Rent reviews are a key part of the lease agreement when renting a commercial property and are something which tenants must pay good attention to.
The process can be complex and both parties (the landlord and the tenant) will have conflicting objectives. A landlord will often employ a professional surveyor to conduct and oversee the process and any negotiations to achieve the best possible outcome for them, which is why a tenant should also do the same.
The rent review process includes assessing and adjusting the rent paid on a commercial property. The rent review is primarily there to benefit the landlord and allows them to increase the rent in line with current market rates during a lease term. These reviews often happen between every 3-5 years - the details of which will be outlined within the commercial lease.
The most common type of rent review is an open market review, which is the assessment of the property’s current market rental value. To assess this, a professional surveyor needs to collect and analyse all relevant information, including current market activity, and comparisons of the rents of surrounding and similar properties. There are a number of variables to consider such as lease term, specification, size, covenant strength, market demand, incentives and location all of which have an influence on how the rent is assessed.
The lease will provide assumptions and disregards within the rent review clause which must also be considered. These clauses are important considerations in the assessment of Market Rent, and often only a qualified surveyor will be able to quantify the impact of these in rental terms during the negotiation process.
Landlords often seek uplifts in rent where there is no justification for such. Tenants who decide to undertake their own negotiations will often accept the uplifted rent to simply draw the matter to a conclusion - or are willing to accept a rental uplift based on a business decision, rather than ensuring they are paying an appropriate rent in line with the market norm.
Leases always allow for a costly and time-consuming third-party determination, which are necessary should an agreement not be reached. Landlords can often use the threat of a referral to a third-party as a negotiation tactic to put pressure on tenants to accept their rental terms.
Often leases allow for rent reviews to be back-dated to the review date contained within the lease no matter how long has passed since this point. This can result in hefty backdated rent being payable, often in one lump sum which can have detrimental impacts on cashflows. Although there will be costs involved in appointing a surveyor, these often lead to much more significant cost savings over a longer period of time.
Rent reviews are a complicated issue which do have the potential to become time consuming and expensive if not undertaken by experts during the initial stages. As a tenant, it is always beneficial to seek professional advice from an early stage so that you understand your position, and to ensure that you do not pay any more in rental terms than is necessary.
We are experts in commercial rent reviews. For more information please call 0191 232 8080.