Negotiating rent reviews

Advice  |   7 September 2015

When negotiating the terms of your lease for commercial premises, agreeing the rent payable will be a prime concern, so too should be the prospect of agreeing the rent review, even though this may be a long way off.

When negotiating the terms of your lease for commercial premises, agreeing the rent payable will be a prime concern, so too should be the prospect of agreeing the rent review, even though this may be a long way off.

Rebecca Facey, a commercial property solicitor at Thackray Williams, outlines how neglecting to agree the terms of a rent review, when agreeing the level of the rent, can be a costly mistake.

Why is the rent reviewed?

A landlord will want to review the annual rent regularly in order to ensure that the rent they receive is not less than the current market value. So, if you have a lease with a term of say 10 years, the landlord may insist on a rent review at year five. Where the lease is granted for a shorter term, say less than three years, it is less common for the rent to be reviewed.

That is not to say that with higher-value properties, or where the market conditions are unstable, rent reviews cannot be introduced in shorter-term leases. This will be a matter of negotiation and will depend on the relative bargaining power of each party and the market conditions when the lease terms are agreed.

For example, during the recession, the market was generally more favourable to tenants, as landlords wanted to keep them in situ. It was easier for a tenant to negotiate either a better rent review provision or to tie it in with a break clause. This enabled the tenant to end the lease sooner if the revised rent was not acceptable to them.

In a more buoyant market however, a landlord may be able to insist on more regular rent reviews; this could be every three to five years. In a longer-term lease, five-year rent reviews are still generally considered to be the norm.

How is the rent reviewed?

There are different ways in which rent can be reviewed:

Upwards only rent review - the most common is for the rent to be reviewed based on the market value at the time and the usual position is for the review to be the higher of either the market rent or the current rent. In a falling market a rent review may technically result in a lower annual rent, but as a tenant you would continue to pay the existing rent, until the next review date.

Retail Prices Index rent review - rent is increased (but not decreased) in accordance with inflation. This type of review may be more suited to lower-value or shorter-term leases

Fixed rent increase - this is useful where both parties want the assurance of knowing what the rent will be, to assist with cash flow and budgeting. This is more likely to be agreed in a stable market.

There are many other ways of reviewing the annual rent and so it is recommended that advice is taken at an early stage, ideally before heads of terms are agreed. This will ensure that you can get the best possible deal to reflect market conditions.

Who reviews the rent?

The usual lease provision will be for you and the landlord each to instruct a valuer to assess and agree the revised rent in accordance with the valuation criteria set out in the lease. If the rent cannot be agreed in this way, there will usually be a provision which enables the rent to be determined either by arbitration or an expert.

Once the rent is agreed, it should be recovered in a memorandum which is attached to the lease and signed by both sides and their respective valuers.

Any increase in the rent will usually be paid by the tenant when the next rent instalment is next demanded on the next quarter date or beginning of the month.

What are the implications of a rent review?

A rent review will not amount to a variation of the lease, unless the lease does not provide for a rent review.

It can, however, have implications for the tenant in terms of Stamp Duty Land Tax. If the increased rent means that the SDLT liability for the term of the lease is increased, you will be obliged to make a further payment to HMRC at the time of your rent review.

As mentioned above, it is also common for break clauses to be linked to rent reviews so that, as the tenant, you have the ability to end the lease if you are not happy with the outcome of the rent review.

Drafting considerations

Careful consideration needs to be made in agreeing a rent review provision, not only to deal with break clauses and upwards only rent provisions, but also to consider how the rent review provision will be interpreted during the life of the lease. For example, if the use of the lease changes, the lease must ensure that the rent review provision is adequate to allow for such variation. Also, where works have been carried out to the premises by the tenant during the term, which may increase its rental value, these too can be included in the rent review criteria. This is of course important to a landlord.

There are many things to consider in agreeing to a rent review and professional advice should be taken as early as possible to avoid any issues once the lease has been entered into.

For more information and advice on rent reviews or any other commercial property problem, contact Rebecca Facey