Rent reviews – the only way is up
Julian Pyrke provides the lowdown on rent reviews, an essential guide for commercial property landlords and tenants.
There have been many changes over the course of my practicing career in relation to Leases, not least the move towards shorter term Leases. When I was wet behind the ears a lot of commercial Leases were for terms of 20 years and over, it being considered that a longer commercial Lease was more desirable, whereas the move today is generally towards shorter term leases commonly a ten-year Lease, with a rent review at year five.
The use of modern precedents has opened up the ability for more firms and landlords to dabble with alternative rent review structures. It also opens up the possibility to make the rent review structure more complicated than sometimes they merit.
What has changed and perhaps is becoming more common is a mix of rent review mechanisms. Traditionally, rent is agreed prior to the rent review date between the parties by a comparison of the open market rental values of adjoining or similar properties in the locality. A good game is had by all playing this one but in the case of default between the landlord and tenant, then the parties look to the terms of the lease and what was agreed usually 5 years previously. In the case of dispute then the matter is usually referred to an independent surveyor who will assess the rent on the basis of a hypothetical Lease, which assumes the Lease is drafted in a certain manner and disregards certain items within that hypothetical Lease. I do not propose to go through the assumptions and disregards of an open market rent review here since that would be a whole separate topic in itself. Any party who has gone through a protracted disputed rent review will see the attraction of a differing mechanism to open market rent review.
Landlords and tenants are also increasingly using other mechanisms in order to ensure that they maximise their returns and recently we have seen more use of annual increases in line with and agreed Index (Retail Price Index or Consumer Price Index). In some instances the rent review is linked to an agreed percentage of the turnover of the business (with a base figure rent) of the tenant. Some of the larger Leases we come across have a combination of all of these mechanisms, so the rent is always the higher of the hypothetical Lease, the turnover rent and an index. Usually Leases such as these are found in large multi-let shopping centres and thankfully not for most Leases on the high street.
Specialist commercial property solicitors
There are a number of considerations to be made when thinking about how the rent is to be reviewed in the Lease and we are happy to run through some of the alternatives with you. Keeping your lease simple but also suitable is something we can advise on. A large part of your decision will be based on the marketability of your property and also general market forces, etc.
If you would like to discuss an existing or new lease in more detail, then please do not hesitate to get in touch.