If you’re a tenant or a landlord in a commercial property, at a certain point within your contract you will have to deal with rent reviews.
There are of course two sides to all rent matters. When it comes to evaluations, landlords will want to review the rent on the properties as set out in the lease in hopes of increasing their rental income. From the tenant’s side, they will want to minimise their liability, meaning negotiation and representation at a rent review will be important to them.
To help explain the topic in more detail, we’ve put together this guide that offers an overview of commercial rent reviews.
Why Have a Rent Review?
A rent review is carried out on a commercial build so that rental figures can be adjusted in line with current market levels.
How to Get Started with Commercial Rent Reviews?
Within any lease, there should be a clause which outlines the rent review subject. Within this clause, the amount of time between each review can be discussed and agreed upon by both parties before entering into the initial agreement together. Typically speaking, a commercial rent review is conducted every three to five years – with 5 years being the most common amount of time.
So what should you expect? Well, within these rent review clauses they should detail when exactly the notice can by given by either the tenant or landlord. It should also state when a response must be served by and what happens if an agreement can’t be reached. This will typically be served in writing depending on what is outlined in the lease as it may also include format guidelines. The Law of Property Act 1925 section 196(1) in fact states that a written notice or country-notice must be given at all times for legal matters such as this.
It is always important to remember that unless the lease states otherwise, the date when the valuation takes place is the same as the date from which the new rent becomes payable.
How Is the New Rent Calculated?
Rent reviews will often be influenced by local comparisons and the open markets rent (rental prices being charged on similar builds in a like for like area, with the best rate the property could receive). Most commonly, both the landlord and tenant will appoint their own property chartered surveyors to conduct and oversee the process and any negotiations following.
When it comes to the rent itself, it can either increase or decrease depending on the market and area, however, it most commonly increases due to inflation. As a result, landlords often seek ‘upward only’ rent reviews – which is currently an accepted lease practice – as this then means that the fee can never be reviewed to be made lower.
What If Both Parties Can’t Agree?
If a new rental rate cannot be decided upon, this then becomes a disputed case. At this point, there are established dispute resolution processes and arbitration systems set in place to help determine the matter legally. Most commercial leases will include provisions for alternative dispute resolution (ADR) in rent reviews, which will mean that a 3rd party member is appointed to fairly assess and decided upon a new rent amount.
In worst case scenarios, these disputes can be escalated to court proceedings to secure a court judgement on the new rent. This, however, will end up being an expensive and drawn-out process, which if you’re running a business, you simply don’t have time for. That is why is it always best to reach an agreement with your tenant or landlord as it is in both of your interests to have this matter rectified as soon as possible.
Another potential legal complication that you need to look out for comes in the form of deadlines. If the rent review clause in the lease has a time limit or set deadline, missing this date constitutes a breach of contract, which could have serious consequences for either party.
If the set date for when the new rent amount should start comes around and the new fee is not yet agreed upon, the rent will continue to be paid at the old amount until an agreement has been reached. Once the rent review has been finalized and the new fee is set, rent will then be backdated to the review date, which will mean an additional lump sum will have to be paid by the tenant or landlord to pay for the difference. Please note that interest can also be charged at this point.
As you may have gathered, this can be a complicated issue that has the potential to become heated. It always pays to seek professional advice from an early stage so that you understand your position, your rights and what rental amount is fair. If you would like more advice about commercial property leases or rent reviews please don’t hesitate to get in touch. Our lease advisory team is here to help.