Rent reviews are part and parcel of renting commercial property. In the current market, they almost invariably bring an increase in rent for you, the tenant.
Although market rents went down or remained static for a number of years in the UK, in many parts of the country rates have been rising in recent times. So, if you’re coming up for a review, you will almost certainly be paying more rent in future.
No one wants to pay higher rents. But the key questions are whether you retain value for money and are prepared for the financial change.
Below, we provide advice and tips to help you understand the rent review process and protect your business interests.
The term ‘commercial rent review’ describes the process of assessing and adjusting the rent paid on a commercial property (usually to reflect current market value). In theory, this means that rents for a commercial property could go up or down.
However, most landlords are savvy enough to provide for ‘upwards only’ reviews. This means the best you can hope for is that your rent will stay the same. More likely, in line with a generally upwards trend in commercial rents across the country, your rent will be subject to a stiff increase.
As a guide, commercial rent reviews happen every three to five years. However, exactly when your rent is reviewed depends on the rent review clauses in your commercial lease. So, be sure to read it and fully understand the terms before signing.
It’s worth seeking legal advice at this point; a commercial property lawyer can review and explain the rent review clauses to you and ensure you’re getting a fair deal.
In the UK, there are three common methods used to review commercial rent:
Open-Market – In this case, the rent is based on the property’s current market value (how much the property would be worth if listed on the open market now). Your landlord will hire surveyors to assess the property’s new value. Be aware that ‘assumptions’ and ‘disregards’ in the lease will apply when valuing the property (more on this below).
Turnover – As the name suggests, with this method the rent is based on your business’ financial turnover. A minimum rent level will also apply. Turnover-based rents are commonly used in the retail sector.
Periodic – In this case, the rent will change periodically at the intervals set out in your lease. It will typically increase in line with the Retail Price Index (RPI).
As mentioned, the rent review clauses in your commercial lease will determine how your rent is reviewed and adjusted. Yet, not all tenants realise they have the right to negotiate these clauses. Prior to signing your lease is your once-only opportunity to negotiate with your landlord. Don’t miss your chance. By negotiating with your landlord, you can achieve fair lease terms that suit your business needs. Find out how to negotiate a strong commercial lease here.
Most landlords hire a lawyer to ensure the terms of the lease protect their commercial interests. So it’s worth doing the same! By appointing a commercial lawyer, you’ll have an expert legal professional on your side. Your lawyer can review the lease and will explain the terms to you. They can also negotiate the terms on your behalf (such as rent review clauses). This will help you avoid financial difficulties and landlord disputes later.
These are provisions in your lease which determine what can be assumed or disregarded when assessing the property’s value.
Assumptions mean the property is valued on the assumption you (the tenant) have kept to the terms in your lease. For example, if you’ve agreed to a full repairing obligation then you’re obliged to fix all repair issues in the property. This means the property will be valued on the assumption it’s in a full state of repair (even if the doors are hanging off and it’s actually falling apart).
Disregards give the landlord the right to ignore certain factors when valuing the property. For example, say you (the tenant) have carried out internal works to the building (not required in your lease) – The landlord can disregard this when adjusting the value and associated rent.
It’s important to understand these terms and their application, as they have a direct impact on whether your rent offers value for money. If in doubt, discuss this with your lawyer.
It’s worth noting that in most leases the landlord is under no time pressure when it comes to a rent review. Even once your rent review date passes they can, in most cases, take as long as they like to engage a surveyor to assess the rent. Typically the surveyor is in no hurry either. It is not unusual for months or even years to pass before the landlord decides to invoke a long-overdue review.
Don’t let this lull you into a false sense of security. It will catch up with you eventually. Once the landlord has got round to establishing a rent review, the new rent gets backdated to the point that it was supposed to have applied. The unfortunate consequence is a huge bill for you, the tenant. Therefore, once the rent review date is approaching, it’s worth talking to your landlord about their plans. It’s also a good idea to seek your own advice from a local surveyor about what rent you might expect.
Familiarise yourself with terms and review dates agreed in your lease. This way you can budget for rent increases, even if they don’t come on time.
The landlord cannot simply impose a rent change on you. You and the landlord must agree on the new rent before it can go ahead, or it has to be passed to an independent expert to assess. Discuss the proposed rent changes with your lawyer – they can liaise with the landlord’s legal representative on your behalf.
If you think the rent changes are unfair or in breach of your lease terms then you have the right to appeal.
Make sure you follow the procedure for third party dispute resolution agreed in your lease. You should find details about this in the rent review clause. This sets out the agreed procedure for dispute resolution. It may require the involvement of an independent surveyor who will then set your rent for the next period.
Always discuss the grievance with your lawyer before doing anything else. Your lawyer can advise you on how best to proceed.
The key to understanding your commercial rent review is understanding your commercial lease. Always get the lease reviewed by a commercial property lawyer before signing on the dotted line. This will help you achieve terms that work for you and your business – whichever property you’re in.
Would you like to discuss this topic further with one of our commercial property experts? Contact us for a free initial consultation.
This information contained in this article isn’t exhaustive and is meant only as a guide to the commercial rent review process.