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As a commercial tenant, you must understand how a rent review clause can impact your legal obligations under a commercial lease agreement. A rent review clause describes the landlord’s right to review the rental amount initially agreed upon. Both parties must be aware of any rent review clause and the details of it, as it will affect what the tenant pays and what the landlord receives. This article will explain backdated rent in a commercial lease with a rent review clause in the UK.
What is a Rent Review?
A rent review clause grants a commercial landlord the right to review the rental amount their tenant pays for the sole occupation of their commercial property. The commercial lease agreement will detail information about the rent review in the rent review clause. This will include when the rent review may occur, as well as the rent review method.
Rent review methods include:
- open market rent review, which is where the landlord assesses the rent in terms of the market value of the property if it were let to a new tenant at that time;
- index-linked rent review, which is where a landlord assesses rent in accordance with an index such as the Retail Price Index (‘RPI’); and
- stepped rent review, which is where the rent increases by a specific amount at a precise point in time-based on the parties’ agreement.
Generally, a rent review should not occur when the lease is of a seven-year term or less.
This cheat sheet outlines what you should be aware of in your lease agreement.
What is Backdated Rent?
A rent review clause should always state when the review will occur. While the commercial lease agreement may expressly detail the exact rent review date, this may not necessarily be the date the rent review happens in practice. Instead, it is usually the date on which the rent review can commence.
As a rent review can occur after the date when it may commence, the rent will remain at the current rental amount for the commercial tenant. When the rent review occurs later, the rental may stay the same or increase. If the rent increases, a commercial landlord has the right to backdate the difference of the increase from the rent review date specified in the lease agreement. They can also charge interest. Consider the following example.
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How Does Backdated Rent Affect Commercial Tenants?
If a commercial tenant receives a request for backdated rent on their lease due to a review clause, the above scenario shows this can be a considerable amount of money they owe. Therefore, it is essential for a tenant’s perspective that they avoid falling into this situation.
In this respect, it is beneficial for a tenant to negotiate that the rent review clause includes the ability for them to initiate a rent review when it is due. Although they do not want their rent to increase, as it ultimately may do, the review should happen sooner to avoid a hefty rent bill and interest.
Key Takeaways
A rent review clause in a commercial lease allows the landlord to review the amount of rent a tenant pays for their business premises. In practice, a commercial landlord may not actually conduct the rent review on the date the clause specifies. Instead, the landlord may review the rent after the date. In this instance, the lease usually allows the landlord to backdate any rent increase resulting from the rent review to this date. This means that a commercial tenant will have to pay the difference in the rental amount, plus interest, which could mean they face a hefty bill. Therefore, it is in the tenant’s interest to include a right to appeal a rent review.
If you need help understanding backdated rent in a commercial lease with a rent review clause, LegalVision’s 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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