Commercial rent reviews were originally introduced after the Second World War, when inflation levels were high. At that time leases were of a longer duration, typically more than 20 years, and landlords needed a mechanism to remain commercially viable throughout the term.
Rent reviews allowed landlords to periodically bring their rental charges in line with current market prices, but now they generally take place every three or four years. This relatively short interval between reviews reflects the nature of modern commercial leases, which generally last around 10 years.
Commercial leases include the provision for the rental amount to change, sometimes in line with current market values - this is done via a rent review clause. The upcoming review dates are specified so tenants know when their rental payments may be subject to change. In order to protect landlords, rent review clauses typically only allow for rent increases to be made. Therefore in the instance where the market value of the property is determined to have decreased, the rent charged will remain the same.
Commercial rent reviews can be based on factors other than market value, however, including a measure of inflation such as the Retail Price Index (RPI), or the company’s turnover. When an open market rent review takes place, negotiations reflect open market values at that time.
Typically, the landlord and tenant will appoint their own chartered surveyors to carry out the process and oversee negotiations. If an open market rent review is taking place, consideration will be given to comparable premises in the area and the use of those premises.
Clearly, business tenants will want to limit any increases in expenditure, which is why rent reviews can be problematic. Additionally, landlords need to evaluate the benefits of increasing their rent against the cost of the professional fees to settle a dispute if negotiations are unsuccessful.
The rent review clause should specify how disputes will be resolved if stalemate is reached in negotiations. A third party may be appointed to undertake an independent property valuation, inspect the terms of the clause and make a decision, but during the resolution process the existing rent is paid.
If the rent increases as a result of arbitration the difference is backdated to the date of the review, potentially with interest added. Depending on the length of the dispute this lump sum liability can be considerable, and potentially lead to financial difficulty for the business tenant.
Rent review clauses can be complex, and potentially increase a company’s rent beyond reasonable affordability. The level of rental payments is also often a significant factor in business survival if an organisation enters insolvency, so it’s advisable to ensure a commercial lease is suitable for its whole term.
Professional representation during commercial rent reviews is essential to limit your liability as a tenant. Begbies Traynor Group is the UK’s largest professional services consultancy and will ensure your interests are protected during a rent review. Call one of our expert team to arrange a free same-day consultation – we operate from an extensive network of offices throughout the country.