Rent reviews
Open market review. The usual type of rent review in a commercial lease requires that at specified intervals the rent will be changed to what is then the current open market rent for the premises.
Intervals. The specified intervals in a long-term lease (10 years or more) are usually every 5 years. Shorter leases may have a rent review every 3 years. It is entirely a matter for negotiation when a lease is granted.
Upwards only. Rent reviews became a standard feature of commercial leases in the 1960s when inflation caused rents to rise continuously. A full market rent when a lease was signed was soon well below market rent after a few years had passed. So the focus of rent reviews was to increase rents every few years to counteract inflation. It became customary to make rent reviews ‘upwards only’ which meant that they went up when rental values increased, but stayed the same when rental values went down. This is still far and away the most usual rent review formula.
Other formulas. Another formula often found is that rent will increase in line with the Retail Prices Index or a similar Government index, so that rent shadows the cost of living. This type is usually found in leases where there is a rent review every year. It avoids the need for an expensive arbitration of rental values. Other formulas include linking rent to the turnover of the tenant’s business at the premises, or to the rents the tenant gets from sub-lettings.
Shorter terms. If a prospective tenant will not agree to a rent review, a landlord’s option is to grant a shorter term. If the term is 5 years then the landlord effectively gets his rent review by negotiating a renewal or a new letting at the end of 5 years. The tenant has the protection that he can walk away from the premises in 5 years’ time. Alternatively, if a tenant wants a longer term, but fears the effect of a rent review, the tenant may be able to negotiate a break clause. For example, a 10 year lease might have an upwards only rent review after 5 years, but also a tenant’s option to break after 5 years.
Open market rent. In most rent review clauses, the old rent is to be increased to the ‘open market rent’ of the premises at the rent review date.
Determining the open market rent. The rent review clause will set down rules for arriving at the open market rent. It will set down 'Assumptions' - factors which do not apply to the premises as they are at the rent review date - e.g. that the premises are available to let - but which are to be assumed to apply. It will also set down 'Disregards' - factors which do apply to the premises as they are at the rent review date which should be disregarded - e.g. improvements the tenant has made to the building at his own expense.
Win the day
Get expert help.
Usually the landlord or his surveyor will invite the tenant to agree a figure he proposes. It may seem too high - it may be too high. A tenant should appoint his own surveyor to argue the figure down. The surveyor needs to be an expert in rent reviews because this is a very technical negotiation. It is best to have one who is familiar with the area where the premises are located.
Comparable evidence.
The surveyors will argue, and the argument will depend to a considerable degree on ‘comparables’. Evidence of lettings in the area which are ‘comparable’ with the premises in question. The most compelling comparable evidence is a recent letting in the same building, or of another shop in the same parade. There are many arguments a tenant's surveyor may be able to bring to bear to knock down the landlord’s starting rent.
Adjudication.
If the parties cannot agree the revised rent, it is referred to a third party for adjudication.