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Rent reviews on commercial leases

By Mohammed Rahman

Borneo Martell Turner Coulston

A RENT review is a point during the lifetime of a lease where the current rent being paid by a tenant to a landlord is reviewed and a decision is made as to whether the rent should stay the same or increase or in some case be reduced.

A rent review gives a landlord flexibility to make sure that they are charging the appropriate amount for rent for a commercial property. It can be useful to negotiate provisions for rent review clauses when negotiating Heads of Terms for a new lease.

Rent review clauses can be very complex and can appear in a variety of formats. There are different types of rent review clauses and they can have various implications for a landlord and a tenant. These clauses are one of the highest areas of dispute in litigation for commercial leases, therefore it is extremely important that rent review clauses are considered very carefully when a new lease is being entered into.

Whilst there is no set rule as to how often a rent review should take place, it is usual practice to have a rent review in a regular period which is easily divisible within the term of the lease, for example, for a 15-year lease, parties would usually agree a rent review either every three years or every five years, as both of these periods are easily divisible by the fifteen-year period.

Fixed increase rent review

A rent review which is in the form of a fixed increase is when the parties agree that at every rent review date the increase will be fixed. This will give the benefit to both parties of knowing exactly how much the rent will increase by and allows both the landlord and the tenant to plan for increases in income and outgoings respectively. The risk here, however, for the landlord would be that if the fixed increase is less than what the open market rent is, then the landlord, in real terms, suffers a loss and for the tenant, if the fixed increase is greater than the open market rent, then the tenant is paying a greater amount than the real value of the property.

Upward only open market rent review

An ‘upward only open market rent review’ is probably the most common type of a commercial rent review. Here the rent is reviewed based on what the property would be let for on the open market. This type of rent review usually works in favour of the landlord because if on the rent review date, the open market rent is higher than what the current rent is, then rent will increase to that figure and the tenant will have to pay the new rent. However, if the open market rent on the review date is lower than what is currently being paid by the tenant, the rent will not go down, but the tenant will be required to continue to pay the same amount of rent. Therefore, in these circumstances, the tenant will not receive the benefit of the lower market value.

Upward-downward open market rent review

In some circumstances, in an effort to retain tenants, a landlord may reduce the rent due to the open market rent showing a lower amount than the actual rent being paid. This is not common practice, but in certain circumstances, for example, if there is an economic down turn, the landlord may choose to receive a lower rent over the prospect of losing the tenant and not being able to re-let the property. This type of rent review is normally an exception rather than usual practice.

Retail Price Index (RPI) rent review

A Retail Price Index (RPI) rent review measures the average change of most household products and services on a month to month basis. Some Landlords may opt to have the rent review based on the RPI measure. As a result there will be a calculation that will need to be carried out using the RPI measure to calculate any new rent.

The different types of rent review methods have different advantages and disadvantages for both the landlord and the tenant. For a landlord they would want to maximise the amount of rent they can achieve. For a tenant they would usually wish to minimise any rent increase but would want some form of certainty of what a rent increase would be in order to allow them to financially plan for their business in the future.

Some parties may wish to instruct a surveyor or a valuer to calculate what the market rent would be at the date of the rent review. The surveyor or valuer would usually work closely with solicitors to ensure that the rent review is recorded correctly.

Whether you are a landlord or a tenant, it is important that the rent is correctly reviewed.

If you would like further information or advice in respect of the above or any commercial property transaction contact Mohammed Rahman at Borneo Martell Turner Coulston Solicitors email or call 01604 622101

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