Table of Contents
In Short
- Includes open market rent review, index-linked rent review, turnover rent, and stepped increases.
- Rent increases can be backdated, with interest charged on the difference, sometimes leading to unexpected costs.
- Tenants should understand the rent review clauses in their leases and consult legal advice to avoid disputes and surprise costs.
Tips for Businesses
When negotiating a commercial lease, carefully review the rent review clauses and understand how rent increases will be calculated. Be aware of potential backdated rent and interest charges, and clarify when rent reviews will occur. Seek legal advice to ensure the lease terms are clear and manageable within your budget.
Commercial tenants often express concern over the rent increase provision in their lease, which can appear as a financial uncertainty. Understanding different rent increase methods can help potential tenants avoid unplanned expenses and unwanted situations. This article explores the contents of rent review clauses, methods of rent increase and interest on backdated rent.
Rent Review Clauses and Statutory Provisions
Relevant Statutory Provisions
The Landlord and Tenant Act 1954 (LTA) is the primary legislation governing commercial leases in England and Wales. While it doesn’t directly regulate rent reviews, it does provide for interim rent in certain circumstances. For example, where business tenants remain in occupation after their fixed-term lease expires, interim rent is set at market rate until a new lease is agreed or the tenant vacates.
Leases
A correctly drafted rent review clause specifies the method, frequency, and dates of review. Where the parties are not in direct agreement, there should also be a process for settling on a new rent amount.
This is usually a provision for appointing an independent third party or expert to explain the reason for increasing rent. In most cases, this will be a chartered surveyor who is bound by industry good practice.
Different Types of Rent Review Methods
Open Market Rent Review
This method aims to align the rent with the current market value. The calculation is based on a hypothetical lease, usually with the same terms as the existing lease.
Some factors, such as the tenant’s improvements and goodwill, are excluded from the calculation. Lastly, similar properties in the area are used to determine market value, with adjustments for the property’s characteristics.
If you are moving out of your leased space and assigning the lease to another party, you are required to notify your landlord and obtain their consent. Use this free proforma template for this purpose.
Index-Linked Rent Review
This method ties the rent increase to a specified economic index, usually the Retail Prices Index (RPI). The clause will set out the review period, which is typically annual. The calculation involves a simple percentage based on the index and can include caps.
Turnover Rent
This is not actually a rent review method but rather a calculation for additional amounts to be paid on top of the existing rent. It is calculated as a percentage based on tenants’ statements of turnover.
Stepped Increase
This involves pre-agreed increases as either a fixed percentage or a fixed amount at specified intervals. This provides certainty to both parties but may not be equal to the actual change in market value for the property.
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Backdated Rent and Interest
Backdating Rent
Tenants should be aware of the provision allowing backdating of the new rent.
This can be charged as a lump sum or instalments, and there may be a buffer period before interest is paid. The interest part of the provision may become unenforceable if it is high enough to constitute a penalty.
Key Takeaways
Different methods offer varied advantages, such as the flexibility of open market rent review or the certainty of stepped increases. Turnover rent can be an incentive for landlords of retail premises, while index-linked reviews can be more predictable for tenants. Tenants should also remain aware of the rent review date, after which they may be charged interest on the increased and backdated amount.
Generally, different types of premises are suited to different rent review methods, which both parties should assess. Obtaining legal advice can help clarify how your rent will increase as a tenant and offer more certainty from a budgeting perspective.
If you need help with rent increase plans, our experienced disputes and regulatory 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. Call us today on 0808 196 8584 or visit our membership page.
Frequently Asked Questions
Periodic tenancies or leases see the tenant rent the property indefinitely until they or the landlord gives the other notice (for example, one month’s notice). A fixed-term period sees the lease expire at the end of the term unless the parties agree to extend.
The statutory minimum notice period is one month if the tenant pays rent weekly or monthly; however, most leases stipulate at least three months’ notice.
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