Commercial Property solicitor, Aimal Gram, discusses rent reviews within commercial leases and how best to avoid the potential risks.
What is a rent review?
Rent reviews are provisions included in most commercial leases that allow the rent paid by the tenant to change over time. A commercial lease might have a term of 5 to 20 years with the rent payable at market rate, but the rent will be subject to change in this time. Rent review provisions ensure the landlord will receive a rent that reflects the true value of the property that is leased to the tenant.
What are the types of commercial lease rent reviews?
Most commonly, rent reviews will be based on “open market rent,” which is the best rent that could be obtained in the open market for the property.
Alternatively, rent reviews can be based on:
- Index-linked – Retail Prices Index (“RPI”) or Consumer Price Index (“CPI”), which is essentially a rent that follows inflation.
- A combination of the higher of open market rent or RPC/CPI, but these are rare.
- Stepped rent – pre-agreed fixed increases for shorter leases of 5 years or less.
- Turnover rent reviews – the landlord of a retail property may accept a lower basic rent in return for a percentage of the tenant’s turnover.
What does a commercial lease rent review involve?
The formal process for rent review will be set out in the lease, but usually starts by the landlord notifying the tenant and proposing a new rent figure shortly before or after the rent review date. Both parties then negotiate to reach an agreement supported by evidence and assistance from their surveyors and legal advisors.
How should a landlord prepare for a commercial lease rent review?
To prepare for a rent review, landlords should start early, ideally at least a year before the rent review date. They should:
- Carefully examine the lease to understand the exact rent review date, notice periods, and the type of rent review.
- Discuss this with a property solicitor and consult a surveyor to assess the current market rent based on comparable properties and lease terms.
- Decide when to initiate the rent review process. If the market conditions are not favourable, the landlord can wait until they are before starting the process, and the increased rent would be backdated to the review date.
In commercial leases, it is expected that the rent review provisions will state that “time is not of the essence” in respect of the review dates, meaning the landlord can carry out a rent review after the review date has passed, with some exceptions.
How would a tenant prepare for a rent review?
The tenant needs to understand their financial position leading up to the rent review dates and their ability to pay a likely increased rent.
Where there are break provisions in the lease, the tenant could approach the landlord first to start the rent review process (but cannot compel the landlord), to allow enough time to then exercise the break option within the deadlines in the lease if the new rent is not acceptable to the tenant.
The tenant should also consider consulting its own surveyor with experience in lease advisory, who can be called upon to prepare a counterproposal in rent review negotiations on behalf of the tenant.
What happens if there are disagreements about the rent review?
If no agreement is reached, usually either party can refer the matter to an independent third party to determine. The lease will govern the terms of the third parties’ appointment, including whether they are to act as an independent expert or an arbitrator.
Potential risks
For landlords
When a review is missed or delayed, the landlord may not be able to recover the increased rent for the period between the review date and the date the new rent is agreed, especially if the lease has ended.
There are also upcoming legal proposals by the Government, potentially banning “upwards-only” rent review clauses, meaning that the rent could go down as well as go up.
For tenants
If a landlord does not trigger a rent review on time, the tenant may face a demand for backdated rent arrears plus interest, which can cause cash flow issues.
The tenant may also miss any opportunities to exercise a break option, thus being stuck with a lease with unaffordable rent.
How to avoid the risks?
We always recommend that both landlords and tenants discuss any upcoming rent reviews with their property solicitor and surveyor to ensure they understand timeframes, break options, and review types within their lease.
Aimal’s blogs
Buying a property at auction? Here’s what you need to know
Full repairing and insuring leases for commercial properties
