24 Sometimes, the actual rent paid on leasehold property (the 'passing rent') will vary from the market rent. This most often occurs in older long leases with unusual rent review patterns. In longer leases with infrequent rent reviews, the market rent can substantially exceed the passing rent and this difference is known as a 'profit rent'. This lasts until the next rent review or the lease ends. This can give the lease a capital value in its own right and such leases are sold from time to time. In a depressed market, the passing rent can exceed the market rent so that the property is described as 'over-rented'. Such leases usually contain upward only rent review clauses (UORR) so that if a rent is set at the top of a property cycle, this may persist over one or more rent review periods.
25 The market rent is the estimated amount for which a property would lease at the date of the appraisal between a willing lessor and a willing lessee operating at arms length, after proper marketing, with proper market knowledge, prudently and without compulsion.
26 Appraisers should also note that the passing rental value (and thus the capitalised rental value) on physically similar properties might be quite different. This may reflect the fact that the lease of one office block may be on full repairing and ensuring terms where the tenant pays for all repairs and insurance. A physically identical office block may have an entirely different lease but with the landlord responsible for insurance and repairs.
27 It is important to remember that what is being valued is the legal interest in a property rather than the physical property itself. This means that appraisers should generally use the market rent because the legal interest that is being appraised will usually cover a number of rent review periods, and it will be the market rent that, over time, will be the relevant value. However, where UORR clauses are imposed, it would be incorrect to use sensitivity testing to show the impact of falling market rents, as the actual rent paid will not fall in line with the market.