Rent Reviews Explained
This guide is for…
1. Landlords and Tenants negotiating Heads of Terms with a rent review clause.
2. Landlords and Tenants with an upcoming rent review.
Rent reviews serve a variety of purposes for landlords of commercial property. Primarily, they give the landlord the flexibility to ensure that they are charging the market rent for their given commercial premises. They also can be a useful bargaining chip for landlords and tenants when negotiating Heads of Terms.
Rent review clauses can be incredibly complex and come in a variety of forms. This piece will explain the different types of rent review clauses and the implications that they can have for Landlord and Tenant. As one of the highest areas of dispute and litigation in commercial leases, it is imperative that you enter any agreement to review the rent with open eyes.
Fixed Increase Rent Review
Rent review can come in the form of a fixed increase. This will be a figure (or number of review figures) agreed between the parties when negotiating Heads of Terms. With a fixed increase, both parties have the benefit of knowing when the increase will occur and how much it will be for. This allows both Landlords and Tenants to plan for increases in income and outgoings respectively. Many Landlords, however, may prefer to have an open market or RPI rent review when there is a buoyant rental market.
Upwards-Only Open Market Rent Reviews
Upwards only open market rent reviews are probably the most common type of commercial rent review. In such a situation, the rent is reviewed based on what the commercial property would be let for on the open market. If it would be let on the open market at a higher rental than is currently achieved by the Landlord, then the rent will increase to that figure. Unfortunately for the tenant, if the rent is assessed as being lower than currently achieved, the rental will not go down – it will simply stay the same.
Upwards-Downwards Open Market Rent Review
In times of economic downturn, Landlords (in a bid to retain Tenants) have been known to reduce rent but this is not a usual course of practice at any other time. An upwards-downwards review allows for the rent to go up or down depending on current market conditions. Though they theoretically exist, upwards-downwards open market rent reviews are exceptionally rare in practice.
RPI Index Rent Review
The ‘Retail Price Index’ (RPI) measures the average change from month to month in the prices of goods and services purchased by most households in the UK. An RPI rent is a rent that increases in line with the ‘Retail Price Index’. As of March 2013, the UK recognises a new form of index known as the RPIJ. Despite the update in indexation, rent review clauses continue to be measured by reference the RPI.
Implications for you:
Each type of rent review clause has its advantages and disadvantages for Landlord and Tenant. For Landlords, maximisation of yield is of primary concern and upwards-only is usually the best way of doing so. A well-negotiated fixed increase has the potential to yield ahead of market conditions but is, ultimately, a gamble that may or may not payoff. For any tenant negotiating Heads of Terms on a new Lease or taking on an assigned lease from a previous tenant, it is important to plan for any increase in rent. Where there are significant changes in market conditions, Tenants can be caught out by an unexpected rise in rent that they had not planned for. Fixed increases carry certainty but could result in you paying over market rate at the time of review.
Whether you are a Landlord or Tenant, it is important your rent is legitimately reviewed. To ensure that your financial and commercial interests are protected, contact our team of experienced commercial property lawyers to guide you through the process.