When agreeing terms of a lease, one of the key terms to be agreed is the rent and how it is reviewed. A rent review is a tool enabling landlords to increase the rent in line with market rates and/or inflation. Typically, a longer lease will involve one or more rent reviews during the term. As a tenant, you will be at risk of the rent increasing. Conversely, as a landlord, you will want to ensure that you are not undercharging later on in the term. So how do the parties agree fair terms?
If the rent has not already been set for the entire term of the lease, there are three main types of rent review clauses to consider.
Open market rent review
This is the most common type of rent review clause. Typically, when the time comes for a rent review both parties will attempt to agree the new rent between themselves. If they cannot agree, the parties will refer the matter to an independent surveyor.
In order to consider the rent increase, the surveyor will look at the rental values of similar properties in the area. There will be various assumptions and disregards that the surveyor must take into account when deciding on the rent. It is up to the solicitors to negotiate these assumptions and disregards into the lease. However, they can include, for example, an assumption that there are no rent arrears or a disregard of any improvements the tenant might make.
Most open market rent reviews are on an upward-only basis. This means that the rent will not go down. Where the market rent falls, the rent is likely to stay the same, rather than increase.
Retail Price Index rent review
Parties use this second type of rent review where they prefer more certainty with the rent increase. It is calculated in accordance with the Retail Price Index (RPI), which in effect keeps rent in line with inflation.
The lease will contain a calculation enabling the parties to calculate what the rent will be on the review date. As a tenant, this clause is beneficial as it enables you to monitor inflation and foresee any major increases.
Turnover rent review
Finally, some parties prefer a rent review based on the tenant’s turnover. This is particularly beneficial for tenants starting off a new business as rent is calculated in accordance with turnover in the business. However, turnover does not always mean profit. Furthermore, if your business is successful, you will be obliged to pay higher rents. This type of clause is fairly common in the retail sector and shares the burden between the landlord and tenant. However, there may be practical issues with evidencing turnover and preparing accounts for the landlord to view.
It is important to take legal advice when agreeing the terms of the lease as the type of rent review clause you agree on could impact on how much the rent is to increase by at the time of the review. As a tenant, you are unlikely to be able to avoid a rent review therefore you should at least make sure you are prepared for it and that the type of rent review is right for you so that it is fair.
If you are considering entering into a lease and you would like further advice regarding rent and rent review, contact our commercial property team. Call us on 0800 988 7756.
