Commercial Leases and Rent Reviews

Rent reviews are an inevitable consequence of letting a commercial property. When handled appropriately, it can be beneficial for both parties.

An expert assisting with the process reduces the likelihood of any disputes and is a more cost-effective option than hiring a professional arbitrator or taking the matter to court.

WHAT IS A RENT REVIEW?

Rent Reviews (likely to be initiated by the landlord) tend to occur every three to five years. The purpose of a Rent Review is to reassess the rent that the landlord is offering at different intervals within the lease. It provides the landlord with an opportunity to review the current value of the property and the level of rent payable.

Most commercial property contracts include an Upward Only Rent Review Clause. This states that the rent can only be adjusted upwards, so that the rates can either rise or stay the same. Thus, when the rent rates are adjusted, an understanding of the current commercial property market will be a key consideration.

TYPES OF RENT REVIEWS

A non-exhaustive list of the types of rent reviews include:

• Fixed Increase Rent Review – where the rent is based on a fixed increase at pre-agreed times. There will be a figure (or number of review figures) agreed between the parties when negotiating Heads of Terms.
  
  This has the benefit of transparency and clarity between the parties. It also allows the parties to plan. However, it may be restrictive on both parties depending on the economic climate.

• RPI Index Rent Review – where the increase in rent is linked to the Retail Prices Index. This measures the average change in the prices of goods and services purchased in households.
  
  This option is fair and consistent but may not consider other factors such as any improvements to the property.

• Open Market Rent Review – where rent depends on the current open market and what the ‘reasonable’ person would consider the rent to be for the same lease, on the same terms and in the same area.
  
  Again, this option is fair and provides an opportunity to assess the current market.

Each type of review has its merits and is dependent on the individual circumstances of each case. It is important that rent is legitimately reviewed to protect your financial and commercial interests.

BEFORE A RENT REVIEW

Before a Rent Review takes place, you should consider the following influential factors:

• Consider the current market – consider the area in which the commercial property is based and the local surrounding area. You should consider properties of the similar size, location and conditions.

• Consider the current state of the property – if the property has recently been subject to improvements, paid for by the landlord, it might increase the value of the property. Evidence will need to be gathered in the event of a dispute.

• Research – research all factors prior to the Rent Review so that the process is as quick and efficient as possible. Do not wait until the Rent Review to consider researching the market.

IF AN AGREEMENT CANNOT BE REACHED

When agreements cannot be reached between the landlord and tenant, a dispute arises and therefore will need to be resolved. It is most likely that there will already be a pre-existing dispute resolution process in place which allows the parties time to agree the reviewed rent.

If this cannot be achieved, it is expected that the parties will refer the matter to an arbitrator. The lease should specify the level of expertise required for the arbitrator and who will be responsible for their fees. It is the lease itself which will be the most compelling factor in the arbitrator’s decision and therefore will need to be drafted accordingly. It is also important to appreciate that the arbitrator’s decision, as to the revised rent, is binding on both parties.

If the situation escalates, the dispute is usually taken to court. Clearly, this is a situation which both landlord and tenant will want to avoid at all costs, as it is time-consuming and can be expensive.

Effective use of drafting leases will reduce the likelihood of any disputes and provides a long-term solution to the Rent Review process.