Rent Review Clauses in Commercial Leases
Most commercial property leases exceeding three years in length will contain provisions requiring the parties to review the annual rent payable under the lease. At the outset of the term it is difficult to set a rent that both parties are satisfied will remain appropriate throughout the life of the lease.
The effects of inflation and changes in the value of the rental property market can be reflected in the rent at the review date depending on the type of rent review used.
Fixed Increase Rent Review
This type of rent review provides for the rent to increase to a fixed amount at the review date. Therefore, both parties have the benefit of knowing when the increase will occur and how much it will be for. The parties to the lease must ensure at the outset that the fixed increases are realistic.
Upwards Only Open Market Rent Review
This type of rent review is probably the most common type of commercial rent review. The rent is reviewed based on what the commercial property would be let for on the open market. If the commercial property would be let on the open market at a higher rental than is currently achieved by the Landlord, then the rent will increase to that figure. However, if the rent is assessed as being lower than currently achieved, the rental will not go down it will simply stay the same.
Upwards-Downwards Open Market Rent Review
In a bid to retain Tenant’s in times of economic downturn, Landlords have been known to reduce rent but this is not a usual course of practice at any other time. An upwards-downwards review allows for the rent to go up or down depending on current market conditions. This type of review is rare in practice.
RPI Index-linked Rent Review
This type of review looks to increase or decrease the rent in line with an index reflecting changes in the value of the money. The index favoured by most practitioners is the Retail Price Index (RPI).
Each type of rent review clause has advantages and disadvantages for the Landlord and Tenant. For Landlords, maximisation of profit is of primary concern and an upwards-only rent review is usually the best way of doing this. However, a well-negotiated fixed increase has the potential for profit ahead of market conditions but is ultimately a gamble.
For any tenant negotiating Heads of Terms on a new Lease or taking on an assigned lease from a previous tenant, it is important to plan for any increase in rent.
How can Askews help you?
Your local firm of Coventry Solicitors, Askews Legal LLP, has a dedicated team of Property specialists who can assist with any commercial property issues. For further advice or to obtain a quote, please contact Kuljeet Sandhu, Head of Commercial Property at Askews Legal LLP.
E: KSandhu@askewslegal.co T: 024 76 231000
