Rent Review

rent reviewWhen you take a commercial lease, one of the most intimidating parts of a lease are the rent review provisions.  They go on for pages and are full of jargon.  I wanted to give you a brief guide to rent review provisions so that when you are given a copy of a lease, you will know exactly what to look for.

The rent review provisions in a lease of commercial property are usually found in one of the schedules at the back of the lease.  At the front of the lease, there will usually be set out the rent review dates.  Most commercial leases have a 5 yearly rent review pattern although some have a 3 yearly pattern.  Reviews every 3 years can be costly for both landlord and tenant who have to employ surveyors each time there is a rent review to argue their position.

Rent Review

Most rent reviews are on the basis of trying to determine the open market value of the premises.   So in order to arrive at what is a genuine open market figure for the rent, there are a number of assumptions which are set out in the rent review provisions such as an assumption that the premises are let on the open market on the same terms and provisions as the current lease except for the rent but including the rent review provisions.  There is usually an assumption that if the premises have been destroyed or damaged at the time of the rent review, the premises are deemed to have been fully reinstated.

There are also a number of factors which are to be disregarded by the parties in determining the open market value.   So where the tenant has carried out improvements to the property these would normally be disregarded in determining the rental value otherwise the tenant will end up paying for the improvements twice, once when the tenant does them and again when the value of the improvements is added to the market value of the premises.  This is clearly unfair.

It is sensible if you have a very substantial building or are paying a large amount of rent to get a surveyor experienced in dealing with rent reviews, to have a look at the rent review provisions and in particular the assumptions and disregards so that he can point out any wording which might cause either landlord or tenant a problem.

The rent review provisions usually provide that the parties are to agree the new rent usually no more than 12 months before the rent review date.   This gives the parties plenty of time to employ a surveyor and to gather comparable evidence of similar buildings.  This is the main ammunition of most rent review surveyors.   Magazines such as the Estates Gazette publish this information so that it is readily available to all surveyors.

If the parties are unable to agree on a revised rental figure then either party can apply to have the rent review determined by an independent surveyor.   The rent review provisions can either stipulate, this person is to act as an expert or as an arbitrator under the provisions of the Arbitration Act 1990.

Where the rent is to be determined by an expert, there is usually a stipulation that the expert is to have say at least 10 years experience of valuing premises of this nature in this area.   The expert’s view is usually final and binding on the parties unless it is clear he has made a mistake in fact.  The expert often has to issue a written statement setting out his reasons for his determination and well drafted leases usually provide that the expert must take into account both parties’ views on what the revised rent should be and why.

With an administrator, it is more costly and time consuming and it is more like a court proceeding with both parties being invited to appear before the arbitrator who receives evidence from both parties and allows each party to speak to the arbitrator.   Having this sort of quasi-judicial approach usually means that you are less likely to get a perverse outcome as the arbitrator is bound by the provisions of the Arbitration Act 1990 as to how the arbitration is conducted.

Whilst the rent review is being determined the tenant usually has to pay interest on the unreviewed rent to compensate the landlord for the loss of his extra rent.  This would normally be at the base rate of a high street bank as it is not intended to be a punitive rate of interest.

I hope this very brief overview has helped you understand some of the intricacies of rent review provisions.  Please consult a solicitor and surveyor if you have a rent review to implement.

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Dominic Beeton, Solicitor
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