Commercial Property Rent Reviews Explained: What You Must Know

One of the critical aspects of leasing commercial property is understanding the process of rent review. This article summarises this topic, offering valuable insights for both landlords and tenants.

The Essentials of Commercial Rent:

Commercial rent is the payment made by a tenant to a landlord for the use of commercial property. Leases typically reserve an annual rent and tenants are obliged to pay it when they enter into a lease with the landlord.

Leases often clarify several matters such as when rent is payable – This can be spread across four equal instalments typically referred to as the ‘usual quarter days’, or monthly payments of rent.

The rent amount is usually determined based on several factors, such as:

• Location – Properties in prime locations command higher rents due to increased demand and visibility.
• Size and Condition – Larger and well-maintained properties often attract higher rent.

The commercial rent is can be subject to change where there is an express provision to that effect. The provision is referred to as a rent review clause and is included in the lease to provide the landlord with an opportunity to review the level of rent payable by the tenant. We will now explore this in further detail below.

Rent Review 

A rent review clause is a provision which enables the annual rent payable under a lease to be periodically reassessed. The primary objective is to ensure that the rent remains in line with current market values so that landlords are able to retain control over their rental income during the term of the lease.

Tenants should consider the potential increase of rent review during negotiations with landlords, prior to committing to a lease agreement to ensure that any increase in rent will not become unsustainable and so that they are able to consider the lifetime affordability. Although, it is difficult for tenants to anticipate what the rental increase will be.

Triggering a Rent Review

Rent reviews are typically conducted at predetermined intervals, commonly every three to five years. The lease will specify the dates on which rent reviews should take place.

Types of Rent Review

There are several methods to conduct a rent review:

• Open Market Rent Review – The new rent is based on the current market rate for similar properties. This method often involves negotiations between the landlord and tenant or an independent valuation and is the most common form of rent review clause.
• Fixed Increase Review – The lease will stipulate predetermined increases at set intervals. Although this method provides predictability for both landlords and tenants, it is not often used due to difficulties arising out of predicting with any certainty what rental levels are likely to be at particular points in the future.
• Index-Linked Review – Rent increases are tied to an inflation index, such as the Retail Price Index (RPI), ensuring the rent keeps pace with inflation. These types of rental increases can sometimes have a ‘cap and a collar’ meaning that the percentage increase of rent is often limited. This does however also ensure that the there is a fixed minimum increase to the rent amount.
• Tenants Receipts / Turnover Rent Review – Sometimes in retail leases, rent is linked to the tenant’s turnover, with a base rent and additional rent based on sales performance. This is often beneficial for landlords as it has the advantage of tracking the tenants actual financial health and so, their ability to pay rent.

Negotiation and Dispute Resolution

Rent reviews can sometimes lead to disputes between landlords and tenants. It’s essential to approach negotiations with clear evidence of market rates and an understanding of the lease terms. If an agreement cannot be reached, the lease may provide for dispute resolution mechanisms, such as arbitration or mediation or expert.

Once an agreement is reached, the new rent should be documented in a rent review memorandum, signed by both parties. This document becomes an integral part of the lease and should be kept with the lease.

Conclusion

Understanding rent and rent reviews in commercial property leasing is crucial for both landlords and tenants. Being well-informed about the factors that influence rent, the types of rent reviews, and the negotiation process can help parties navigate this aspect of commercial leasing more effectively. Whether you’re a landlord seeking to maximise your property’s value or a tenant aiming for fair rent terms, knowledge and preparation are key to a successful leasing experience.

If you need any further assistance, please do not hesitate to get in touch with our Commercial Property Team.