Question – Rent Review – my landlord is asking for far more rent than I expected on review. Am I obliged to pay this?
Answer – Commercial leases are contractual – the parties agree to and are bound by its clauses and that includes rent review provisions.
The rent review process is a way of periodically “adjusting” the rent to current “open market values”.
“Open Market Rent” or “Open Market Value” (OMV) at review is a hypothetical concept based on restrictions and assumptions made in the lease 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 all the lease terms.”
Many leases have upward only rent review provisions, an accepted practice in the UK which means that the rent cannot come down, even when the market locally has declined. However, this practice is under government review – not a major threat to landlords as rents rarely do decline over time.
As a negotiating tactic landlords often ask for far more rent initially than they expect to get.
Tenants have the right to challenge this.
The starting point is when the landlord sends out the notice of rent review (the “trigger notice”). The tenant should respond quickly, certainly within any time constraints set-out in the lease, otherwise s/he could face a large increase by default.
Landlords and tenants should try hard to reach agreement through mutual negotiation, perhaps coupled with advice on values from an expert. The whole process can become very expensive if the parties go into dispute.
Usually, leases make provision for disputes through a process of Alternative Dispute Resolution (ADR) which involves the appointment of one or more independent experts and/or arbitrator, usually appointed with the independent assistance of RICS.
Rent reviews are a complex process so landlords and tenants may decide to seek expert help. In practice, if agreement cannot be reached initially, it is advisable for each party to appoint their own chartered surveyor, or alternatively, for them both to agree on the appointment of one independent surveyor.
An independent can take the emotion out of a wrangle over values between the parties involved.
Using local property market knowledge, their ability to interpret and make allowances for the relevant lease provisions, and their personal contacts in the industry for comparable rents, surveyors are the best people able to reach accurate assessments and objective settlements. They are also the best placed to negotiate dispassionately with the other party or with the other party’s expert.
Disputes are expensive and time consuming, so the parties should make every effort to reach an amicable settlement before going into any sort of dispute process.
Apart from the OMV method, other methods can sometimes be incorporated into the lease which are designed to avoid arguments and litigation, though none are perfect in practice – there are pros and cons for these.
For example, there may, and these are rare instances, be provision in the agreement for increases at a fixed rate.
Another method used is to index – link e.g. by reference to the Retail Price Index. However, index linking is quite unusual because movements in the indices and in property prices are not always in sync.
A further option, which is sometimes but not commonly adopted, is linked the rent to the turnover of the business or net profits generated at the premises.
For more details see:
By Tom Entwistle,
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©LandlordZONE All Rights Reserved – never rely totally on these general guidelines which apply primarily to England and Wales. They are not definitive statements of the law. Before taking action or not, always do your own research and/or seek professional advice with the full facts of your case and all documents to hand.