Leases contain rent reviews so that landlords can take advantage of improving market conditions and protect their investment income from inflation. It is important for tenants to understand that it is not uncommon for the rent to increase at review. The CTA offers advice on how to tackle the rent review discussion with the landlord when the time comes.
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With the rising rate of inflation after the War years, landlords began to include rent review clauses within leases in order to protect their income from its eroding effect.
Typically, nowadays, rent reviews occur every five years and are almost always ‘upwards only’ in nature. Reviews should be distinguished from the new rent agreed when renewing the lease as the process for agreeing the rent is very different. In particular, renewal is one occasion when the rent may reduce.
The starting point for all rent reviews will be in the lease. The lease will indicate any rent review dates. The rent review clause is usually one of the longest clauses in the lease and will dictate how the entire process operates, providing the basis of the review and the mechanics of arriving at the reviewed rent.
There are four main methods for reviewing the rent a tenant pays:
Open Market – where the rent payable reflects the prevailing market evidence at the date of the rent review.
Turnover – as the name suggests the rent is reviewed based on the tenant’s turnover. In each case the tenant will normally pay a base rent and a top up rent based on the turnover receipts it must regularly supply to the landlord. Turnover rents are typically associated with shopping centres, train stations and airports.
RPI – in the case of RPI rents, the rent will be reviewed to a formula agreed in the lease. The formula will effectively automate the rent increases at various points throughout the life of the lease.
Stepped Rent – This might be agreed as the basis of review at the start of the lease. It usually allows the tenant to take account of how its business or trade may grow from the outset, ratcheting up as the business establishes.
The open market review enables the landlord to take advantage of rising rents in a popular location. The tenant will only become aware of the landlord’s intention to review the rent on receipt of a ‘trigger notice’ or a letter informing the tenant of what the landlord intends the new rent to be.
It is good practice to take professional advice ahead of any rent review so that the tenant can budget for any rental increase. Often the landlord fails to instigate the review on time but this does not mean the review will not take place at some date in the future.
Many months may pass until the rent is agreed and the tenant will face a large bill for back rent together with interest.
If there is a concern the rent review is being delayed then a tenant should seek advice from a surveyor or solicitor experienced in such matters.
In order to help save time, money and ensure the best negotiating position with the Landlord, a tenant should seek advice from an experienced surveyor and do so well in advance of the rent review date.
A tenant has the right to negotiate what the new rent should be and may decide to undertake the negotiations on its own or appoint a surveyor to act on its behalf.
The way in which the lease was drafted will have a bearing on how the rent is reviewed. The rent review clause sets out the terms of a hypothetical lease against which the market evidence will be judged against.
It will guide the valuer (including any third-party) as to how this hypothetical relationship between landlord and tenant should be interpreted.
The assumptions include the nature of both hypothetical parties and that they have complied with their obligations under the terms of the lease.
In the majority of cases, the lease will set out the procedure relating to rent review disputes. Normally, the lease will direct the parties to the RICS who will appoint an Arbitrator or Independent Expert who will decide the rent. This will usually follow expert submissions from the parties’ surveyors with market commentary and evidence in support of their individual opinions of rental value.