Most commercial leases contain a rent review clause; a mechanism which enables the landlord to review the rent at set intervals. The rent will be reviewed in line with the formula set out in the lease; that might be the Open Market Value, in line with RPI (or now, more popularly, CPI) or perhaps a percentage of turnover.
It is commonplace for these reviews to be ‘upward only’, meaning that the rent will be reviewed at either the current rent or the figure provided for in the formula, whichever is the higher. That way the landlord never loses out.
Rent reviews which are index linked sometimes provide for a ‘cap’ and a ‘collar’, that is a maximum and a minimum by which rent can increase. The benefit of this type of review is that the landlord is offered some protection in a weak economy and the tenant is protected when inflation runs high, as in the current climate.
So, we are familiar with what a rent review is, but how is it operated?
The lease will specify how the landlord triggers the rent review and in 99% of cases this will be by serving a notice on the tenant proposing the rental increase.
It is, of course, paramount that the notice complies with the exact requirements of the lease to avoid any preliminary arguments over valid service i.e. if the lease says notice by hand only in business hours, then that is how it must be served.
It is usually the case that for the purposes of the rent review time is not of the essence. There is a rebuttable presumption that this is the case, but most leases will be specific on the issue.
That means that if the landlord does not trigger the rent review at the specified review date, they reserve the right to do so later. This will be accompanied by a ‘shortfall payment’ clause, which enables the landlord to claim the uplifted rent from the earliest review date, even when the reviewed rent may not be agreed until some weeks, months or years later.
That might seem favourable to landlords. However, if the review date has passed and the review has not been triggered, the tenant could be incurring a substantial liability for rent that is not yet known to them. Usually, a landlord will want the rent from the tenant and to ensure they can pay it; so, it is better not to delay where possible.
Rent reviews and break dates are often closely aligned, so from the tenant’s perspective, it is better for either party to be able to trigger the rent review. That way, the tenant will have certainty over their rental obligations moving forward when deciding whether to break the lease.
Occasionally, a lease may be more tenant friendly and provide that the landlord may only recover the reviewed rent from the date the review notice is served.
Landlords beware: if the review date is overlooked and a significant amount of time has passed (assuming time is not of the essence); you can still operate the rent review, but the claim to the uplifted rent will be limited to the period from when the notice was served, as opposed to from the review date. That could mean losing out on substantial rent.
It is advisable that both parties keep a note of important dates in the lease, such as review dates and break dates, so that they are not forgotten.
Disagreement of the Parties
When the parties cannot agree the reviewed rent, the lease will normally contain a dispute clause which allows them to refer to matter to a surveyor for expert determination or arbitration. Where the reviewed rent is determined by a surveyor, they will make their determination based on a number of pre-agreed assumptions that are set out in the lease.
This provides a useful mechanism for resolving disputes; however, it can be an expensive and uncertain exercise where the surveyor awards the costs. Especially for the tenant, who will already be facing a back payment for the uplifted rent.
It is important to consider whether the lease allows for recovery of interest on the shortfall payment of rent. If it is recoverable, this will be an additional cost that the tenant will need to account for when agreeing the new rent.
Where a late rent review is either agreed or determined by an expert, interest can only run on the uplift from the due date. The position is different if the rent is determined by an arbitrator who has a wide statutory power to award interest. However, if the landlord forgets to claim for interest, none will be awarded.
Rent reviews are complex and it is advisable that the landlord and the tenant consult with a legal advisor and surveyor before agreeing to any change in the rent. If an uplifted rent is agreed in error, it is likely to prove difficult and potential costly to unravel.
This blog provides general information in relation to rent reviews in commercial leases and is not intended to constitute legal advice. It does not apply to rent reviews in residential tenancies, which are subject to a separate regime.
If you are thinking about serving a rent review notice, you have recently received one or find yourself in dispute with the landlord/tenant over the terms of the review, we can help.
Please contact our Property Disputes Team; we have a team of experienced legal advisors specialising in this area.
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