Leases of commercial properties often have a rent review clause to adjust the rent over time that can be easily missed in the focus of the main lease terms and rent right at the beginning.
And even if it is plainly agreed, years can soon go by before you’re at the point of the rent being changed again.
This is where a rent review surveyor can help – someone to help get into the nitty-gritty of what this rent should be, what rights there are you to challenge it, and the procedure for going about this.
Therefore, here are seven key points to help you not only understand the principle but then easily resolve it for your situation:
1. What is a Rent Review
A rent review in a lease of commercial business property is the basis on which the amount of rent that a tenant pays a landlord is changed at some point in the future.
Because you’re often talking about years into the future for most leases, then the rent is assumed to be adjusted over this period just like any other business costs – and often going upwards.
In terms of how often should rent be reviewed, then it can be annual for shorter leases and a more straight forward basis, although every three or five years for longer leases, say, ten years long.
When you look at how does a rent review work, then in simple terms, it’s supposed to be what the local market rent is for that type of property at that point in time.
So, just like a house rental may increase to say £700 per month in a year’s time from £650 per month now – so commercial rents are supposed to also mirror the market movements.
2. The Different Types of Rent Review Clauses
How rent reviews are calculated to do vary as prescribed in whatever clause or basis is in the lease.
Therefore, when you’re first drafting a new lease, it’s essential to make sure you include the right rent review template and clause that everyone agrees to, something a good rent review surveyor can advise on. And, if possible, even an example of how it should be calculated.
The traditional basis for longer commercial property leases is what they call an upwards only rent review. i.e. the rent will always stay at the current minimum level and can only be increased upwards. So if the true market rent goes down, the lease's rent still stays at the current higher level.
This is often on as assumed open market rental basis, which is what a tenant should openly pay if the property were being let on the market.
However, you can have more rigid calculations within the lease of how new rents should be arrived at.
These are often based upon, say, standard index-linked increases to follow what other general economic cost increases are, and often on an annual basis. The retail price Index (RPI) is the common form of an index to refer to, but there can be others.
You can then get further developments like the cap and collar which place a minimum and maximum range of percentage increase that a new rent can go to.
3. How to Calculate the New Rental level
The big question is how much can a landlord raise the rent in a year or whatever period when it comes to looking at the rent review.
If it’s a set calculation like the index-link, you need to carefully read the lease to see how this is done, paying close attention to the dates and months being assumed in this.
When it comes to a more general open market rental value and the calculation of this, it can get more complicated.
There should be what they call assumptions and disregards in the rent review clause that basically states a hypothetical world that you need to assume when looking at the new rent.
So often forgetting what actual tenant is in occupation, their own fit-out and tenant improvements, and any form of goodwill at the property – and assuming a perfect market of a willing and able landlord and tenant.
This rent review valuation will then need to be at a certain point in time, which is why they can often be only agreed upon after the rent review date.
You can look at what they call comparable evidence in the market to determine this. This might be looking at what a similar unit down the road recently let for, or more complicated rates per square foot of space and carefully measured property areas and end allowances to come up with a bespoke rent for your particular property and circumstances.
You then have to look at any incentives like rent-free periods and capital contributions in the market to devalue to the true effective rather than headline rent.
4. The Process of Agreeing Rent Reviews
Now we come onto the actual procedure of agreeing these that a rent review surveyor will typically go through – often a longer process than you first think.
The key to this is the lease and rent review clause – this, rather than any other law, dictates how it all happens and when.
Although they tend to be very similar in commercial leases, there are often differences to be aware of.
An example is time of the essence which basically means that whatever dates and timeframes for notice are stated and important to stick to.
In terms of how to trigger a rent review, there’s often a requirement to service an initial notice or maybe begin negotiations – by both the landlord and tenant or just one of them first, what they call triggering the rent review.
Ensure any prescribed notices are spot on according to the general rent review clause and wider lease clauses on serving notices.
Regrading how to write a rent review letter or notice, then check if this needs to be in any particular format with set information on it.
Otherwise, focus on is going to the correct landlord or tenant’s name and address in the right format such as letter or email, to copy in other parties like a managing agent, and clearly state the date of the lease and rent review being looked at along with the current and proposed new rent.
