One of the most important parts of a commercial lease is the rent reviews provisions.
Commercial leases with a long term contain rent review provisions which set out when each rent review will take place, the method of review, assumptions that are to be made when valuing the premises for the purpose of the rent review, the procedure to be followed and provisions dealing with any disputes.
Traditionally rent reviews are 'upwards only' and it is often very difficult to persuade a landlord to accept that the rent review provisions should also allow for downward as well as upward reviews.
Different methods of review
There are several different methods of calculating a rent review, which include:
- Indexed-linked: The rent review is linked with an index such as the retail price index.
- Revaluation in the open market: The rent is calculated based on the current market rate at the date of the rent review. This is the most common form of rent review.
- Turnover or profit rents: The amount of the rent review is linked to the tenant's turnover of profit.
- Premium rents: The tenant pays a premium on the current market rent so that the landlord agrees to conduct fewer rent reviews during the term of the lease (or no rent reviews at all if the premium is sufficient).
- Fixed increases: The increase to the rent for each review is fixed at the commencement of the lease.
- Sub-lease rents: The rent increase is linked to the rental income generated by sub-letting the premises.
Assumptions and disregards
When calculating a revaluation in the open market, certain hypothetical assumptions are made about the lease for the purposes of the valuation. Examples include:
- The premises are vacant
- The premises are fit for their use
- The lease has a term which is preferred by tenants based on the current market conditions
- No premium is paid or a rent-free period is granted
- The tenant has complied with their obligations under the lease
In addition certain matters are disregarded, such as:
- The tenant's occupation of the premises
- Goodwill generated by the tenant's use of the premises
- Improvements made to the premises by the tenant
It is recommended that the parties should obtain the expert advice and assistance of a surveyor when conducting a rent review. If negotiations between the parties or their surveyors breaks down then the parties should follow any dispute resolution terms set out in the lease.