Vertex Law

When the landlord comes calling

by Ed Auger

Ed Auger examines what to do if your landlord has presented you with a rent review and how timely action can save you money.

Do you need to do anything?

Check your lease as it will contain the answer.  If your lease is for a relatively short term, say less than four years, then it is unlikely to contain any rent review provisions.  If this is the case rent will not change during the lease term.   

If your lease is for four or more years then it will probably include provisions allowing the rent to be reviewed, generally in every third or fifth year of the lease.   

Once you know the review date, you must adopt a reminder system giving you advance warning of an impending rent review.   

Calculating the new rent

The three most common methods of rent review reference increases in the Retail Price Index (RPI), open market rent review, or a ‘linked’ rent review.  

Open market is the most common method, with both parties, usually via agents, agreeing on the rent payable on the open market for the premises. 

Those reviews classified as RPI are relatively straightforward as the old rent is simply multiplied by the relevant RPI figure.  

A small minority of leases, most commonly affecting retailers, include rent review provisions linking the revised rent to, typically, the turnover of the shop. Known as ‘linked’ reviews, these procedures rely on disclosure by the tenant of relevant information. The process for review will be set out clearly in the lease.   

Plan ahead

Commercial leases often provide that the revised rent can be agreed between the parties at any time during the six months leading up to a review date.  There is nothing to stop you contacting your landlord direct and agreeing the revised rent without recourse to professional advisers.   

If the revised rent has not been agreed by the review rate then usually the passing rent will continue to be payable until the revised rent has been agreed.  Once the revised rent has been agreed it will become payable immediately.   

In addition, it is usual for commercial leases to provide that the tenant will pay the landlord the difference between the passing rent and the revised rent from the review date until the date on which the rent is agreed together with interest – usually the base rate – on the balancing figure. 

The Review date’s getting closer

Don’t ignore it!  There is little to be gained from hoping the landlord will forget to review the rent.  The fact that a review date passes without a revised rent being agreed between the parties does not mean the issue goes away.   

Most leases allow the rent review process to continue indefinitely during the lease term.  Such a situation rarely favours the tenant because, as mentioned above, interest is payable on the revised rent.   

Seek professional advice

Having a good chartered surveyor to assess the likely level of the revised rent, based on the amount being paid for similar premises (called ‘comparables’), is invaluable. Once they have arrived at an open market rental figure you will be in a much stronger position to either initiate the rent review process yourself or respond to any proposal made by the landlord.  

If you wait for your landlord to make revised rent proposals then, in most cases, the revised rent proposed is significantly higher than the passing rent. Without a surveyor’s advice it is much harder to negotiate the revised rent back down to a realistic level.   

If you are able to pre-empt the landlord by proposing a reasonable revised rent then your landlord is less likely to want to go to the time and money involved in arguing the revised rent figure.   

If agreement cannot be reached, then commercial leases usually provide for the rent to be determined by an independent arbitrator.  

Once agreement is reached, or a determination made, both parties should sign a rent review memorandum, as evidence of the agreement.  

In summary:

1.     Don't ignore a rent review date!

2.     Familiarise yourself with the rent review provisions, if anyk contained your lease.
        Seek advice from your solicitor if you have any questions.

3.     Instruct an agent to determine a reasonable and sensible revised rent figure.

4.     Make sure the revised rent is recorded by way of a rent review memorandum.

For advice regarding agents/surveyors in your area, visit The Royal Institution of Chartered Surveyors website - www.rics.org.

Glossary

*  passing rent - the ren payable immediately prior to any rent review.

*  revised rent - the rent payable immediately after the rent review has been concluded.

*  review date - the date (there may be more than one) on which the rent is ude to be
    reviewed.