When deciding to commit to a Commercial premises, tenants tend to think optimistically and are sometimes are quite happy to enter into a long lease with the promise of certainty and stability. However, if a lease contains a ‘rent review’ clause, this could potentially leave them exposed and faced with a commitment to a substantially increased rent.
Lease rent review clauses
It is fairly standard for a long lease to have provisions included within it for it to be reviewed every 3-5 years. It is important to thoroughly read through the terms of the lease as this will usually include the procedures that are to be followed. It is usual for the landlord to have to give notice to the tenant of the proposed new rent by a specific date. If the tenant does not respond to this notice by the landlord they are deemed to have automatically accepted the new rent.
It is typical for the lease to contain the terms upon which the new rent is to be calculated, which is why it is recommended to carefully read through the lease prior to commencing the rent review procedure. Sometimes the rent will either be set at a pre-agreed level or will be calculated on the basis of an index which is stated within the lease. However, the most likely scenario is that the new rent is to be calculated by working out what the current open market rental value for the property would be. This is normally worked out by investigating what similar properties in a similar area on a similar lease are being rented out for. Savvy landlords will have a term included within the rent review provisions which state that the rent review will be ‘upwards only’ this will allow the rent to increase but not to fall, this will ensure that the landlord is never penalised by a rent review.
Negotiating the rent increase
If the lease states that the rent review is to be based on open market values of similar properties this will usually allow the tenant room for manoeuvre in relation to negotiating. The first thing the tenant should do is to have a look at the local rental levels which will give a great indication of what kind of increase or decrease in the rent that they are looking at. It is likely that the landlord will look at the top end of the local rental market whereby the tenant is likely to look at the lower end.
There is a lot to consider when comparing similar properties and the rent they are currently paying. Some landlord will induce new tenants in with attractive rent offers in their first year of occupancy which are lower than advertised whilst other tenants may be subject to tough restrictions on use which justifies paying rent which appears lower than the average open market price.
Tenants may look to instruct a local chartered surveyor who can provide supporting evidence as to what a lower rent level is more suitable and can additionally handle the rent review negotiations on the tenant’s behalf. The reduction in the increase usually achieved by surveyors on behalf of the tenant normally covers the additional rent that a tenant would be faced with paying.
Resolving rent review disputes
It is often best for both parties if the rent review can be handled by a negotiations that runs smoothly, however, if this is not the case then the lease should contains provisions for any disputes. These are usually arbitration or the use of an independent expert who will make a binding decision. However, it is crucial that a tenant continues to abide by the terms of the lease throughout any dispute over the rent review including paying rent at the currently agreed level.
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