Landlords want to see rents keeping up with market values during the terms of a lease and in many cases rents are often reviewed at 3 or 5 year intervals, although there is no hard and fast rule as to when a rent review should take place. Generally the review periods are often agreed between the parties at lease commencement.
The Rent Review clause in the lease will define how the new rent is to be calculated, and will set out the assumptions (length of lease, use, state of repair etc.) and disregards (goodwill, tenants improvements etc.) that are to be made. The assumptions and disregards that are to be made are generally similar across most commercial leases, however slight variations can have a significant impact on the rent calculation.
Whilst most rents are reviewed to a Market Rent which is assessed by reference to comparable transactions, other rents can be reviewed to pre-agreed fixed amounts, or by reference to RPI (Retail Price Index).
The majority of Rent Review clauses require the rent to be reviewed on an upward only basis i.e the new rent is to be the higher of the Market Rent or the rent passing immediately before the review date, however it is possible (where the tenant has managed to negotiate it at lease commencement) for rents to be reviewed on an upward or downward basis, although this is often strongly opposed by Landlords (except during weaker market conditions where tenants hold a stronger negotiating position).
A question Barker Storey Matthews are often asked is ‘How can a Landlord serve a rent review notice increasing the rent from a review date that was years ago?’ The short answer is that, unless the lease states to the contrary, there is usually no time limit for a rent review notice to be served, meaning that even if a rent review date was 4 years previous to the date notice was served, the rent review is still valid and capable of being negotiated. In these instances it is particularly important to seek advice from a Chartered Surveyor. Barker Storey Matthews keep a comprehensive database of transactions which can be referred to in order to support a case (on behalf of Landlords or Tenants) in such instances.
A word of warning – some rent review clauses state that ‘time is of the essence’, and will set out an explicit timetable for the service of rent review notice and the requirements for the Tenant’s response. Where a lease states that time is of the essence, it is vitally important that both Landlords and Tenants ensure any timescales defined in the review clause are met. Barker Storey Matthews are happy to review leases and provide further advice on this point if required.
It is often the case that Landlords and Tenants alike believe they do not require a Chartered Surveyors assistance to agree a Rent Review, but all too often we come across situations where Landlords or Tenants have been financially disadvantaged as a result of not seeking professional advice at the appropriate time.
For Landlords, a well negotiated Rent Review can result in an uplifted rent, which in addition to improving the cash flow that is received from an asset, can in turn have a positive impact on the capital value of the property.
For Tenants, a poorly negotiated Rent Review can have a detrimental impact on the performance of the business resulting in increased overheads, and can also have a knock-on effect on the Business Rates payable on the property as the Valuation Office will have regard to the rent being paid under a lease at the point of assessing the rateable value of a property.
Contact one of Barker Storey Matthews specialist rent review surveyors to discuss your requirements or for an informal discussion: http://www.bsm.uk.com/rent-reviews-lease-renewals-arbitrations/