Whether you are a Landlord of a commercial premises who has decided to provide a lease to a tenant, or if you are a prospective tenant of a commercial lease of any considerable length, then the likelihood is that you will be either bound by, or looking to impose, a rent review clause in your lease.
This overview of rent reviews should assist you in understanding why it is important, both in the short and long term, to seek professional legal advice in negotiations leading up to taking a lease and when it comes to rent review negotiations.
What is a rent review?
A rent review is a clause usually inserted within a lease of a commercial premises which allows either the landlord or the tenant to renegotiate the rent due under the lease. Rent review clauses are usually set to be triggered at certain dates and often in a certain manner, both of which can vary from lease to lease – which is why it is always beneficial to seek the help of a solicitor or legal professional when dealing with them.
Whilst traditionally rent review clauses have tended to favour landlords, there has recently been a shift and there now appears to be a greater deal of equality when dealing with rent reviews.
How is the rent reviewed?
There are usually two types of rent review clauses, the first being an open market clause and the other being a market value clause. A market value rent review clause will alter the rent at the time of the rent review to keep in line with the market value. Whereas, the open market rental value bases the rent on what could be achieved on the open market and can be affected by the use of the premises and the location.
Who determines the new rent value?
Commonly in commercial leases, the landlord will trigger the rent review clause in line with the lease, this is usually done by serving a notice on the tenant. However, the tenant will be able to object if they feel the landlord is being unfair and the rent is unreasonable. If an agreement cannot be reached, quite often the lease will make provision for how any dispute can be resolved, either by way of an arbitrator or independent expert who can be a chartered surveyor, often at this point either the tenant and/or the landlord may wish to contact their solicitor to assist in dealing with an expert and in negotiating a new rental figure.
How much notice will the tenant receive?
The lease will specify the notice period the tenant will be given before the rent is due for review. It is important to check the specifics of the notice that the landlord must give as there may be consequences if the deadline is missed. For example, if the landlord misses the deadline, he may no longer be entitled to increase the rent, or if the tenant fails to raise a dispute in relation to the proposed new rent, the new rent may be deemed to have been accepted and will automatically come into force.
How should a rent review be handled?
In order to prevent animosity between the tenant and landlord, expert legal advice is essential. We can help reach a settlement swiftly to avoid costs escalating.
What if the tenant cannot afford the new rent?
The lease may allow ways of exiting the lease. For example, the lease may include a break clause which allows you to surrender it to the landlord. Furthermore, you may be able to sell the lease to someone else or even sublet part of the premises.
Does the tenant still pay rent whilst rent is being negotiated?
Yes, you must continue to pay rent at the previous rate as stated in your lease. Once a new rent is agreed, you will usually be required to pay any shortfall (plus interest) between the amount you have been paying and the new higher rent backdated to the date on which the review was supposed to occur.
The most important thing to remember when considering what to do when you are faced with a rent review situation is to ensure that you obtain legal advice from a specialist solicitor as to how to proceed. Whether you are a landlord or a tenant, correctly negotiating the future rent can have a big impact on your business, it is therefore imperative to get it right!
If you are faced with any of the issues discussed above, then please do not hesitate in contacting our solicitors at Fitz Solicitors, who will be happy to discuss any issues you may have in relation to commercial leases, or any commercial property query, on 01753 592 000 for a no obligation consultation.