Commercial property rent reviews
Where a commercial lease has a term longer than 5 years, it will often include a rent review clause that will allow the rent to be varied at intervals in order to keep pace with market conditions. If there were no rent reviews in leases, Landlords would likely front load rents to protect their investments from inflation.
Historically, the length of commercial leases in the UK was driven by institutional investors who favoured long leases of 15 or 21 years. It was common to see rent review patterns of 5 and 7 years, but in recent times, market demand, and Tenant demand for flexibility, has meant that leases have gotten shorter, and so have rent review patterns, and it is now not uncommon to see 3 yearly review patterns.
How the rent is set at review will be dictated by the terms of the rent review clause in the lease. If well drafted, the clause will refer to -
How the rent is calculated – for example, is it index linked, based on turnover or an open market valuation.
The date of valuation and any timing issues.
The assumptions and disregards to be made – for example, the terms of the hypothetical lease.
The mechanics of how a dispute should be handled if no agreement can be reached – for example, arbitration or independent expert.
A characteristic of many leases in the UK is that the rent review clause will be upwards only, meaning that the new rent cannot be any lower than the existing passing rent. This can be a significant burden on Tenants when market conditions are poor, and can mean that Tenants end up paying an inflated rent, sometimes for many years with no way to adjust it to market levels.
It is important for the Landlord and Tenant to understand the rent review clause in their lease and what obligations it places upon them. It could prove costly if key dates are missed, or they fail to follow the formula laid out in the lease.
It is common for both parties to appoint surveyors to act on their behalf. Not only can a surveyor advise on the procedure to follow, but they are also best placed to negotiate the rent if the review is to open market value. For example, a surveyor will have evidence of rents set at other properties in the market, will know how to adjust these to match the subject property, and will be able to challenge the opposing party’s proposal on rent, and potentially save their Client significant sums of money.