In a
commercial lease, it is common for the landlord and the tenant to agree that
the rent payable under the lease is subject to change at certain points during
the lease. These provisions are known as rent review clauses. Some of the most
common types of rent reviews are market rent, indexed rent and stepped
increases.
A stepped
increase clause is the simplest mechanism for increasing the rent over the term
of a lease. Stepped increase clauses simply provide that the rent will increase
by fixed amounts at set intervals. Both landlord and tenant have certainty as
to what the rent will be at any given time, but at the cost of rigidity – the
rent may not reflect the actual market conditions at the time of the agreed
increases.
In order to
provide an element of flexibility, the parties may agree an index-based review
mechanism. This means that the rent will change based on an agreed inflation
index, such as the Retail Price Index (RPI). The benefit of this is that the
rent review mechanism is linked to market conditions, without requiring the
complexity of re-evaluating the market rent on each review – the rent is simply
changed by the amount of the agreed index. However, neither party will know
what how the index will change in future and therefore there is a degree of
uncertainty.
Market rent
reviews provide that, at the time of each rent review, the rent is adjusted to
reflect the open market rent at that time. Clearly, a valuation of this type
can be a complex process. The review provisions will need to set out in detail
the basis on which the valuation should be carried out, including all relevant
assumptions and disregards. The lease will therefore become more complex and
expensive to draft and negotiate. The valuer’s
fees will be an additional cost.
Whichever means of rent review is chosen (other than
an agreed stepped increase), neither then landlord nor the tenant will have
certainty as to how the rent will change in future. In order to limit their
risk, a landlord may insist that any rent review is an “upwards only” review.
This means that, if the chosen mechanism would produce a decrease in rent, the
rent will remain as it was immediately prior to the review.
The Commercial Property team at Ramsdens are experts in dealing with all aspects of leasehold
transactions (including rent reviews in leases), and act for both landlords and
tenants.
For more
information or to make an enquiry, please contact our team by emailing [email protected] or calling 01484 821 500. Alternatively you can fill out an online
enquiry form and a member of our team will be in touch.