Over-Rented Property: a Worked Example

Rent is set on a date and markets move after it. A lease signed at the top of a cycle, a review that cannot go down while the market falls, fixed annual increases that outrun market rents, or a rent set high in a sale and leaseback to lift the price can each leave a tenant paying above what a new tenant would pay for the same space. So can a high face rent bought with large incentives, which is why effective rent and over-renting are read together.

To a lender the overage is income with a shelf life. While the lease holds it, it pays interest as well as any other rent. At expiry, or at a review that can reset rent to market, it goes. And it goes sooner if the tenant fails: a lease above market is the first a struggling tenant will want to leave, and the hardest for anyone to take on.

On an over-rented building the reversionary yield is lower than the initial yield, and the gap is the share of today's return that will not last. Valuers often value such a building in two layers: the market rent capitalised as if it ran indefinitely, and the overage as a separate slice of income that ends at expiry, discounted at a higher rate because it depends wholly on one tenant paying above market. The capitalisation rate on passing rent alone would value the overage as if it were permanent.

How long the overage lasts depends on the review clause and the market. In the UK, upward-only reviews have long been common, and they hold the passing rent until expiry. The English Devolution and Community Empowerment Act 2026 inserts rent review rules into the Landlord and Tenant Act 1954 for business tenancies in England and Wales. Once commenced, they set aside the upward-only element of a review in a tenancy granted or varied after that date, and also catch a renewal lease granted under an option or agreement entered into on or after 17 March 2026. The rules await commencement regulations, and leases already granted keep their reviews. In New Zealand, the standard form of deed of lease most leases use offers ratchet options that stop a market review going below an earlier rent, and in practice a soft ratchet applies unless the parties choose otherwise. In Australia, several states' retail lease Acts make a ratchet void in a retail shop lease. Victoria's, for example, voids one in a market review but not in a fixed-percentage or index review; outside the retail Acts, a ratchet is a matter for the lease.

A car showroom with a workshop behind it, constructed for this page like every figure in it, is let to a dealership on a net lease with six years to run. Its reviews cannot reduce the rent. The passing rent is US$900,000 a year; dealers' needs have changed and the valuer puts market rent at US$720,000. The owner asks for a loan of US$6.5m at an interest rate of 6.8%. The yields and rates are the example's, not a market norm.

The headline is a building yielding 8.1% with cover of two times. The building the lender will own in six years, if nothing else changes, yields 6.5% on today's value and covers its interest 1.63 times. Neither is alarming here, but the lender has learned that a fifth of the rent is temporary and that the loan to value rises at expiry unless the loan amortises. If the dealership fails in year two, the overage goes in year two.

The mirror case, a tenant paying below market, is called reversionary or under-rented, and it reads the opposite way. The reversion is an uplift, the reversionary yield is higher than the initial yield, and a vacancy costs less because the next tenant pays more. A lender reading an under-rented building asks whether the uplift will be captured at review; one reading an over-rented building asks how long the excess is protected and whether the tenant will stay to pay it.

Passing rent is printed on the rent roll; market rent is an opinion, usually the valuer's. A lender reads the evidence behind it, and reads it with the expiry dates, because an overage protected for six years is worth more than one that ends at a review next year.

DEFINED IN ONE PARAGRAPH → · EFFECTIVE RENT, WORKED → · WEIGHTED AVERAGE LEASE EXPIRY →

The reverted rent usually decides the size of the loan, and the passing rent its comfort in the early years. Where the two differ widely, a lender may set the loan on the lower figure, ask for amortisation that brings the loan down by expiry to what the reverted value supports, or set the loan's maturity before the lease ends so that refinancing happens while the overage is still in place and visible. The lender also reads the tenant. A strong tenant with a reason to stay, such as fit-out it cannot move or a trading location it needs, makes the overage more likely to be paid. A weak one makes it the first thing lost.

NET OPERATING INCOME → · LOAN TO VALUE RATIO → · CAPITALISATION RATE →