Rent Reviews in Leases
Leases of commercial buildings are essentially contracts, governing the relationship between a landlord and tenant. Some of the most important and complex provisions relate to the review of the rent. Like all contract terms, they are negotiable at the outset, but, once agreed, will be binding for as long as the contract lasts – in the case of a lease often for 10 years or more.
So, to minimise the risk of delay and expense when the rent is being reviewed, both landlords and tenants should ensure that they fully understand the rent review clauses at the outset.
It is obvious why a landlord wants to include a review clause in the lease. Usually the review is “upward only”, allowing the landlord to increase the rent to the market value during the life of the lease, usually after every 3 or 5 years.
The recent introduction of The Code for Leasing Business Premises was designed encourage landlords to agree more flexible rent reviews, allowing upward and downward movements of rent according to market conditions. However the Code remains voluntary and is usually ignored in relation to review clauses!
When the time does come for the rent review, the parties will usually start the process by entering into negotiations, and it is in both their interests to try and agree the new rent, quickly and by mutual agreement.
But, where the rent can’t be agreed, it is referred to a third party (usually an experienced surveyor) to determine – though this will increase the costs. The surveyor will look at similar properties to arrive at a valuation. However, the ultimate determination of the rent will be decided by reference to the concept of a “hypothetical lease”. The hypothetical lease is like an instruction manual for the surveyor on how to carry out the valuation. It is a mirror of the actual lease, but with certain assumptions and disregards being made regarding the actual lease in question. The extent of the assumptions and disregards may be extensive and will vary from lease to lease – hence the need for careful negotiation at the outset.
The simple moral is that to avoid arguments and costs, parties should bear in mind the future when negotiating the lease, and take proper legal and valuation advice from experienced professionals. As so often, cutting corners at the outset can lead to significant problems later on.
Robert Enticott, Head of commercial property and business services.Business, General, George Ide