Commercial Leases – What do businesses need to know about rent review?

It is vital for businesses that tenants have a suitable property from which to run their commercial, business or investment undertakings. Commercial leases can prove to be complex documents that regulate the relationship between landlord and tenants. Nowadays, commercial leases tend not to be unduly harsh or restrictive to the tenant. It seems that the most complex provisions of the lease are those related to rent review. Rent reviews allow the periodical adjustment of commercial rents to the market level at the date of review. The rent review is an area that has taken up, for years, time and expense to determine disputes between landlords and tenants, regarding the amount of rent passing at various stages throughout the life of a lease.

Negotiation of Provisions

In order to reduce the stress, delays and expenses, when the commercial lease is being reviewed, both landlords and tenants should ought to ensure that they are aware of the rent review process and negotiate these provisions. Shorter leases (between 10 and 15 years) are nowadays more popular with landlords and tenants. Traditionally, UK commercial leases were granted for 20 years or more. Rent review clauses were introduced to combat high inflation levels and up to the 1960s reviews were at 7 to 14 year intervals. At the present time, the rent review clause sets out when each review will take place (usually every three to five years), the method of review, and provisions for dealing with disputes if they arise.

In Crawford v Bruce (1992), the court held that a review clause in a lease was void because it only provided for the rent to be reviewed every three years, but did not say how. In City of Aberdeen Council v Clark (1999), the clause provided for either party to require the rent to be renegotiated at the end of each period of twenty-one years, and failing agreement for the rent to be determined by an arbiter. The court held that the clause was workable, and that the lease said how the review was to be determined, albeit somewhat short on detail.

Code for Leasing Business Premises

The ‘Code for Leasing Business Premises in England and Wales 2007’ represents both owners (landlords) and occupiers (tenants). The Code aims to promote fairness in commercial leases, and recognises a need to increase awareness of property issues (specially for small businesses), ensuring that occupiers of business premises have the necessary information to negotiate the best deal for them. This Code specifically states that rent reviews should be clear and headline rent review clauses should not be used. If landlords are requested by tenants for alternatives to their proposed option for rent, they should be able to do it according to a risk-adjusted basis. For example, alternatives to upward only rent review might include up and down reviews to market rent with a minimum of the initial rent (or reference to another measure).

Leases may contain provisions allowing the landlord to change the rent. These provisions should be clear and understandable and should clearly indicate that the landlord cannot simply impose a rental increase. In case, landlords are unable to offer alternatives, they should justify it. Commercial leases should allow both landlords and tenants to start the rent review process. Usually, the method of recalculating a commercial rent is through revaluation in the open market at review date. The rent review should be to the market rent unless clearly stated otherwise and if the tenant agrees over increases fixed to an index, then the basis should be a published, independent, authoritative source.

Tenants and landlords should understand the basis on which the rent can be changed. For example, can the rent go down as well as up? The tenant should see if the landlord is ready to allow upward or downward rent reviews, or if the tenant could ask for a ‘break option’. The commercial lease should also include a provision allowing tenants to serve a rent review notice on the landlord. Tenants should make sure that the interest rate on the difference is no higher than bank rates. The landlord loses interest on the difference if he or she does not initiate the rent review process prior to the review date.

Carrying out the rent review?

If the lease does not provide for upwards-only rent review, but only provides for the landlord to be able to initiate the review, then the courts have stepped in to protect the tenant; this happened in Royal Bank of Scotland plc v Jennings (1997), where the rent review was not upwards only, and the lease provided that the initial yearly rent was payable only until the first review date and after that the rent should be a market rent calculated in accordance with the review clause. The review clause said that only the landlord was entitled to have an expert appointed. The court held that as the landlord had failed or refused to appoint an expert, the court could do so. The landlord could not frustrate the operation of the contract by failing to operate the review clause. However, in Standard Life Assurance Co Ltd v Unipath the rent review provision in a lease was upwards only and it was held that it would be pointless for a tenant to seek to initiate a review. There is no presumption that a rent review clause should be able to be exercised by both parties; it will always depend on the type of the review and on the wording of the clause.

Contact Healys Specialist Rent Review Solicitors

Healys Solicitors’ Commercial Property Team is well established and benefits from great depth of experience. If the parties do not agree over the rent, the rent review clause will stipulate a procedure for a third party dispute resolution (an independent expert or arbitrator to settle). Poorly conducted rent reviews can lead to financial loss and termination of the lease. Healys Commercial Property Solicitors can act successfully on behalf of tenants or landlords in commercial rent review matters.