Rent Reviews: What you Need to Know
As with many aspects of commercial property leases, there are many misconceptions when it comes to rent reviews. These are not a formality where the landlord sets the new rent, but are a matter for negotiation. The best advice is to start preparing early and take advice from a surveyor who understands the local commercial property market and is familiar with the nuances of lease interpretation and the significant impact they can have on value.
Whilst in recent years nil increases have been common as rental levels have not risen or may have fallen, there are also instances where rents have doubled over the review period and turned a once affordable property for a tenant into an unmanageable burden.
Invariably, the lease will state that the rent is to be revised to market rental value, based upon the terms of the lease and further taking into account various hypothetical assumptions, contained within the rent review clause.
Where the parties cannot agree on the rent, it is usual for either party to be able to apply (to the Royal Institution of Chartered Surveyors) for the appointment of an arbitrator or independent valuer, whose decision or determination will be final. As with most judicial and quasi-judicial processes, this is not without potentially significant cost and risk. It is, however, the desire to avoid costs and uncertainty that promotes negotiation and sometimes compromise.
Rent reviews often take many months and occasionally years to conclude, for which there may be a good reason. The ‘old’ rent will continue to be paid therefore until the new rent is concluded, at which point the difference between the old and new rent backdated to the rent review date will become due for prompt payment, plus interest. By way of example, if therefore the old rent was £50,000 and the new rent is £75,000 and the process takes 1 year to complete, additional rent of £25,000 plus interest will need to be paid in addition to the normal periodic rental payment. It is important therefore that tenants accrue for an uplift to avoid cash flow problems.
Tenants should also not assume that just because the landlord has not implemented the review by the review date, there is no intention to do so. Unless it has been formally concluded, the opportunity to implement an outstanding review remains open for many years. It may, therefore, be appropriate for the tenant to take the initiative.
The rent itself is assessed in accordance with the valuation hypothesis and assumed terms, set out in the lease. Whilst these terms are broadly similar in most commercial leases, they are rarely identical and therefore need careful reading, as the impact on the value of a missing or additional word can be significant. Unclear or poorly worded clauses are not uncommon and may well not reflect the intention of the parties at the outset of the lease. When leases are entered into landlord particularly should bear in mind that the more burdens and restrictions placed upon the tenant are likely to lead to a lower rent on review and lease renewal.
Planning for reviews and making sure you obtain advice from a specialist is essential. Contact Hicks Baker today on 01189 596144 or visit the links below to find out more.