Rent Review in Commercial Property Leases
22 May 2018 by Lisa O'Boyle
A Rent Review clause in a commercial property lease, is a clause providing that the annual rent will be reviewed during the contractual term of the lease. Rent is often reviewed on an “upwards only” basis, meaning that the rent (once reviewed) will either remain the same or will be higher calculated in accordance with the Lease provisions.
Rent Review is generally expressed to take place on one fixed date, or on regular intervals during the contractual term. There are various ways of calculating the reviewed rent, the most common being market rent.
If rent review is based on market rent, a surveyor is appointed to determine the rent (often the “best” rent) achievable for the property on the open market.
The surveyor will determine what the market rent is for the property as a hypothetical letting according to various Assumptions and Disregards. It is crucial to obtain legal advice as to the implications of Assumptions and Disregards, as slight tweaks to the wording may lead to potentially unfair review provisions. For example, if the rent is reviewed on the assumption that the Landlord has complied with all the Landlord Covenants (and it hasn’t), this may result in the Tenant paying a higher rent than it should be. This is because the Tenant would be suffering firstly, from the fact that the Landlord is not complying with its obligation under the Lease and secondly, from the fact that the rent review would not be taking that fact into account.
The reviewed rent could be calculated by reference to an index. For example, based on the Retail Index Price (RPI), Consumer Price Index (CPI), the Retail Index Price Jevons (RPIJ), Consumer Price Index including owner-occupiers’ housing costs (CPIH). This allows rent to follow inflation. Parties can introduce a minimum and/or a maximum rent under which and/or over which the rent cannot be set at. Alternatively, parties should consider “rebasing” the index price following a review. An indexed rent review could also be combined with market rent.
This method of review applies where the rent is based on the tenant’s business turnover at the premises (usually expressed as a percentage of that turnover). Similarly, it is common for parties to introduce a minimum rent.
There are other ways of reviewing rent and obtaining legal advice will help parties tailor rent review to suit their circumstances. In addition, a review of the rent may have stamp duty land tax implications and could lead to the payment of further tax during the contractual term of the lease.
It is important for a tenant to fully understand how rent review works and the implications of a particular rent review structure, before completion of a lease. The commercial property team at Fisher Jones Greenwood are happy to advise further. Please do contact us on 01206 700113 or on [email protected].