As a commercial landlord, you are entitled to include a rent review as part of the lease with your commercial tenant. Regularly reviewing the rental amount on your property will ensure you are able to maximise your rental income in line with the market rate.
What is a rent review?
A commercial rent review allows the rental rate of a property to be reviewed and adjusted in line with the market level.
The review will take place at the interval specified in the clause in the commercial lease, which is typically every three to five years. The exact time can be negotiated and agreed between the landlord and tenant when the lease is signed.
The length of a commercial lease has shortened in recent times, as traditionally commercial leases in the UK were granted for a period of 20 years or more. Leases of between 10 – 15 years are now more popular with both landlords and tenants.
What is covered in a commercial rent review?
The rent review clause in the commercial lease specifies:
- When the rent review should take place
- The format of the rent review
- Any inclusions or exclusions to be made when the commercial premises is valued
- The procedure to be followed
- Provisions for dealing with disputes, should they arise
The rent review clause in the commercial lease should also outline when a notice period can be served by the landlord or the tenant. The lease will typically state that notice must be given in writing.
The rent review clause may also include specified time limits or deadlines which must be adhered to. If either party fails to meet these deadlines, they will be deemed to have broken the terms of the rental agreement, which can have consequences for both sides.
The review clause should also state when a response must be served by what will happen if an agreement can’t be reached between the landlord and tenant.
How is the proposed rental fee calculated?
A commercial rent review must take into account the fees being charged for comparable local properties, plus current open market rents – the amount being charged for similar properties in a similar area, plus the best rental rate the property could attract.
Both the landlord and the tenant are advised to appoint an independent property surveyor to represent their interests in a rental negotiation process.
Commercial rents can decrease as well as increase, but they typically increase as a result of inflation. Commercial leases often include an ‘upward only’ rent review provision, which ensures the rent can never be decreased following a review.
Tenants are likely to want to reduce any increase as much as possible, so negotiation is a necessity during a rent review.
Unless the lease states differently, the date that the rental valuation takes place is the date from which the new rental amount becomes payable. The amount can be backdated to the date of the review, resulting in an additional lump sum being owed to the landlord. Interest can also be charged on this amount.
What happens if the landlord and tenant can’t agree?
If during a commercial rent review the landlord and tenant can’t agree on the proposed rental rate, a formal dispute resolution process is entered into. It’s advisable to seek legal representation if this stage is reached. It is however in the interest of both parties to negotiate a new rental fee and resolve any disputes early on, as the process can be lengthy – and costly.
Most commercial leases include a provision for alternative dispute resolution (ADR) in rental reviews, whereby an independent third party can be appointed to assess and impose the new rent.
If the landlord and tenant are still unable to agree following the dispute resolution process, the case may be heard in a county court, where the new rent will be agreed.
To discuss your own individual needs or to obtain a quote for your commercial buildings insurance, contact us and our team of property specialists will be happy to help you.