Rent reviews are a significant aspect of commercial property leases in the UK. As a small business owner, it’s essential to understand how commercial rent reviews work and the process involved.
This article provides valuable insights into handling rent reviews, explaining their frequency, retrospective rent reviews, acceptance of rent reviews and reasonable commercial rent increases.
How do commercial rent reviews work?
Commercial rent reviews serve as a means to adjust the rental value of a property during the lease term. The process typically assesses the prevailing market conditions and determines whether the current rent remains fair and in line with market rates. They aren’t included in all leases, and generally the longer the commercial lease the more chance the landlord will insist on rent reviews.
Rent review clauses in the Lease outline the specific method of review. There’re several types of rent reviews, namely:
- Open market – the rental value is assessed by considering the rent if the property were to be advertised for let on the open market at the time of the review
- Index linked – the rent increase is in line with a specific index, often the Retail Price Index (RPI)
- Fixed increases – a predetermined and fixed amount of rent increase is automatically applied on the review date/s
- Turnover rent – this is where a portion or the entirety of the rent is based on the tenant's financial performance. This method tends to be less common than the others.
To initiate a rent review, either the tenant or the landlord must serve a notice to the other party, stating their intentions and proposed changes. At this stage, it’s crucial to engage with a legal professional specialising in commercial property to ensure compliance with the lease terms and any relevant statutory requirements.
Commercial rent review process
The commercial rent review process typically involves the following steps:
1. Notice of rent review – the party starting the review serves written notice to the other party, specifying their intentions and proposed changes.
2. Valuation – both parties appoint independent surveyors or valuers to assess the current market rental value of the property. They consider factors such as location, condition, size, and market trends.
3. Negotiation – the surveyors or valuers from both sides engage in negotiations to determine a fair rental value. They may exchange proposals and counteroffers to reach a mutually acceptable figure.
4. Agreement or arbitration – when the parties (acting through their surveyors) reach an agreement a new rent value is established. However, if they fail to agree, the lease may include an arbitration clause, which will outline the details for a third-party arbitrator to settle the dispute.
5. Rent adjustment – once the new rental value is determined, the rent is adjusted accordingly. Most open market rent review clauses are ‘upwards only’ which means that even if the market conditions have deteriorated, the rent won’t reduce. However, some leases do have review clauses which allow either an upward or downward rent review, depending on the market conditions.
How often are commercial rent reviews conducted?
The frequency of commercial rent reviews depends on the terms specified in the Commercial Lease. Common intervals for reviews range from every three to five years. However, it's crucial to review the Lease Agreement to determine the exact timeframe applicable to your commercial property.
Can a commercial landlord retrospectively carry out a rent review?
A commercial landlord can usually carry out retrospective rent reviews, also known as backdated rent reviews, under specific circumstances. Generally, retrospective rent reviews are permissible when:
- The Commercial Lease includes a rent review provision allowing for retrospective rent adjustments
- The tenant failed to respond or engage in the rent review process within the specified timeframe
- Both parties agree to a retrospective rent review to correct an oversight or error
Do I have to accept a rent review on a commercial property?
You’re under no obligation to immediately accept the rent increase your landlord is proposing. As a tenant, you have the right to negotiate the terms of a rent review proposed by the landlord. However, it's important to note that refusing a lawful rent review could lead to legal disputes and potentially strain the landlord-tenant relationship.
Therefore, we generally recommend actively engaging in constructive discussions and seeking professional advice to arrive at a fair and reasonable rental value.
What if I disagree with the landlord about the rent review increase?
Most commercial leases provide a dispute resolution clause, that in the case of a rent review dispute, either party can refer the matter to a third party for review by an Arbitrator. If you and your landlord can’t agree on the appointment of a third party, the lease may provide for the President of the Royal Institute of Chartered Surveyors (RICS) to appoint a body that will determine the revised rent increase
What’s a reasonable commercial rent increase?
The determination of a reasonable commercial rent increase depends on several factors, including:
- Prevailing market conditions – the rental value should align with the prevailing market rates for similar properties in the area
- Lease terms – the commercial lease should specify a method for calculating rent increases, such as open market, fixed increases or index-linked adjustments
- Property characteristics – the size, location, condition, and amenities of the commercial property can influence the appropriate rental value
- Length of lease – longer lease terms may result in more rent reviews, to ensure the rent keeps pace with the continually changing market as the years progress
A reasonable open market rent review actively takes into consideration the terms of the review clause (including the assumptions and disregards) and the specific circumstances of the property, while being supported by an evidence-based valuation.
Get legal assistance from LawBite
A rent review can induce worry and stress, especially if it falls during an economic downturn. Understanding the process of rent increases can help you approach rent reviews with confidence and protect your business's financial interests.
However, it’s crucial to seek legal advice and engage with professionals specialising in commercial property to ensure compliance with lease terms and statutory requirements. By adopting a proactive and informed approach, you can effectively handle rent reviews and ensure a fair and sustainable rental value for your business premises.
If you’re dealing with an issue or dispute from your existing commercial premises, our commercial property solicitors are on hand to advise. To find out more, book a free 15 minute consultation or call us on 020 3808 8314.