If you’re a tenant or a landlord on 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 Do You Get Started with Commercial Rent Reviews?
Within any lease, there should be a clause that outlines the subject of the rent review. Before committing to the initial agreement, both parties can discuss and agree on the interval between each review within this clause. 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, they ought to specify in these rent review clauses when the tenant or landlord can give notice. It should also state when a response must be served 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), states, in fact, 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?
Local comparisons and the open market rent—the best rate the property could get—will frequently have an impact on rent reviews. 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 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 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 third-party member is appointed to fairly assess and decide 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 it is 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 finalised 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 at an early stage so that you understand your position, your rights, and what the rental amount is. 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.