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There are several different types of rent reviews in modern commercial leases. The nature of a rent review and the type of mechanism that is appropriate to a lease, is largely dependent upon the type of the property concerned, and the bargaining power of the parties when the Lease was entered into.
The most common type of rent review for a high street premises or industrial unit would typically be an open market rent review. This is where the rent review is undertaken by a surveyor who will carry out a valuation of the property and make a decision as to what it considers the open market rent to be. Rent review clauses of this nature will typically include phrases such as ‘assumptions’ and ‘disregards’ and may even given an initial opportunity to the Landlord and Tenant to try and agree what the rent should be without going to a solicitor. Virtually all leases will however say that the outcome of the rent review will only ever be that it should stay the same or increase – or ‘upwards only’ – it is very rare to see a lease which allows for the rent to go down.
If your property is within a shopping centre, then you may have an ‘index linked’ rent review. This is a mathematical process by which on each rent review date (sometimes annually) the rent is increased in accordance with the Retail Prices Index or some other nationally published index. This means that a surveyor is not usually needed for the rent review, since it is a case of multiplying the current rent by the difference in RPI from the date of the last rent review. The principle here is that the rent reflects what the increase in the cost of living has been, or is linked to the economy – however, once again, these clauses will hardly ever allow the rent to go down.
Alternatively, your lease may set out a turnover rent clause – this is where the level of rent payable is dependent upon the financial performance of the Tenant, who as part of the review process, needs to disclose its accounts to the Landlord. Typically, the rent review is then based on a percentage of the turnover achieved above a certain figure, which means the review is undertaken on an accountancy basis.
Finally, some leases will have a stepped or fixed review pattern – this is where the Landlord and Tenant have agreed at the outset what the rent should be in future years. The trade off here is clear, the parties have the certainty of knowing what the future rent is going to be, but there is of course the potential for either the Landlord or the Tenant to ‘miss out’ if those fixed increases in rent are either too high or too low.
If you are currently reviewing your leases in connection with rent review clauses, or are about to enter into a lease with a rent review clause, then please do not hesitate to get in touch.
With over 40 years’ experience, our commercial lawyers have the expertise to anticipate and eliminate issues, communicate clearly and identify the most cost-effective course of action. Our team can advise on all areas of commercial real estate law, whether you are a developer, investor or vendor. We have offices in Liverpool City Centre, Allerton, Garston Village and Golders Green, London. Contact our team on 020 8103 8561 for our Liverpool office or 0151 453 0023 for London enquiries. Alternatively, email email@example.com. You can also view more information about our rent reviews lawyers here.