Commercial Property Rent Reviews (Part 2)

“Upwards Only” open market reviews and “Collars and Caps”:

An “upwards only” review fixes the rent payable at the review date as the minimum rent which is payable following the review. This can mean that, in a falling rental market, a Tenant can end up paying above the market rent.

In an “upwards and downwards” review, the rent can go up or down following the review. These reviews are less common, even when market conditions are poor for Landlords. A review clause of this type could significantly affect the value and marketability of the Landlord’s asset and, as a result, the availability of financing.

Collars and caps: Rent review clauses sometimes include a ‘collar’ and/or a ‘cap’.

In this context:
• a ‘Collar’ is the minimum rental increase that the parties agree will be payable following the review, and
• a ‘Cap’ is the maximum rental increase that the parties agree will be payable following the review.

In this type of review, the open market rental value is calculated first (in accordance with the rent review clause). That rental value is then subject to the applicable “Cap” and/or “Collar”.

So, if the passing rent is £20,000 per year, the open market rent value is calculated as £30,000 per year, and the “cap” is £25,000 per year, then the new rent payable from the review date will be £25,000 per year.

A “Cap” can be agreed with or without a “Collar” and vice versa. A Collar or Cap can be a specified sum, or it can be calculated by reference to a formula. It may be beneficial to include worked examples.

Whether a Collar and/or a Cap is appropriate in a particular transaction is sector and market dependent and will depend on the relative bargaining strength of the parties.

A typical upwards only market rent review clause is likely to contain :
• a definition of ‘open market rent’
• the mechanism to initiate and agree the rent review
• the mechanism to refer the review to third party determination if the parties can’t agree the reviewed rent
• an operational clause stating that, following the rent review date, the new rent will be the higher of the rent reserved immediately before the relevant review date, disregarding any rent suspension then in operation, and the ‘open market rent’ as at the relevant review date .

(This article is not intended to be comprehensive or to provide specific legal advice. It should not be relied upon in the absence of specific advice given in relation to particular circumstances.)

For further information, please contact: Natalie Linehan, Andrew Williamson or David Thorp