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Rent and Rent Review

Are you about to enter into a new lease but haven’t properly considered the rent review provisions? Do you know the differences between the main types of rent review clause and what the terminology means?

Are you about to enter into a new lease but haven’t properly considered the rent review provisions? Do you know the differences between the main types of rent review clause and what the terminology means?

We are all used to prices increasing (although, at the present, not as much as they used to).  In practical terms, of course, what this means is that £1.00 today will only be worth 98p this time next year.  At today’s rates, that may be just about bearable but in the days when inflation was 20% a year, the impact on money was high and prices increased very rapidly.

Rent under a lease has traditionally always been fixed at the start of a lease so in the days of 25 year leases, the effect of inflation was that by the end of the lease, a rent of £1,000 per annum would be worth only £50.  Added to this was the fact that the underlying value of land was rising faster than general inflation so that a large amount of the value of the land was trapped until the existing lease ended and a new rent could be negotiated.

The development of rent review provisions have therefore allowed landlords to tap into rent as a source of income without having to forfeit the security that longer terms bring to both landlords and tenants.

At the moment it is market standard for any lease of more than 5 years to have a rent review on at least the third anniversary and any lease of 10 years or more to have a rent review every five years.

Please do not hesitate to contact an Everyman Legal Solicitor on 01993 893620 for a free discussion or email geoffrey.cotterill@everymanlegal.com

There are various ways to review the rent, including:

A stepped increase at a fixed rate.

This is a simple way of including a rent review provision within a commercial lease but can sometimes have unforeseen consequences.  The automatic increase may not keep pace with inflation or underlying land values or may over estimate them so much that by the end of the term, the rent is unrealistic and unserviceable by the tenant.  In one case, the owners of caravans on a caravan park found that their service charge was scheduled to increase by 10% a year.  At the time the lease was granted, inflation was high but has since moderated.  The effect, however, was that by the end of the 95 year term of the leases, the service charge would have increased from £90 per annum to over £1 million per annum!  Even over a 25 year term, a similar clause would increase a £5,000 a year rent to over £54,000!

An automatic increase but in line with inflation

A simple method for rent review but one which does not match underlying land values.

A full re-evaluation of the rent

The problem here is to define what exactly is being reviewed.  For example a tenant might have carried out works to the property at its own cost.  It would be unfair for such improvements to be included in the rent calculation.  Conversely the landlord will not wish to lose out on rent because the tenant did something which reduced the underlying value of the property.

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What does a rent review clause in a commercial lease need to cover?

Whichever course of rent review procedure is adopted, a detailed clause needs to be agreed when the lease is entered into so that the new rent can be accurately calculated at the rent review date.  It is the wording of this clause which so often causes difficulties as minor changes of wording can have major effects in practice.  In the case of a full re-evaluation of the rent, the clause needs to deal with at least the following issues:

  • On what basis is the lease assumed to have been granted?
  • What is it being compared with?
  • What facts should be disregarded because it would be unfair to take them into account?
  • Should any rent-free periods be taken into account?
  • Will the review be “upwards-only” i.e. the rent cannot decrease?
  • What are the review dates?
  • When is the lease to be valued?
  • Who carries out the review and how do disagreements get resolved?

When agreed the new rent should be properly recorded on the lease itself in a memorandum so that there can be no argument in the future what the agreed rent is and when it started from.

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