22 May Commercial Leases – Rent Review Mechanisms
When a new commercial lease is being granted, there are three main mechanisms of rent review to consider. In conjunction with our other comprehensive guides covering the topics around commercial conveyancing, we believe this document can be used to understand the various methods by –
- Prospective Tenants looking to offer on a commercial property an compiling preliminary terms
- Landlords who are considering offers and working out starting rents
- Commercial Agents negotiating Heads of Terms (HoT’s) and or preparing marketing material.
Traditionally, since almost all commercial leases are granted for a number of years as opposed to months (Residential Property), where the landlord can increase the ‘rent’ and let the property to a new tenant for the next 6 months – so on and so forth; commercial Landlords need the rent review provisions to be agreed in advance such that the rent will always be in line with Market Rents.
Commercial Leases being an unregulated arm of the property sector, great care must be taken when negotiating the topic if rent and clear advice should be obtained by a qualified commercial solicitor. A significant amount of Commercial Property related litigation arises surrounding rent reviews.
From a Landlords point of view, Commercial Freehold’s (assuming the leases are of good standing) are considered safe and lucrative investments by the various cooperate (such as pension funds and asset management companies) and foreign investors – therefore the security of a future; profitable sale depends significantly based on the rent review provisions too.
The three main rent review mechanisms for commercial properties –
- Upward Only Rent reviews
- Upward and Downward Rent Reviews
- Rent review in line with RPI
We will now look at dissecting each model –
Upward Only Rent Reviews –
This is fairly straightforward to understand. At the point in time where a rent review is required, the landlord will increase the rent in accordance with prevailing market conditions. You will most likely find provisions within the lease where the landlord can appoint a valuer who will produce these figures and the tenant can also then independently instruct a valuer to ensure that the figures are not biased. However, the important point to remember here is that assuming markets have taken a downward spiral and the market rents have actually reduced (gone below the initial rent) the new rent will not go below the previous last rent.
Upward and Downward Rent Reviews –
Similar to the above, the terms of operation are exactly as Upward Only Rent Review Provisions, naturally with the added benefit to the Tenant of there being room for the rent to potentially to go down. Landlords rarely agree to Upward and Downward Rent Reviews; especially during periods of economic downturn.
Rent Review in Line with RPI
This type of rent review is now the benchmark when it comes to residential leasehold properties (as doubling rents, for instance, are no longer considered mortgageable), however, RPI Index based commercial rent reviews are just about catching. Since Retail Price Index is based on inflation, the rent increases can mostly be seen as marginal compared to Upward Only Rent review mechanisms as explained above. What this otherwise means is that naturally, a Land Lord (from a biased view) is best off with the former. From tenants point of view, this set up can be seen as a fairly ‘risk mitigated’ scenario.
However, it is, of course, worth remembering that agreeing rent review provisions are very much a significant part of formalising HoT’s and therefore, we are always happy to assist by advising you of your options.
Please contact our team of Commercial Solicitors on 0203 375 2187 or alternative, email email@example.com with your queries. We will endeavour to respond to you as soon as possible either by return email or over the telephone.