Commercial Property Rent Reviews (Part 1)
Commercial Property Rent Reviews: Maintaining Asset Values
This article looks at some of the key concerns in connection with rent reviews for each party to a Lease.
Commercial property Leases with a longer term (e.g. one for more than three to five years) will usually contain a rent review provision to allow the rent to “keep up” with the changing rental values.
Rent reviews are crucial for the Landlord to maintain the value of its investment, enabling it to benefit from any increases in rental values over the term of the Lease. Without them, investor Landlords would struggle to sell or fund property.
Types of rent review and alternatives to rent review:
There are different methods of carrying out rent reviews. However, almost all rent review clauses include a formula or method by reference to which to calculate future rent at a particular date (a review date). Examples are:
Open market rent review: Here the rent is reviewed by reference to the market rent for comparable properties at the review date.
Index-linked rent review: Here the rent is linked to a particular index (such as the Retail Prices Index or Consumer Prices Index) at the review date. These types of clauses may be regarded as appropriate where the Tenant is in a strong negotiating position, the view sometimes being that an indexed review is likely to produce a lower rent than an open market review in a rising market. However, this is not always the case.
Turnover rent review: Here the review is based on the Tenant’s turnover. This type of arrangement is commonly found in the retail and catering sector.
Stepped rent increases: This is an alternative method, under which fixed increases at particular dates are agreed at the outset and are documented in the Lease.
(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