Hannah Smith from our Commercial Property Team writes:

Most businesses (at least initially) will rent space for their business to operate from. Once you’ve found the perfect space, negotiated the commercial terms, and signed your new lease, the issue of rent payable in future often still poses an issue. What happens when your lease’s rent no longer reflects the current rental market? This is where rent reviews can apply to alter rent payable during the lease term.

Open Market Rent Reviews

The most common form of rent review is one based on the current market position. Often a surveyor will act as an expert, employed on behalf of the landlord and tenant to decide the current market rent payable for the lease at a specific time. The review of annual rent will take place at predetermined intervals as set out in the commercial lease agreement.

The open market rent review process involves comparing the property to similar properties in the locality, to gauge its true value. Often there may be an adjustment in the rent either increasing or decreasing it according to current market conditions.

However, some landlords may opt to protect their position by ensuring that the lease provides that the review of rent can only be upwards (to a higher rent) following each review.

While this form of rent review might sound straightforward, often debates can arise between landlords and tenants, as each party attempts to secure the best outcome for themselves.

Fixed Rent Reviews: Greater Predictability

Fixed rent reviews provide stability by establishing predetermined intervals for rent adjustments within the lease agreement at a fixed level. This means that both landlord and tenant are certain that the rent values will remain constant for a set number of years. For tenants, fixed term rent reviews help facilitate longer term financial planning and budgeting for their business. For example, the lease may provide that the rent will increase by 4% every five years.  Alternatively the rent may change by a prescribed amount set out within the lease.

Index-Linked Rent Reviews: Adapting to Economic Change

Often used in longer commercial leases, index linked rent reviews are designed to align rental adjustments with changes in the economy by way of a specific index. Usually this is either the Retail Price Index (RPI) or Consumer Price Index (CPI). These indices track the standard price of goods and services, reflecting any rise in economic inflation. When the indices alter, the rent will adapt to mirror the percentage change present in the chosen index. For example, if the lease is to be modified bi-annually in line with RPI, and it rises by 6%, then the rent for the next two years would be increased by 6%.

Index linked reviews can help ensure the true value of rent payable remains consistent, even during times of economic fluctuation. In turn, index linked rent reviews can be deemed relatively fair due to their ability to generally reflect the wider economy. They can also be less expensive to implement because there is no need to instruct a surveyor, as is the case under an open market review.

The appealing combination of the “higher of” Open Market Rent and Index Linked Rent Reviews

This dynamic approach to rent adjustments is often a popular choice with landlords as it offers the “best of both” in terms of rent reviews. The “higher of” type of rent review safeguards landlords against market variations, whilst also ensuring their rental income remains competitive and in line with market standards.

Conclusion

Rent reviews are a key tool for landlords and tenants alike to ensure that rents payable reflect the property’s true worth. Understanding the various types of rent reviews available is a valuable tool for any business owner, whether in their capacity of a tenant or landlord. Open market rent reviews utilise elements of negotiation, fixed reviews offer the comfort of predictability for parties and index-linked reviews can adapt to economic change. Your commercial property surveyor will be able to help advise you on the best type of rent review to implement for the property.

 

For more information or for any advice on leases or commercial property generally, please contact Hannah.

 

This article does not constitute legal advice and is correct at the time of publishing.  For specific advice on your circumstances, please contact us.