Rent reviews are a critical aspect of commercial property management. They ensure that the rent paid by tenants remains in line with current market values, theoretically providing a fair return for landlords while maintaining affordability for tenants. This article will explore the process, strategies, and legal implications of rent reviews in the UK commercial property sector.
Rent reviews are typically conducted at predetermined intervals, commonly every three to five years, and the process is usually commenced following written notice from the landlord. However, some leases allow for a rent review to be called by either party. They are almost always “upwards only” meaning that the rent will not be reduced irrespective of market values. It would be very unusual for a landlord to accept a “downward” rent review.
Types of rent reviews
Open market rent review
This method bases the new rent on the current market rate for similar properties, but also sets out certain assumptions and disregards to form the basis of the way the rent is reviewed. It often involves negotiations between the landlord and tenant or an independent valuation but the wording of the rent review provisions in the lease can have significant effect on the level of the new rent and should therefore be considered very carefully when agreeing the terms of the lease.
Fixed increase review
The lease stipulates predetermined rent increases at set intervals. This method provides predictability but is less common due to the difficulty in predicting future rental levels.
Index-linked review
Rent increases are tied to an inflation index, such as the Retail Price Index (RPI) and Consumer Price Index (CPI), ensuring the rent keeps pace with inflation. Some commercial tenants seek to limit the volatility of an indexed linked review by negotiating a “cap” and “collar” provision in their leases. This limits the level of the new rent irrespective of the change in rates.
Turnover rent review
Leases of retail properties will often provide that the rent is linked to the tenant’s turnover, with a base rent supplemented with an additional rent calculated in line with the performance of the tenant’s business. This is often beneficial for landlords as it has the advantage of tracking the tenant’s actual financial health and so, their ability to pay rent. Again, the exact terms of turnover reviews need to be considered very carefully. They will set out the basis on which turnover is calculated, what items should or should not be included, which then affects the level of the turnover rent.
Preparation for rent review
- Both parties should collect data on comparable properties and current market rents – this information is crucial for informed negotiations
- Review the lease to understand the specific provisions related to rent reviews, including the timing and method of review
- Engaging with us and a surveyor can provide valuable insights and help navigate the complexities of rent reviews
Negotiation strategies
- Enter negotiations with a clear understanding of your position and the market conditions. Preparation is key to achieving a favourable outcome
- Clearly articulate your expectations and be open to discussions. Effective communication can help resolve differences and reach an agreement
- If negotiations stall, consider using a mediator to facilitate discussions and find a mutually acceptable solution
Common pitfalls
- Ignoring market conditions: Failing to consider current market conditions can lead to unrealistic rent expectations and stalled negotiations
- Overlooking lease provisions: Ensure that you understand the specific provisions in the lease related to rent reviews to avoid disputes
- Delaying negotiations: Start the rent review process early to allow sufficient time for negotiations and avoid last-minute pressures
Completion and documentation
Following agreement of the rent review a rent review memorandum is normally completed, detailing the pertinent terms of the lease, the revised rent and the effective date of the new rent. This is then annexed to the main lease.
Navigating rent reviews requires careful preparation, clear communication, and an understanding of the legal framework. By following these guidelines, both landlords and tenants can ensure a fair and successful rent review process. Seeking professional advice can further enhance the chances of a favourable outcome.
Contact the Glaisyers ETL Real Estate team today for further information or guidance.
