Within a commercial lease, rent review clauses enable the parties to reassess and adjust the rent payable during the lease term. As rent review clauses are typically incorporated into the lease when it is created, tenants and property owners must pay close attention to the terms and negotiate to ensure a fair and favourable outcome.
What Is a Rent Review?
As the name suggests, a rent review is an opportunity to re-examine the rental amount. Technically, a rent review can result in the rental amount being reduced, but this is unlikely. In virtually all instances, a rent review will result in the rent increasing or staying the same. Overlooking key clauses is one of the common mistakes tenants make before signing a commercial lease.
In fact, some commercial leases stipulate that the rent can only increase following a rent review, so prospective tenants should beware of these clauses.
Rent Review: Example
If a landlord grants a tenant a 20-year lease with an annual rent of £10,000, they may include a rent review clause in the lease term that will allow them to adjust the rental amount at specific intervals.
If the market changes significantly, and the lease doesn’t contain a rent review clause, the landlord would essentially be leasing the property at lower than market value. If the lease does contain a rent review clause, however, the landlord can increase the rental amount in line with market value.
Different Types of Rent Reviews
If a commercial lease contains a rent review clause, it should stipulate what type of rent review will take place. There are numerous types of rent review which can be incorporated into a commercial lease, including:
Open Market
This type of rent review is based on what the rent would be if a new lease was granted based on the open market. If rental values have increased, for example, a rent review enables the landlord to increase the rent in line with market value.
Stepped Rent
A stepped rent agreement means that the parties agree to a rent increase at specific points in the lease. The parties may agree to increase the rent by £2,000 every two years, for example.
Index Linked
An index-linked rent review means the rent increase is linked to a specific index, such as the Retail Price Index (RPI).
Turnover Rent
Parties may agree that all or part of the rental amount due is based on the tenant’s turnover. Although this isn’t technically a ‘rent review’, it can be a viable way to agree rental terms throughout a commercial lease.
When Does a Rent Review Take Place?
It’s up to the parties to stipulate when a rent review will take place. This should be done at the outset and incorporated into the lease so that all parties are aware of when a review will occur. In longer-term leases, it’s common for rent reviews to take place every three to five years, but it’s generally accepted that a rent review should take place at least every seven years.
These intervals often coincide with points where tenants may also be negotiating lease renewals, making it crucial to understand how the review will affect future terms.
Can a Landlord Charge Backdated Rent After a Review?
A rent review is used to adjust the rent going forward, for the remainder of the lease (or until the next review date), so a review and increase won’t mean that the ‘new’ rental amount is backdated to the start of the lease. However, if a rent review takes place after the agreed review date, then the new rental amount is usually backdated to the review date stipulated in the lease.
Tenants may initially be pleased if a landlord doesn’t initiate a rent review at the earliest possible time, but they can be taken by surprise when a subsequent rent review results in increased rent being backdated. Due to this, a tenant may wish to instigate the rent review process if they want to obtain certainty regarding the increase.
What Is the Rent Review Process in a Commercial Lease?
To facilitate a rent review, the landlord needs to give the tenant notice of the upcoming review, the date it is due to commence, and the proposed rental amount. This is sometimes referred to as the ‘trigger notice’.
The other party (usually the tenant) can then either accept the proposed terms or make their own proposals via a counter-notice. The lease may stipulate timeframes in which acknowledgement of the trigger notice and/or a counter-notice should be made.
At this point, the parties will either reach an agreement regarding the revised rental amount or negotiate to try and find common ground. It’s common for parties to instruct their legal team to make submissions and manage the negotiation process on their behalf.
If an agreement still cannot be reached, independent third parties, such as a surveyor expert in rent reviews, can make a binding decision which is enforceable in the courts. In some cases, unresolved disagreements can also lead to broader property ownership disputes, particularly when lease boundaries or title issues are involved.
The lease should set out the relevant mechanisms for resolving this kind of dispute, so both parties should consider the most effective way to resolve disagreements regarding rent reviews at the start of the lease term.
Legal Advice for Rent Reviews in Commercial Leases
Both parties need to seek legal advice to ensure their interests are reflected in any rent review clauses in a commercial lease. While negotiations may be required at the time of the rent review, whether the terms favour the landlord or the tenant will be determined when the lease is first agreed.
Due to this, all parties should consult a commercial property solicitor before negotiating or signing a commercial lease. By doing so, you can protect your interests and ensure that all terms, including rent review clauses, are fair and, if possible, work in your favour.
To find out more or to seek expert advice, contact Heald Nickinson now on 01276 680000 or send us a message.