Rent Reviews for Commercial / Business Tenancies
Rent Reviews are a common topic for questions on the LandlordZONE Commercial Property Forum, for example: “At rent review my landlord is asking for an extortionate amount of rent. Am I obliged to pay it?”
What you’ve got to remember with commercial leases, as opposed to residential letting agreements, is that they are purely commercial contracts agreed between the parties. Following negotiations, once agreement has been reached, the lease defines the contract terms that guide the relationship and the parties are contractually bound by what they have agreed to: namely, all the lease terms.
Because of the unique nature of commercial leases, if the full interests of the parties are to be adequately served, it is often not appropriate to use “off the shelf” agreements. It is nearly always wise to have one custom made to reflect the agreed terms by a commercial property specialist solicitor.
Statutory Protection – Security of Tenure
There are some statutory safeguards for commercial property contracts. These come into force at the end of the tenancy to give security of tenure to business tenants. They are the rules included in the Landlord & Tenant Act 1954 Part 2, which affect commercial leases and under some specific circumstances these override the purely contractual nature of the agreement.
Rent Reviews, usually every 3 to 5 years depending upon the length of lease, are intended to allow landlord and tenant to adjust the rent to the current or “open market” rent at certain points in time – the rent review dates specified in the lease agreement.
Rent review clauses have resulted in much litigation over the years, much of which has involved issues of assumptions and timing of review, creating a large body of case law far too comprehensive to cover here.
Tenants should realise that it’s common practice for landlords to ask initially for far more rent than they expect to get on review: this is a negotiating tactic and therefore tenants should not be panicked into thinking they must comply without a challenge.
What is “Open Market Rent”?
Open Market Rent is academic in concept and could be defined as: “the best rent a property might achieve if on the open market at the review date with vacant possession, using standard marketing methods, without extra incentives, given a willing landlord and tenant, and taking into account the lease terms.”
Leases usually include a range of “assumptions and disregards” to be taken into account on review. For example, they assume the type of use of the premises, whether or not the tenant is using them that way. For example, if an office let is now used for storage the assumption is office use on review. Generally, the more onerous the assumptions on review, and the more restrictions in the lease as a whole, the more they restrict rent levels, so these tend benefit the tenant.
Effective rent review clauses generally contain few timing provisions, which might trap either landlord or tenant, but they should deal with the stages of any review: (1) When a notice can be served (2) when a response must be served, and (3) what happens next if agreement cannot be reached.
Is “Time of the Essence”?
It is very important to determine whether a rent review clause makes “time of the essence” or not. If time is “of the essence”, even by implication, then one of the parties (landlord or tenant) missing a time limit could lose their chance of complying, possibly with disastrous consequences for them.
Rents can get “out-of-line” with the current property market in the locality. This could be due to price inflation, the level of supply of similar properties in the area, the state of the local economy and the number of similar uses around etc, which will affect demand for that type of property.
Upward Only Rent Reviews
In theory, market rents can go down as well as up but generally because of inflation rents go up and it’s been accepted practice for many years that leases have upward only rent review provisions. This means that the rent can never be reviewed lower. However, there is some controversy over upward only review clauses and there are government proposals to ban them – see links below.
Landlords have the right to adjust rents on review, as set out in the lease agreement, and the process is usually started by the landlord serving the tenant with a notice (the trigger notice) indicating the proposed new rent. Conversely, the tenant has a right to challenge this and should do so formerly without delay (complying with any timing limits) otherwise the new rent may be legally imposed by default.
If landlords and tenants can come to an amicable agreement on a new rent, all well and good – it saves a lot of trouble and expense. However, very often it’s not that simple. Rent reviews can be quite technical and complex and need to take into account local comparables (rents being charged on similar properties in similar areas) and allowances made for specific points and assumptions and disregards in the lease agreement.
Using a Surveyor to Process the Rent Review
The most effective way to assess an open market rent and have all the variables taken into account, is to have professionals deal with the process. It’s usual for both parties: the landlord and the tenant to appoint their own property surveyors to process the rent review.
Surveyors have the necessary expertise, the contacts and the market knowledge to accurately asses a fair market rent, the give correct weighting to the lease clauses and to reach agreement with the other party.
Ultimately it’s going to cost money to employ professionals, but a few hundred pounds for surveyor’s fees is still inexpensive compared to overpaying or under claiming rent for many years, or going into dispute and litigation.
Most leases make provision for ADR (alternative dispute resolution) in rent reviews where agreement cannot be reached by other means. This means appointing experts or arbitrators to independently assess the new rent, which is then binding on both parties. Alternatively, the parties may opt to go to court where a county court judge decides.
Disputes are expensive, they take a long time and any agreed or imposed rent can be back dated to the review date and interest charged. It’s important and in the interests of both parties therefore that landlords and tenants make every effort to reach an amicable settlement at an early stage.