Rent Reviews in Commercial Leases (A Guide!)
Rent reviews on commercial leases are generally carried out when a landlord wishes to bring the rent in line with the current market level.
Your landlord has the right to increase the rent and the tenant, equally, has the right to challenge any increase. The rules and processes for carrying out both of these are outlined in your commercial lease.
The landlord will generally look to bring the rent in line with the open market rental value, that is, the rent the landlord could receive if the property or premises were rented under the same conditions to a third party.
A rent review will generally take place every three to five years.
The commercial lease will initially have been drawn up with certain assumptions in mind, such as drawing comparisons with similar premises and where a property can be used for different purposes where one purpose is of higher value than the other (the difference between the value of storage space over factory space, for instance) the rent will be charged at the higher value.
It is important that you read through your commercial lease so that you are aware of any assumptions made.
Notice of a rent review
The Law of Property Act 1925 section 196(1) states that any notice or counter-notice (reply to the notice) must be given in writing.
The landlord should include the proposed change to the amount of rent in the notice so that the tenant can respond.
Notice should be given around three months before the rent review begins. This allows the tenant sufficient time to gather any supporting documents should they wish to negotiate the new rent.
There will generally be a deadline for the tenant to respond by. If the tenant wishes to reject a proposed rent increase and enter into negotiations, then they must reply before the deadline. Otherwise, they will be forced to pay the new rent.
Any communication rejecting the proposed rent increase should be made in writing before the deadline, giving the tenant’s reasons.
Negotiating a rent review
As a starting point, you should check your lease before entering any negotiation.
Your landlord will generally wish to increase the amount of rent you pay. If you feel this is wrong, you will need to prove this. Evidence could include:
- Information on the rents charged for similar premises in the local area. You can gather this kind of information by speaking to fellow tenants or local commercial estate agents.
- Your own estimate of the open market value of the property, bearing in mind similar premises in the area.
- A valuation provided by a professional third party such as a surveyor or commercial estate agent.
During a rent review, the tenant is not limited to simply renegotiating the amount of rent they pay. This could be the ideal opportunity to review other aspects of the commercial lease.
If your landlord had not fulfilled all his obligations, for instance, not maintaining the electrical system of the building to a safe standard or not repairing a faulty roof, then you may be able to use this as a bargaining tool, either to retain the rent at its current level or to have the required works carried out before the rent is increased.
Involving a third party to negotiate a rent review
If the landlord and tenant cannot agree on a rent review, most commercial leases will state that an independent third party should be called in to resolve the dispute.
Generally, this will be a chartered surveyor.
The first step is to agree on whom that third party will be. Both the landlord and tenant have the right to reject the other’s suggestion on the third party, but if they cannot come to an agreement, the choice will generally by made by the President of the Royal Institution of Chartered Surveyors.
The third party will take into consideration evidence from both the landlord and the tenant, and either side may also use a professional adviser such as a solicitor to act as a go-between.
The third party will also decide on how any fees or other costs incurred will be shared between the landlord and the tenant, although if one side is seen to be unreasonable in their response to the rent review, then they may be ordered to pay the total costs.
The main problem of involving an third party is the expense incurred, plus the costs of any legal advice you may take. However, where the landlord and tenant cannot agree, it may be the only option.
Once the third party has come to a decision, the new rent amount will be set in place and should be paid from then on. At that point, the new rent will be backdated to the rent review date, possibly with interest charged.
What happens when the rent review is agreed upon?
When the rent review is agreed upon, the relevant documentation should be signed by both the landlord and the tenant. A copy of the signed agreement should be attached to the tenant’s commercial lease as proof that both sides have agreed on the new rent.
Where residential property is subject to council tax, commercial property, with some exceptions, is subject to business rates.
In most cases, it is the tenant or occupier who is responsible to pay business rates. Some commercial leases will include business rates as part of the rent charged but this is not common.
The amount of business rates that you pay are based on the rateable value of the premises. To find out how the rateable value of the premises you rent is calculated, contact the Valuation Office Agency (VOA).
If your rent increases, the business rates you pay will probably also increase.
What rent does a tenant pay during the period of negotiation?
Until the landlord and tenant have reached an agreement on how much rent should be paid, the tenant will continue to pay the old rent amount.
What happens if the open rental value goes down?
If the open rental value goes down, the amount of rent you pay won’t necessarily follow.
It could be that the rent merely stays the same, or where your commercial lease includes an upwards only clause (where the rent can only ever be increased at a rent review), your rent would increase regardless of the lowering of the open rental value.
How legal advice can help
Rent reviews in commercial leases can be complex and require a level of legal knowledge and experience.
Specialist legal advice can help in several ways:
- Examining and interpreting the commercial lease so that both parties are aware of any conditions or assumptions that might affect a rent review
- Communications between the landlord and tenant to avoid any awkwardness or upset
- Gathering information to support either party
- Communicating with a third party, such as a chartered surveyor, should the landlord and tenant be unable to agree on the rent review
It is in the interest of both the landlord and tenant to come to a quick agreement to avoid unnecessary costs, especially on the part of the tenant who could be liable to pay backdated rent and interest.
With specialist legal advice, you can enter a rent review with the reassurance that you will be guided through the whole process in as fair and smooth a way as possible.