Rent Reviews: The devil is in the detail

Whether landlord or tenant, rent review clauses can be daunting and so it pays to consult a qualified and accredited chartered surveyor.

For landlords, the benefit of a well-negotiated rent review can result in an uplifted rent which, in addition to improving cash flow realised from a property asset, can have a positive impact on the capital value of the property.

For tenants, a poorly negotiated rent review can see increased overheads for the business and a knock-on effect on business rates as The Valuation Office Agency takes account of the rent being paid when it assesses the rateable value of a commercial property.

Landlords want to see rents keep pace with market values during the life of any lease. Generally, rents are reviewed at 3 or 5 year intervals although there is no hard and fast rule. Review periods are part of the negotiations between the interested parties prior to lease commencement and occupancy.

The rent review clause in the lease agreement will define how the rent is to be calculated and will reference ‘assumptions’ and ‘disregards’. Assumptions are the length of lease, use of property, state of repair etc. Disregards cover aspects such as goodwill and tenant improvements etc. Both assumptions and disregards are, in the main, similar across most commercial property leases. However, slight variations can have a significant impact on the rent calculation when it comes to review time.

Most rents are reviewed using local market rents of the time as the yardstick and the case will be made by referencing comparable property transactions. Some rents can be reviewed to pre-agreed fixed amounts or by reference to the Retail Price Index (RPI).

The majority of rent review clauses require the rent to be reviewed on an upward only basis and will, de facto, be in the landlord’s favour. However, where the tenant has managed to negotiate successfully before lease commencement, rents can be reviewed on an upward or downwards basis. Landlords try to resist this, although during weaker market conditions tenants can hold a stronger negotiating position.

Unless a lease agreement states to the contrary, there is usually no time limit for a rent review notice to be served. Even if a rent review date was due, say, four years before the date the notice is served, the rent review is still valid. But the key thing is that it is still capable of being negotiated too. In such instances, it’s imperative to seek advice from a qualified chartered surveyor as we keep a comprehensive database of transactions which act as point of reference and evidence to support any case made by either party.

Some rent review clauses may state that ‘time is of the essence’ and will set out an explicit timetable for the serving a rent review notice and the tenant’s response. Where a lease states that ‘time is of the essence’, landlords and tenants must ensure timescales as defined in the review clause are met.

Matters of leases and rent review clauses are legal matters and qualified chartered surveyors have the professional skills to act for either party but will never act for both on the case in question.

Whether landlord or tenant, contact one of Barker Storey Matthews now part of Eddisons specialist rent review surveyors to discuss your requirements or for an informal discussion. http://www.bsm.uk.com/rent-reviews-lease-renewals-arbitrations/