As a tenant, if you’re wondering why your landlord is getting a rent review surveyor to deal with this, then the reason is that it is usually in their interest to activate this and see a rent increase. They’ll realise that both the process of triggering and agreeing to a rent review is important and the actual basis on how rent is calculated.
You’re then into the negotiation of the new rent between the parties, offering different views of the rent and hopefully coming to a fair agreement. Just because a landlord quotes a new rent does not mean that this needs to be agreed, even if they insist on this.
The final stage is then documenting this through what they call a rent review memoranda – basically, a document clearly stating the parties' official details, lease, and then, more importantly, the new rent.
These may not be technically required under the lease, and solicitors may push for doing these. Although they’re handy to have in reality to clearly agree what this is rather than someone then claim to change afterwards, you can often provide your own form of memoranda.
5. How to Negotiate the Best New Rent
It’s then important to look at the nuts and bolts of what the new rent should be and how to conduct rent review negotiations.
As above, a quoted n from a landlord is often here to start the ball rolling, leaving tenants to respond with a lower one (hence the need for a good rent review surveyor to help agree on the true level).
For most commercial properties, you boil the rent down to standard amount per square foot or meter of space. After looking at what similar properties are being rented for, you use this as what they call comparable evidence, on the subject property.
However, the detail counts here, including tweaks for different lease terms in each property, not just the physical property, as you have to assume certain hypothetical circumstances in each lease under a rent review clause.
Timing is also key, as you’re looking at a specific point in time in the past (or future), not just now.
In reality, of course, it’s often harder to agree on the new rent. This is why most rent review clauses will have what they call a third part determination clause.
This allows both parties to agree to an independent rent review surveyor to determine a rent fairly, or if both won’t agree, then like the RICS to appoint one (this isn’t actually a court or tribunal as such).
This rent review surveyor can then act in different capacities, such as an Arbitrator or Independent Expert, as dictated by the lease.
Although this is a great option to have, be aware that their costs have to be paid by either the landlord or tenant or often shared – and it can delay matters even further.
You can then look at what they call a Calder bank offer letter which is a letter basically stating that it is “without prejudice save as to costs”.
This basically means that the offer is without prejudice and not binding if matters progressed later; however, when it comes to the third party, then this offer does affect sharing of costs between the two parties. It demonstrates one side trying to amicably come to a resolution.
A final thought is to think outside the box with the lease as a whole.
So rather than just completing the rent review as it is, are there other changes to the lease or rent that both parties can look at for a win-win situation long term.
Okay, there may be further costs and changes to the lease to look at, but these can pay off with say a longer lease term being agreed for a lower rent now (see our regear resource here).
Even though a higher rent after a rent review clause may be the correct market level, the tenant's affordability might also lead to agreeing this being staggered or a stepped rent over time.
6. Adding up the Final Consequences
At the end of the process, you can hopefully arrive at what a new rent will be; however, you still need to carefully look at what other knock-on effects and costs emerge from this.
More often than not, there is clarity on how you can raise a back-charge for any additional rent in the rent review clause. So if you agree on a new rent in October one year, but the rent review date when this new level took effect was back in April, then you can raise an additional six months back rent.
In short, this is like a top-up rent between the old and new levels apportioned over this period of time or to when the next rent due date is.
Plus, you’re often allowed even to charge stated interest in this rent which a landlord had not benefited from overtime.
If you have had external advice like through a rent review surveyor, third party determination, or even legal input – then don’t forget to factor these fees in as well.
A final thought here is when a rent review is left undecided, which can cause an uncertain cost to either a landlord or tenant.
So, a landlord may decide not to bother even triggering a rent review clause on the basis that there won’t be any increase in this. In contrast, a tenant may want this specifically agreeing to make sure the landlord does not come back arguing an additional rent and cost in the future.
A Rent Review Surveyor’s Take on Things
No matter what interest you have in letting a commercial property, it’s still essential to know what such rent review clauses are and how you may or may not benefit from these.
If you’re a landlord, then generally, these will only ever increase, which is good news, and with tenants, it’s trying to keep these costs as low as possible.
But even advisors in the middle like property managers and solicitors aren’t able to provide the full picture of these, hence the need for a specialist Rent Review Surveyor, or sometimes known as Landlord & Tenant Surveyors.
The above seven pointers will help with an overview of all the issues before then digging into the detail.
The biggest advice is not to panic, as often there is time for these to be agreed well past the review date.
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