped, or didn’t, a few lines on Amazon are worth more than they look: they are what the next reader goes on. Write a review. The workbook stays free either way.