What is a commercial rent review?

A commercial rent review is the process of adjusting the rent amount a tenant pays at a designated point during their tenancy. The majority of commercial leases contain rent review clauses. They allow landlords to propose an increase to the figure payable in line with market conditions, inflation or some other pre-determined index.

Rent reviews can be straightforward, but they can also lead to significant rent hikes for tenants that they do not accept. Given these complexities, it’s worth looking at what the commercial rent review process is and what happens when the two parties disagree.   

Understanding commercial rent reviews

Rent reviews are standard provisions in many UK commercial leases. They aim to keep the rent in line with the amount a new tenant would pay for a comparable space. Rent reviews typically take place every three or five years, but their frequency differs depending on the quality of the asset. 

Rent review clauses are usually included in long-term leases of between 10 and 25 years. Shorter-term leases - those lasting five years or less - tend not to have them. Instead, they may include a fixed annual rent increase or a variable amount tied to an index such as the consumer price index (CPI) or retail price index (RPI). 

In longer-term leases, rent reviews will usually be assessed on one of two bases as outlined in the lease:

• Index-based review - The rental amount rises in line with an index such as RPI.
• Open market valuation - A Rent Review Surveyor will conduct a detailed appraisal of the property’s value based on other comparable properties in the market. This assessment method can lead to substantial rent increases if there is significant demand for the property type and location.

Can rent reviews lead to downward adjustments?

Rent reviews only usually lead to upward adjustments, which is why tenants often try to resist rent review clauses in commercial leases. If an open market valuation suggests the rental price should be reduced, it will usually stipulate in the lease that the rent payable will remain flat. 

Although rent reviews are often thought of negatively by tenants, depending on the rent review clause, they can lead to wider conversations about other parts of the lease. For example, a tenant may agree to accept a rental increase but if only the landlord resolves issues with the building or agrees to meet future requirements the tenant may have.  

What is the commercial rent review process?

The commercial rent review process depends on the type of assessment you perform and the terms of the rent review clause in your commercial lease. However, the process will usually play out in the following way.

Notification

The landlord will inform the tenant of the rent review. The rent review dates will be listed in the lease. The landlord is not legally required to initiate a review but usually will. It’s good practice to give the tenant plenty of notice, which is around three months before the review. That gives the tenant time to gather documents and data and hire a professional rent review surveyor to act on their behalf. 

Rent review assessment

If the rent review is based on an open market valuation, a landlord will carry out an assessment to analyse the market. A surveyor will conduct the assessment on behalf of the landlord to determine the current rental value of the property based on properties in the same area, with similar features, of a comparable size and in an equivalent condition.  

Serve notice

When the landlord has completed the assessment, they must notify the tenant in writing of the increase and set out what the new rent will be. If the tenant wants to challenge the increase, they can do so by issuing a counter notice letter, which they usually must do within 28 days of receiving the original notice.  

Negotiate the rent

If the tenant issues a counter notice, the landlord and tenant, or the surveyors acting for them, can negotiate to reach a mutually acceptable rental amount. If they cannot agree, the lease will usually explain how a consensus should be reached. That will usually be to appoint an independent arbitrator, who is also a professional surveyor, to determine a suitable figure.  

Document the decision

The final decision should be documented, with details of the rent amount you have agreed on, the dates of the review and when the new rent will apply. The document should be signed by both parties. 

Acting for landlords and tenants

When navigating rent reviews, it pays to be prepared. At Eddisons, our chartered rent review Surveyors can manage the assessment process and negotiation for building occupiers. Our formal representation helps tenants establish fair lease terms moving forward. Read more about our commercial lease advisory services, including lease renewals and rent reviews, and get in touch to discuss your requirements with our team.