Commercial leases granted for three years or more will almost often include a clause providing for rent review at – typically – three or five yearly intervals. Such clauses can take a variety of forms. The lease may provide for the rent to be increased in line with the Retail Prices Index. However, it is more usual for the review to be on the basis of the open market rental of the premises let with vacant possession on the same terms as those contained in the lease. Despite considerable pressure from tenants in recent years for an increased use of “either way” clauses, the vast majority of rent review clauses remain “upward only”. This means that from the relevant date, the rent will either remain unchanged or be increased to the current market rent (if that is higher).
Typically, a rent review clause provides for the review to be on the basis of a number of assumptions and disregards. It is standard practice to assume that the tenant has complied with its obligations under the lease. This is reasonable. It would obviously be unfair to allow the tenant to argue for a lower rent because he has failed to keep the premises in repair in accordance with the lease.
However, sometimes the landlord puts forward a clause under which it must also be assumed that the landlord has complied with his obligations under the lease. This is not so reasonable as it can result in the rent being assessed on the basis that the landlord has carried out repairs or provided services when it has not done so.
Generally, the tenant should aim to have the rent reviewed on the basis of the grant of a lease on the same terms as the actual lease. The landlord may want to provide for variations. For example, the lease may contain a term highly restrictive of the use to which the premises may be put. The landlord may try to argue that the rent should be reviewed on the basis of a much wider user provision, which would have the effect of enhancing the rental value of the premises.
Consideration must be given to any improvements a tenant may carry out to the premises at his own cost. All such improvements should logically be disregarded on rent review. The tenant does not want to find that he has the bear the cost of, say, mezzanine floor and also have to pay an increased rent reflecting that improvement.
The lease should provide machinery for ascertaining the revised rent if the parties are unable to reach agreement. A well-drafted clause will also cater for the fact that the rent may not be agreed or determined by the relevant review date.
It should spell out that in such circumstances, rent will continue to be payable at the old rent pending the new rent being finalised and then for the payment of any shortfall together with interest. Interest at rent review is often set at a rate equal to base rate (where a tenant is in breach of its obligations under the lease a default rate of several percentage points above base rate will generally payable on sums paid late).
We have extensive experience in negotiating commercial rent review clauses and in liaising with surveyors in order to secure the best deal for our clients.