Most commercial leases, if they are more than 3-5 years in length, will incorporate a rent review clause.
The concept was introduced to counter the effect of inflation over time, re-establishing the financial relationship between landlord and tenant to a market rental level at periodic intervals, typically 5 yearly but any interval is possible.
There are no stock answers or standard solutions when it comes to rent reviews. There is a huge body of case law but the key to any rent review is the actual wording of the relevant clause in the lease.
Whilst most rent review clauses are broadly similar, a different word here or there can have a dramatic effect. Even words that seem to say the same thing may have evolved quite different meanings over time and through legal precedent. “Fair rental value”, for instance, means something quite different to “open market rental value”. The former can be open to interpretation depending on the relationship between the parties, who has paid for what works and a host of other variables. The latter is defined in law and always means the same thing.
Most commonly, the review clause seeks to assess what rent the property would let for in the open market as at the review date and assuming the tenant has met his obligations under the lease. Typically, the property is valued as you see it assuming a lease similar to the actual lease and a use the same as the actual use but the clause may build in all manner of hypothetical assumptions that have nothing to do with reality. Very of ten there is one introduced to protect the tenant from paying rent on works he has done at his own expense (disregard tenant’s improvements) but there have been review assumptions that require the surveyors to value the property as if it were a particular size, or a different use, or even in a completely different location.
Timetables in review clauses may be just for guidance or they may be critical. If you see the words “Time is of the essence” you can be pretty sure it is critical but most timetables or notice periods are regarded by the law as being for guidance. It’s very easy to be caught out, however, and bear traps are laid in the most innocuous words. Any connection between a review clause and a break notice, for instance, may have the effect of making time of the essence. Words like “deemed” should throw up a warning, too, as a clause deeming a particular rent to be accepted if not rejected by a certain date can cut off an escape route to a late notice. The best advice is never to miss a date if it can be avoided and always send anything that could be a legal notice, even if it’s in casual language, to your solicitor and your surveyor without delay.
Typically, a rent review commences with a notice or a rental proposal being sent by the landlord (or his surveyor) to the tenant. The surveyors for the landlord and the tenant each carefully consider the requirements of the review clause, reference the property (measure it up, take notes and photographs), research local evidence of lettings and reviews of similar properties and negotiate to achieve the best deal they can for their client. The negotiating period may be over in one meeting or it may last months (even years has been known). If professional surveyors on either side are working towards a rental valuation based on the same documentation, the same property and the same body of evidence, they should not take forever to reach common ground. Sadly it is not always the case. If they can’t agree, the lease will usually set out a detailed dispute procedure involving putting the case before an Independent Expert or Arbitrator.
References to 3rd party (Expert or Arbitrator) occur in only a small proportion of cases and, as a good deal of additional work is required to prepare and submit a case, surveyors will usually charge an additional fee. This should be agreed in advance. The 3rd party reference may involve an oral hearing but the vast majority are decided on written submissions and counter-submissions.
Once determined, a reviewed rent has the same legal position as the rent originally written into the lease. There is rarely any get-out clause if you don’t like it (or can’t afford it) and it is usually fixed as a minimum until the end of the lease. Important, then, to treat it seriously and get it right.