How your business can make sense of rent review clauses and get the best deal

How your business can make sense of rent review clauses and get the best deal

11th December 2023, 11:16 am

With rents for commercial property subject to all sorts of market pressures, many landlords often build rent reviews into their contracts so that the value of the rent coming in can be amended depending on if the market changes. But how can you know you are getting the best deal? Rupert Collis, Head of Commercial Lease Advisory at leading property consultancy Fisher German’s Manchester office, explains more:

Commercial rents, especially in major cities like Manchester, can fluctuate significantly depending on market conditions and the type of property being leased.

When deals are signed between an occupier and a landlord, there is typically a rent review clause included in a contract to ensure the original rent does not fall far below market value. This is often around every five years but can vary from contract to contract.

When a rent review comes around, it is important as an occupier to know how the new rent was calculated, and if it truly reflects market value, before agreeing to the new rate.

Typically, a rent review is triggered by a written notification from your landlord, which begins the process of negotiation.

If a figure can be agreed upon between yourselves and your landlord, the process is complete. If a figure cannot be agreed, a third party will need to resolve the dispute.

However, many tenants may not understand the intricacies of how the new rental figure ought to be calculated, so they may not be making a completely informed decision.

New rents can be calculated in different ways depending on the contract. There are typically four main types:

· Open market – basing a rent review on what the open market would price it at assuming a hypothetical lease. The most common form of rent review.

· Index-linked – where a rent increase is based on a common price index such as the Retail Prices Index. This is relatively common, but landlords can sometimes make mathematical errors on this, so it is important to be thorough when agreeing on a new rent.

· Stepped – where parties agree to a fixed increase of rent, e.g. £1,000 each year. Easy to understand but this can be unfair to either tenants or landlords if it falls out of kilter with the market.

· Turnover – where rent increases are automatically increased depending on the tenant’s turnover. Typically seen in retail businesses where a low base rent is agreed that is ‘topped up’ during times of success.

So, how can you know you are getting a fair deal? The devil is in the details, and having experts in your camp will only help when a rent review comes around.

Most leases specify if the rent review is ‘upwards only’, meaning the rent cannot fall. But if it doesn’t and the market has contracted, you may be able to negotiate a cheaper rate.

Some leases include a clear deadline for a decision – known as ‘time is of the essence’ in law. If this exists, failing to meet this deadline means you may have to pay a much higher rent than if you responded on time. However, if it isn’t expressly stated, it is assumed there is no strict deadline, and you have more wriggle room.

Having experts like Fisher German on your side will help you understand your contract, how much you can negotiate, and ensure you are getting the fairest deal while maintaining an amicable relationship between you and your landlord.

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