Commercial Rent Reviews

Commercial leases will often contain provisions for a review of the annual rent at specified intervals during the term of the lease. These intervals are agreed upon and outlined in the commercial lease. The methodology and procedure for reviewing the rent are outlined in the lease and typically the process involves the parties’ representatives putting forward their respective valuations and supporting market evidence in support of their respective cases to negotiate a settlement.

Re-evaluating current market conditions is the most-often employed method of recalculating the new rent.

It is important for landlords to re-evaluate market trends, as it can lead to more rental income and therefore profitability of the property. Whereas, for tenants, it is important to negotiate competently to reduce the rent increasing as much as possible. Preventing delays is also a priority in this situation; as the tenant remains liable for paying any backdated rent from the rent review date and onward.

Where agreement cannot be reached, there will normally be provision for referral of the commercial rent review to a third-party surveyor who will act as an arbitrator or an independent expert.

Poorly executed rent reviews can result in monetary losses, failure to reach an amicable rent agreement, and dissolution of the commercial contract entirely. Therefore, navigating this process in a reasonable and efficient way is vital.

Detailed knowledge of the local market and rental values as well as an in depth understanding of lease terms, statutory provisions and case law is critical in achieving the best result at rent review.

7 Tips to Navigate your Rent Review

At Roger Hannah we have extensive experience in acting on behalf of Landlords and Tenants of commercial property and have put together Seven Tips to a successful Rent Review exploring:

The Lease | When can I Review | Types of Rent Review | Expert Knowledge | Negotiations | Dispute Resolution | Completion

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When Is My Rent Reviewed?

The date of a rent review is not necessarily set in stone, but the frequency of reviews will be outlined in your rental contract agreement. There is typically a set 3-month notice period that a landlord needs to inform the tenant of the increase, otherwise, it becomes invalid.

Why Do I Need A Rent Review?

All rent reviews–whether commercial or residential–are conducted to ensure current rental figures are in line with the market. If not, they can be adjusted fairly.

How Much Notice Does Your Landlord Need To Give?

As with anything, your landlord will need to give an appropriate level of notice before any intended rent rise. A trigger notice is typically required within a 3-months grace period. Though this can differ during the commercial rent review process.
If appropriate notice is not given, you may be able to contest the rent rise. As failure to inform you will negate the landlord’s right to impose an increase.

Will Any Improvements Made Be Counted In The Rent Review?

In most cases, the rent review process will be based on the condition of the property at the beginning of your lease. Keep a detailed record of all improvements made during your lease. As this way, you will not risk the chance of being potentially charged more rent for improvements made during your tenancy.

Can You Negotiate A Lower Commercial Rent Rise?

During a commercial rent review you will only have a certain amount of time to contest your landlord’s notice. Or, indeed, negotiate a new rent which is agreeable for both parties. Failure to respond within the given time frame could lead to unnecessarily inflated rent for your business. Responding well in advance of your commercial rent review deadline, then, is extremely important.

How Is The Commercial Rent Review Calculated?

A typical commercial rent review will be calculated via comparisons to the local market and open markets rent (also known as open market rent value – OMRV). For most cases, both parties may wish to appoint an independent commercial property surveyor to determine a fair outcome for the rent review or to contest it.
Though a commercial rent review may end in either a rent increase or decrease, it will most commonly be increased. This is the result of inflation. Landlords typically only seek ‘upward only’ commercial rent reviews – so, you will likely never face a review where the fees may be lowered. If market levels do indicate a lower rent, then your rent will likely remain the same.

What Is Open Market Rent Value?

The OMRV is affected by the average rent for similar properties in your local area. However, it is important to know that OMRV is calculated based on the most valuable purpose of space. For example, if your lease allows your commercial rental property to be either a storage unit or an office, the calculation will treat the space as an office for this purpose.
Therefore, you may find yourself paying a higher rent on a commercial property despite the current use.

What If The Landlord and Tenant Disagree?

If neither parties can reach an agreement it becomes a disputed case. Therefore, both parties will need to follow an established arbitration process to resolve the issue in a legal matter. In most cases, this will mean following alternative dispute resolution (ADR) as a standard part of the rent review. A third-party representative will, therefore, be appointed to assess and determine a fair outcome.
When ADR fails and the dispute escalates, it could result in a court judgement to fully resolve the issue. This can quickly raise the expense and length of the process, so resolving the issue during ADR is better for both parties.

Is The New Rent Level Applicable During a Dispute?

If a commercial rent review is under dispute, then you will have to continue paying the old rate until an agreement is reached. Should the rent increase go-ahead, a back payment for the period of a dispute will be required. Some cases may require an interest payment on the overdue amount.

What If The Outcome Of The Commercial Rent Review Is Unaffordable?

In the case that the new rent is not affordable for your business, you may have some options in-built into your lease. You may be able to surrender the lease to the landlord or sublet/sell the lease to another business.

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