Rent review clauses are common in commercial property leases to re-adjust the rent every so often.
On a traditional format, this is every three or five years and on an 'open market' basis, which basically means what the local fair rent should be.
Plus, they're usually 'upwards only' rent reviews that mean the rent can only go up and not below the initial rent – great news for landlords.
However, you can come across rent review clauses that give a more certain mathematical calculation of what any rent should be rather than leaving it to people like rent review surveyors to decide what any market rent should be.
These can be still every few years, although more common on an annual basis.
Although simple in principle and practice when you understand them, they can be confusing to get your head around.
Therefore, here are five key aspects to understanding what these 'index linked' or 'RPI' rent review clauses are all about:
1. Understanding What is an RPI Index-Linked Rent Review Clause
In short, they are a way of tracking the rent to general increases in costs and prices on the broader economy.
This is on the assumption that rent should be like any other business or property cost – if there's say a 3% increase in overall prices, then the same will be assumed to the rent, even though the particular property or location may be more or less valuable now.
This also assumed a compounded effect on rent reviews. Without getting too bogged down with the mathematics of this, the 3% increase, say next year, is based upon an initial say 2.5% on this year. Hence, future percentage increases are added-on and compounded to previous years.
You often see these in commercial leases where greater certainty is needed, such as retail property and ground rent calculations for long residential leases.
Regarding what metric you use to base this rent review increase, it's usually the Retail Price Index (RPI). However, it can be on variations such as the CPI (Consumer Price Index) or some other more bespoke form of an index.
2. Checking What the Lease Rent Review Clauses Says
The first thing you must then do is carefully look at the lease in question – that simple.
This is where the nitty-gritty of how and when this rental calculation takes effect should be outlined, not in some general overall law or guidelines.
And the more detailed, the better – and ideally with example calculations to avoid misinterpretation.
These include the mathematical side, namely the form of the index used and what and when this is changed.
However, watch out for the procedure of this also being included – who and how it is actioned with notices, and what to do if you can't agree.
Surprisingly, you might even see errors in here that don't make sense – probably down to solicitors and rent review surveyors not getting a clear understanding at the outset.
A typical example of this is assuming a figure from July for a rent review in June. Unfortunately, this means you will have to wait until at least August or September until this data is available to calculate and backdate to June.
3. How to Do the Rent Calculation
You then come to the challenge of these RPI index-linked rent reviews and how it works.
In short, follow the lease's formula and rent review calculation, but very carefully.
There will often be a specific month and year of whatever basis you're looking at, like the Retail Price Index, which nowadays you can find online like here.
You'll then need to compare an older one before the current or initial rent in the lease with a new one around the current review date.
Often one is divided by a hundred to form a percentage increase of the current rent.
However, this can get more complicated and worth writing out section by section to make sure you don't make a mistake and easily explain to others afterwards how you have arrived at this.
4. What the Final Reviewed Rent Looks Like
Regarding what increase in rent you're looking at in whatever year, then take a step back at your final calculation and make sure it actually makes sense.
Does it seem a realistic increase, or is there a strange doubling of the current rent, for example, which suggests that the calculation may have gone wrong somewhere along the lines?
5. The Final Tweaks and Consequences
You have the final agreed RPI or index-linked rent review figure – you then need to make sure the final detail and issues are correctly applied.
You can sometimes see what they call a 'cap and collar' element in these clauses, which is a minimum and maximum percentage increase in any year or period.
For example, this may be between 2 and 4 % on the assumption of a usual 3% year-on-year increase. So in a good year of 5%, the resultant rent increase can only go up to 4%.
It would help if you looked at any additional back-rent and interest due to being paid. Of course, all after the final rent has been documented by a rent review memoranda if applicable in the lease.
It's also worth noting that these index-linked RPI rents can be suitable for budgets, which is why accountants rather than property managers tend to like them.
They can offer greater certainty of future costs over several years to help with budgets.
However, double-check these are then amended after everything is agreed as the compounding effect over several years can create significant variances in the future.
Keeping RPI Index-Linked Rent Reviews Simple
As you try and read through one of these rent review clauses in a commercial property lease, it can feel like you need a degree in maths to try and understand what they're saying.
But don't give up so easily, as they will become more apparent, and in fact, they can offer a lot more certainty and simplicity for both a landlord and tenant going forwards.
As you go through the above five factors, you will hopefully end up with a mutually agreed new rent to action and a common understanding of how these will be calculated in the future.
The best advice then is to make a detailed note of this so that someone can easily come up to speed with it later on.
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