What is rent review?
Rent reviews allow landlords of commercial property to periodically adjust the rent charged to tenants based on different factors.
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 and profitability.
As a tenant, you will want to minimise your liability, so proper negotiation and representation at rent review will be important.
Why do commercial leases have rent review clauses?
Where market rent is payable, the landlord will want to ensure that they always receive the maximum possible rent for the premises and are not bound by the rent amount which was set at the start of the lease.
How can rent be reviewed?
There are various ways in which the rent can be reviewed:
- a stepped rent review (the landlord and tenant might agree to increase the rent in fixed amounts each year)
- a turnover rent review (the landlord and tenant might assess the rent based on the tenant's turnover at the premises)
- an open market rent review (the rent is based on market values)
The most common and typical type of rent review is the open market rent review.
How often do rent reviews occur?
Typically rent reviews occur every 3 - 5 years, depending on the length of the lease. A rent review clause in a commercial lease will dictate how often a rent review will occur, the method, procedure and how to deal with disputes.
How is the value of the rent decided?
Open market rent review involves a periodic revaluation of the rent based on what the rent would be if the premises were re-let fresh at the date of review (eg would the rent have increased if a new lease was created?).
The new rental amount is based on rents in the local market for similar leases ('comparable premises'). If after the review, it's found that the rents in the local area have increased then the rent for the premises can be increased.
In most situations, the landlord and tenant should try and agree the new rent themselves.
Normally, both parties appoint their own property surveyors to help manage the process and negotiations.
The use of the premises can have a significant effect on the open market rental value. If the lease allows the tenant to use the premises for a variety of purposes, the open market rental value will be calculated as if they are being used for their most valuable purpose.
For example, if office rents are higher than rents for storage space and the lease allows the use of the premises to be either offices or storage, the rent will be calculated as if the premises were offices.
What happens if the landlord and tenant can't agree?
If both parties can’t agree on a new rate, there are established dispute resolution processes and arbitrations systems in place.
Some leases may contain Alternative Dispute Resolution (ADR) provisions, which means a third party can be appointed to make an independent decision and impose a new rent or keep the rent the same.
If the parties are in disagreement, or if ADR is being used, the rent continues to be paid at the old rate until a new rent has been agreed. Once the new amount is agreed, rent can be backdated to the review date. This means that the tenant will need to pay the difference that may be owed to the landlord between the old rent and new rent. Interest can also be charged on this.