Solicitor Ed Williams, in our Commercial Property team, explains how a rent review works in a commercial lease.
Rent reviews are a mechanism which allows the annual rent of a property to change over the term of the lease. They typically happen three to five years into a lease, but ultimately when they are depends on what is agreed between the parties. It is important that a rent review clause protects both the tenant and the landlord in order to prevent any breakdown in relations and to clearly govern how the rent will be determined throughout the lease. This can be achieved by clear drafting and informed decision making from the parties.
There are various types of rent review clauses. It is therefore important to know which one your lease contains before you enter into it. A few of the most common types of rent review clause are described below, though most of them are not mutually exclusive and can be combined with others.
Upward-only
These clauses ensure that the rent payable under the lease never decreases and are very common. This is good for the landlord because it provides them with certainty that the rent will not fall below a certain level. These clauses aren’t so good for tenants who could then be stuck paying a rent that represents the market value when the lease was entered into or at the date of the last review, but which is above the value of the current market (for example after a crash) at the date of the current review.
Index linked
This allows the annual rent to increase in line with an index, for example RPI (Retail Prices Index). Linking the rent to an index is often seen as a reliable measure of economic activity and is considered a fair and equitable way of increasing the rent. This is not how tenants feel if inflation is high, and the rent is linked to RPI. An index linked review may also include a minimum or maximum percentage increase or a percentage increase above RPI.
Open Market rent
In this type of review, the new rent should reflect the market value of the premises at the time of the review. The lease will normally set out the procedure for agreeing the new rent and the assumptions and disregards. Depending on what the parties agree, this could mean that the rent will rise or fall depending on the market value of the property. It is however, common for a minimum level of rent to be agreed or for this to be combined with an upward only review.
Stepped increases
Although not ‘real’ rent reviews, they are worth mentioning. There is no review mechanism, but the rent payable at various stages in the lease is agreed and set out prior to commencement. With that said, they may be ‘too certain.’ This is because it is exceedingly difficult to predict the future and therefore the stepped increases may not keep up with inflation or other market pressures.
Conclusion
Before agreeing to a certain type of rent review it important to understand the types and ultimately which one you are about to enter into. Since these clauses can be complicated, we always recommend that you seek legal advice. Particularly for tenants, you may want to consider negotiating maximum increases where a review is open market or index linked, though the landlord will then likely want a corresponding minimum increase.
For further information or legal advice, please contact law@blandy.co.uk or call 0118 951 6800.
