3rd July 2018 | Michael Lewis | Retail, Landlord, Leases

A landlord can only conduct a rent review if there is a rental review provision in the lease. In modern leases, rent reviews are around every three to five years. Negotiations over rent clauses are crucial because the landlord will... Read more

A landlord can only conduct a rent review if there is a rental review provision in the lease. In modern leases, rent reviews are around every three to five years.

Negotiations over rent clauses are crucial because the landlord will have a different objective to the tenant as the provisions often only allow for increases in rent. It is very rare that the provision allows for a decrease in rent and so at the time of review, the rent will either stay the same or increase.

When the time comes for rent to be reviewed, the process can be instigated by notice (in writing) or by parties entering into negotiations. However it is clearly in both parties’ interest to negotiate a new rent and resolve any dispute early on to avoid incurring unnecessary time and costs. Tenants should remember that often rent reviews can be backdated.

The most common type of rent review falls under the umbrella of open market rent reviews – the rent at which the premises might reasonably be expected to let at in the open market. It enables rent to be set according to market conditions at the time of conducting the review (on par with other rents being charged on similar properties in similar areas at the best rate).

How is open market assessed?

Usually an expert assists in helping both parties and more often than not they will appoint a surveyor to decide on the open market rent and help them with negotiations.

The surveyor will determine the value of the new rent in the fairest way, by considering the ‘hypothetical lease’ basing it on assumptions and disregards. The reason for this is that if the surveyor valued the open market rent based on the actual property it may lead to an unfair valuation (say, if the property was in a state of disrepair because the tenant failed to comply with covenants relating to repairs), so the assumption would be made that the tenant has complied with all covenants. Certain aspects will also be disregarded, for example, if the tenant has built up a good rapport with neighbours or if the tenant has made significant improvements to the property, these can be disregarded to give a general unbiased valuation.

To minimise potential risks, it is strongly advised that both landlord and tenant seek professional legal advice to ensure they are fully aware of the rent review provisions of the lease.

After a valuation has been provided to both parties, hopefully they will agree. If this is not the case and parties cannot come to agree a new rent, the rent review clause in the lease usually stipulates a procedure for alternative dispute resolution (ADR) which involves the use of a neutral third party.

If negotiations fail, parties then often look to arbitration where a neutral party comes in to actually resolve the dispute and make a decision, requiring both parties to comply with the final outcome.

The rent continues to be paid at the old rate until a new figure has been agreed. Once the new amount is agreed, it can be back dated to the review date meaning that an additional sum making up the difference may be owed by the tenant, and interest may also be charge

To find out more, click here to speak to Michael Lewis. 

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