It is rare to find a commercial lease which does not allow, at some point during the term, for a rent review.
When Can My Rent Review Take Place?
A rent review simply put is when the rent for the property is reviewed and amended in accordance with the findings of the review. The lease should specify the rent review date(s), generally being at intervals throughout the term of the lease. Depending on the length of the lease these are commonly found to be every third or fifth anniversary of the start date of the lease.
The dates of the rent reviews should be agreed in the Heads of Terms before the lease is drawn up. Both parties should carefully consider the frequency of the reviews. For tenants, the considerations are clear as the more frequent the reviews, the more likely that the rent will be increased. Landlords, on the other hand, need to strike a balance between the benefits of an increased rent and the likely cost of not only undertaking the review but also the professional costs should the tenant dispute the increased amount.
What Happens If The Rent Review Date Is Missed?
It is important to note that generally time is not of the essence when it comes to carrying out the rent review. The rent review dates are simply the earliest date that a rent review can be done. The Landlord is able to carry out the rent review after the specified date should they wish and any rental increase can be backdated to the date on which the review should have taken place. Tenants should therefore be vigilant as to when the rent review dates are and remind the Landlord as they could otherwise find themselves with a large bill for backdated rent. If the Landlord indicates that they do not intend to carry out the rent review, then the Tenant should ask the Landlord to provide written confirmation of this and keep a copy with the lease.
What Type of Review?
When it comes to the actual review, there are two main types of review which are most commonly used:
- A market review and,
- An index rent review.
An open market rent review is carried out by a surveyor and assess what the market rent for the property would be at the rent review date. The assessment is based on a number of things, including the rental value of similar properties that have been recently rented along with the condition of the property. The surveyor should be independent of both the landlord and the tenant so as to reduce any likelihood of bias and most leases provide that the cost of the surveyor should be split equally between the parties as a result of this.
A market rent review is most commonly upward only and therefore should the surveyor find that the rental value of the property is less than the rent being paid at the time of the review, the rent will stay the same. Should the market rent be found to be higher than rent at the time of the review, then the rent will rise in accordance with that.
An index rent review is usually done in accordance with inflation on the Retail Prices Index (“RPI”). The Retail Prices Index measures the average change from month to month in the price of household good and services. If a rent review is RPI based then the lease will specify a particular month and at the time of the rent review date, the inflation as of that month is the amount in which the rent will increase by.
For advice on drafting or negotiating a commercial lease, speak to Farleys’ commercial property team on 0845 287 0939 or complete our online contact form.