April 9, 2018
If you are a landlord or tenant in a commercial property, chances are you will have to deal with rent reviews at some point.
As a landlord you will want to review the rents on your properties as set out in the lease. Doing so will increase your rental income.
As a tenant you will want to minimise your liability and so proper negotiation and representation at rent review will be important to you.
This guide gives a brief summary of commercial rent reviews.
We can give you more detailed guidance and specific advice based on the terms of your lease.
What is the purpose of a rent review?
Rent reviews allow the rent on a commercial property to be adjusted in line with the current market level.
How does a commercial rent review start?
The exact interval between commercial rent reviews can be negotiated and agreed between the landlord and tenant. The period should be stated in the rent review clause of the lease. Usually, they take place every three to five years. A five year gap is very common.
The rent review clause should outline when a notice can be served by the landlord and/or tenant. It should also state when a response must be served by and what happens if an agreement can’t be reached.
Normally the lease will state that the notice must be given in writing.
Even if it doesn’t, the Law of Property Act 1925 section 196(1) requires a written notice or counter-notice. The lease may also outline if the notice needs to be in a particular format.
Unless the lease states otherwise, the date when the valuation takes place is the same as the date from which the new rent becomes payable.
How should the new proposed rent be calculated?
Rent reviews need to take into account local comparables and ‘open market’ rents – i.e. other rents being charged on similar properties in similar areas and the best rate the property could receive. Normally, both parties appoint their own property surveyors to help manage the process and negotiations.
It is possible for rents to decrease as well as increase, but typically they go up due to inflation. Because of this, it is an accepted practice for leases to include ‘upward only’ rent review provisions. This means the rent can never be reviewed lower.
There has been some controversy around this though, and these clauses may be banned in the future.
There are usually ‘assumptions and disregards’ outlined in leases which need to be considered.
For example, the use of the property may be ‘assumed’. This means it may have originally been used for one purpose (e.g. as an office) but is now used for another (e.g. as storage space). In this case, on the review the assumption will be that it is for office use.
What if the landlord and tenant can’t agree?
If both parties can’t agree on a rate, there are established dispute resolution processes and arbitrations systems in place. A solicitor can advise you on these.
Most leases make provision for alternative dispute resolution (ADR) in rent reviews, meaning a third party can be appointed to assess and impose the new rent.
Another option would be to go to court and let a county court judge decide on the new rent.
It is in both parties’ interest to negotiate a new rent and resolve any dispute early on. It can end up being a long, expensive process.
The rent review clause in the lease might include time limits or deadlines. If either party misses these then they have broken the agreement and it could have serious consequences for them.
The rent continues to be paid at the old rate until a new figure has been agreed. Once the new amount is agreed, it can be back dated to the review date, meaning an additional lump sum making up the difference may be owed by the tenant to the landlord, and interest can also be charged.
If you need any further information about commercial property leases or rent reviews please contact us.
This article is for general information purposes only. It does not constitute technical, financial, legal advice or any other type of professional advice and is no substitute for specific advice based on your individual circumstances. We do not accept responsibility or liability for any actions taken based on the information in this article. For more information, please click here.