Rent reviews: the devil is in the details

What is a commercial lease Rent Review?

A commercial lease rent review is the evaluation of a properties’ commercial lease. The landlord of the commercial property is responsible for initiating a rent review, and they should typically be conducted on a basis of every three to five years. Review periods are part of the negotiations between the interested parties prior to lease commencement and occupancy.

Why is it important to conduct a Rent Review?

As a landlord, it is important to conduct frequent rent reviews to assess whether your rent charges are in line compared to current market rents. The benefit of a well-negotiated rent review can result in an uplifted rent which, in addition to improving cash flow released from a property asset, can have a positive impact on the capital value of the property.

How does a Rent Review Affect Tenants?

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.

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.

What is a Rent Review Clause?

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.

How are Rent Reviews Calculated?

Rent reviews can be calculated through two different methods:

• Based on the rental market, examining similar properties’ lease terms and the average market rates
• Based on the Retail Price Index (RPI), where rent is based on wider inflation levels across the market

Negotiating Rent Review Terms

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. It is important to note that this is still possible to negotiate.

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 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.

Further Advice on Rent Reviews for Landlords

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