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Rent Reviews

Almost every lease on commercial property includes provision for the rent to be reviewed from time to time and this is generally to the “market rent”.
Willmotts have a team of Chartered Surveyors Regulated by RICS who are well placed to provide the professional valuation advice required to ensure that the rent is set at the right level. Our practice is based in London and most of work is based in London and the Southeast.

Willmotts act on behalf of both landlords and tenants across a range of asset classes including retail, office, and industrial properties.

The rent review provisions in the majority of commercial leases offers the landlord to propose an increase to a figure they consider to be the market rent and care is required since in some cases that figure will be deemed to be agreed if the tenant does not respond within a specified time raising an objection or making a counter proposal.

It is therefore essential to take independent professional advice from a chartered valuation surveyor experienced in interpreting and applying what can be very varied and rarely clear wording.
 
The surveyor will need to inspect and measure the commercial property and compare it with the lease plan and with any licences for alterations which have been issued during the lease or even during a previous term where it has been renewed since most rent review clauses require the valuer to disregard any properly authorised improvements. The lease will also direct the valuer in any other assumptions which will have to be made in arriving at a proper view of the market rental value. This is different from a lease renewal, indeed lease renewals have regard to the Landlord and Tenant Act 1954 if they are contracted inside the Act.

Below we will explore the rent review process and how our rent review surveyors can assist.

What is a commercial rent review?


A rent review is the process of adjusting the level of rent a tenant pays. The mechanism and consequently the level of the revised rent is informed by the terms of the lease. The lease is a legal contract which should explain the commercial rent review process.

How often is my rent review?


The frequency of a commercial rent review and the rent review dates are determined by the lease.

What is the function of rent reviews?


There is no single function/ purpose of a rent review apart from to adjust the rent. However, on occasion, the rent review ends in no change to the rent. Traditionally rent reviews are a mechanism used by landlords to protect themselves from inflation across the term of a longer lease (longer than 3 years).

What is the rent review process?


There is no prescribed format for a rent review, the mechanism for a rent adjustment is set out in the lease. Although there is no prescribed format there is a body of case law around particular clauses.

Is there a time limit in respect of my rent review?


This is again informed by the terms of the lease and the body of case law around it. Most leases are fairly lenient in respect of time constraints; however, this is not always the case with some rent reviews being time sensitive with failure to comply with the timings resulting in potentially damaging outcomes for either the landlord or the tenant.

Where time is not of the essence there are few limits as to when the rent review can be operated, in the case of Bello v Ideal View it was held that a 13 year old review could be enacted. Therefore, although the Limitation Act 1980 may prevent landlord claiming rent arrears older than 6 years it probably will not help with rent reviews.

What types of commercial rent reviews are there?


As above there are no prescribed rent review formats. The following are common types of rent review.

  • Open Market upwards only
  • Open Market Upwards or downwards
  • Fixed increase
  • Index Linked
 
Please be aware that the below clauses are not mutually exclusive, and it is possible to have rent reviews that include several types of review at a single date. For example, it is possible for a rent review to be for the higher of the RPI increase over the review period or the open market rent.

What is an Open Market Upwards only rent review?


In our experience most rent reviews are upwards only to market rent and assessed with reference to transactional evidence at the rent review date. Upwards only rent reviews do not usually stipulate that the rent must go up, only that the rent can be no lower than the passing rent prior to the review date.

The set of assumptions at each rent review is specified by the terms of the lease, and the rent review clause. As a rough guide we find most rent reviews of this nature broadly follow the assumptions and disregards in section 34 of the Landlord and Tenant Act 1954. A link can be found here.
 
An upwards only rent review protects the landlords investment, safeguarding a minimum level of income.

What is an Open Market Upwards or Downwards rent review?


This type of rent review is like an open market upwards only rent review, however, there is nothing preventing the rent from being lower than passing rent prior to the review date.

What is a fixed level Rent Review?


A fixed level rent review is a figure inserted into the lease at its inception to take effect from an agreed date. The benefit of such an agreement is that both parties know the rent going forward. However, the downside is it cannot account for larger market fluctuations.

What is an Index rent review?


It is fairly common for some leases to be assessed not by reference to comparable transactional evidence but to an index, usually this is the Retail Price Index (RPI). Our surveyors are experienced at assisting with reviews of this nature.

Example of the Rent Review Process

As above there is no definitive process for rent reviews, the below information is for illustrative purposes only.
 
  1. The process is usually instigated by the landlord whose rent review surveyor will inspect the premises. Research will be carried out with emphasis on finding similar, local space, both in terms of square feet but also amenity. The surveyor then writes a report with their recommendations in terms of the rent (showing how the rent was calculated) and negotiations.
  2. The landlords surveyor will obtain instructions from their client and trigger off the review. In most instances there is no prescribed format/ notice or time limit, however, there are exceptions informed by what the lease says.  
  3. The lease usually allows a time for the parties (landlord and tenant) to come to an agreement.
  4. If the parties cannot come to an agreement most leases allow a provision for dispute resolution with the matter to be settled by a third party, usually an arbitrator or expert.
  5. Once the rent has been agreed the parties formally document the rent in a rent review memorandum.
  6. Most leases allow for back rent to be paid together with some form of interest if terms are agreed after the rent review date. Back rent is the accrued difference in rent between the passing and revised rent between the date of review and the date of settlement. It is, therefore, usually in the tenants interest to agree a rent review close to the rent review date. A historical inactivated rent review can be an expensive liability for a tenant and their business.

Possible valuation considerations for a commercial rent review


We have prepared a list below of possible considerations for a market rent review (an Open Market upwards only review) The below list by no means exhaustive, as the considerations are informed by the rent review assumptions and terms of the lease and there may be other matters which the lease states are to be regarded or disregarded. In many instances the rent is assessed with reference to an assumed (or hypothetical) agreement which may or not mirror the terms of the lease.
Our rent review surveyors regularly must consider the following in respect of the property under review and comparable transactional evidence which we are valuing it with reference to:

  • Location
  • Configuration
  • Size
  • Amenities
  • Assumed condition
  • Tenant incentives
  • Landlord capital contributions
  • User Clause
  • Tenant improvements and whether they are to be disregarded
  • Is the lease afforded protection by the Landlord and Tenant Act 1954
  • Is the alienation clause onerous? Alienation relates to assignment or subletting of the lease.
  • Hypothetical term. The assumed length of the term under the rent review.
  • Break clauses
  • Repairing covenants
  • With the comparable evidence, the date and type of transaction is also routinely considered. 
  • Tenant rent review implications
Generally, it is in the tenants interest to agree a rent review as close to the review date as possible. The two main reason for this are:

1) Back rent will likely be payable including potential interest
2) An outstanding rent review can have an impact on the ability to assign (sell) your lease. Rent reviews can take months to years to agree, and outstanding rent reviews have the potential of making your interest less marketable.