I’m a Commercial Tenant in the UK. What Does My Landlord Base My Rent Review On? 

As a commercial tenant in the UK with a lease, you regularly pay rent to your commercial landlord in return for your occupation and use of their property. However, the regular rent amount of commercial leases can change if you have a rent review clause in your lease agreement. If your lease is subject to a commercial rent review, you should understand what your landlord will base your rent review on, which will be in the rent review provisions. Doing so helps you prepare for the possible likelihood of a rental increase and allows you to understand and budget for your future costs. This article will explain to you, as a commercial tenant, the factors that will affect your rent review.

Rent Review  

Your business premises can be subject to a rent review if you have a rent review clause in your commercial lease agreement. A rent review clause will detail how often your lease may be subject to a rent review, typically every three to five years. It will generally detail:

• the procedure;
• how to dispute any rise in rent; and
• factors affecting your rent review.

Landlords generally use one of the following review methods:

• open market rental value;
• periodic or Index;
• fixed rent review; and
• turnover.

Let us explore each of these.

Open Market Rental Value 

Your landlord may base your rent review on the open market rental value. This refers to how much they should expect to receive in rent for the commercial space. So, they consider how much rent they can receive if they put their property on the rental market and lease to another business.

The property value of your landlord’s property is the current market value. So, in other words, your landlord assesses how much they would get for their property now if it were on the market for sale. They consider these through a surveyor and have to factor in some points regarding your commercial lease when they do so. These are:

• assumptions; and
• disregards.

Assumptions refer to a valuation of your landlord’s property on the assumption that you have complied with your lease terms, regardless of whether you have. Therefore, if there is an obligation in your lease for you to repair items in your commercial premises within a reasonable time when they break, the property value will assume you have done so even if you have not.

Disregards are factors regarding your lease that your landlord does not have to consider when assessing the property value. Therefore, if you redecorate the business premises, but your landlord does not require you to, they do not need to consider this when valuing the property.

Periodic or Index  

Where landlords rely on reference to a periodic or index, they generally refer to the Retail Price Index (RPI). Occasionally, they may use other indexes. The RPI is a mechanism for assessing average UK service and goods changes. If your rental price matches the RPI, it reflects the rental market. Typically, an RPI review will multiply the then current rent by the index amount as a percentage.  

You may hear a reference to a ‘periodic review’. This is also based on the RPI but is a rent review where the rent changes periodically according to this.

Fixed Rent 

If your commercial landlord assesses your rent review as a fixed rent review, your lease agreement may refer to this as a ‘stepped rent review’. This is when you agree your rent will increase in fixed amounts yearly. Therefore, for the first year, there may be a low amount of rent, the second year slightly more, and the third year more. A fixed review may also do this by referencing a percentage multiplier rather than fixed amounts in the lease. 

Turnover  

Commercial landlords may assess their rent reviews on the turnover of their commercial tenant’s business while running it from their property. This is a turnover rent review. Where your landlord bases their rent review on your business’s turnover, the rent review clause will set out a minimum rent which must apply at all times. Turnover rent is typical for businesses in the retail sector.

Key Takeaways

The rent you pay your commercial landlord for your business premises is likely subject to a rent review. In this case, your commercial landlord will periodically assess your rent to account for increases in general expenditure (normally, market price increases in property values and inflation). The point at which they do this and what they base their commercial rent review on will depend on your lease agreement details. Four common types of rent reviews are:

• open market rental value;
• periodic or Index rent reviews;
• fixed rent review; and
• turnover rent review. 

If you need help understanding what your commercial landlord bases your commercial rent reviews on in the UK, our experienced leasing lawyers can assist as part of our LegalVision membership. For a low monthly fee, you will have unlimited access to lawyers to answer your questions and draft and review your documents for a low monthly fee. So call us today on 0808 196 8584 or visit our membership page.

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