Rent reviews: avoid the mid-life crisis
Most rent reviews are pinned to the mid-point of the lease life, so for a typical 10-year lease that’s year five.
But there is nothing to stop either party in a lease seeking professionally qualified advice prior to embarking on negotiations. The ideal would be nine to 12 months ahead of the review so neither party can be surprised when they get round the table.
The existence of a rent review will be in the Head of Terms and it’s incumbent on a tenant’s solicitor to check the lease and explain the existence and timescale for a rent review before completion.
However, it is still the case that many occupiers are not professionally represented and in the scramble to secure premises, the existence of a rent review clause can be overlooked. That just stores up trouble.
The starting assumption for a rent review conversation is that the new rent is at a level that could be obtained if the property was available to let on the open market at the point of the review by a willing landlord and equally willing tenant on the equivalent terms of the lease in question.
While there are some leases that provide for index-linked reviews, fixed rents and turnover rents, by far the majority of rent reviews are tied to open market values. It’s normal for the rent review to be upwards only or at current open market rental values, and this will be stated in the lease agreement.
The landlord or their agent will look to the market for comparables to arrive at a suggested market rent at the review date. However, if they can see the rent would be unchanged or, indeed, lower, they may decide not to take any action to record the rent and leave it a while to see if new evidence comes to light that might back up and secure an increase.
The important point to make in this instance is that it’s the evidence that is recorded around the rent review date that counts, not further down the line.
Leases usually provide a clause which states whether time is of the essence. However, most leases/review clauses state time is not of the essence - so if the review date is missed or forgotten then it can be instigated at any time after the review date.
It can be the case that landlords – and it’s generally those who don’t have ongoing professional agency or property management representation –although aware of rent review points, choose not to instigate them.
Historic rent review work is then undertaken on instruction, usually, because the landlord is wanting to sell their freehold interest and is looking for evidence on rent reviews, as well as professional advice on investment values.
Rents are determined by occupier demand and commercial stock availability that influence market values. In recent years, the retail sector has taken a hit and vacant shop units in the vicinity of an occupier may help provide evidence to secure a nil increase on the rent review.
In contrast, the recent buoyancy in the industrial commercial property sector has seen new lettings at considerably increased rental levels and this has seen existing tenants quite shocked at the level of new rent that could be achieved at review.
Once the rent review is agreed, both parties sign a legally binding Rent Review Memorandum stating the new rent. If there is dispute, a referral back to the Lease agreement will clarify the legally binding process by which the rent review will be resolved: This could be through an arbitrator or an independent expert.
In the case of a tenant vacating the premises and no agreed sub-letting or replacement tenant being agreed by the negotiation of a new lease, the original tenant remains liable for any revised rent for the life of the lease.
