Commercial Rent Reviews in England and Wales

If you own commercial property in England and Wales, you will want to ensure that you get an appropriate rental income from your tenants. Likewise, if you are a tenant of business premises, you want to make sure that you know how and when your rent can be increased. This article will explain how commercial rent reviews work in England and Wales.

What is a Rent Review?

Generally speaking, the owner of any property you rent, whether residential or commercial premises, will aim to increase the rent you pay over time. This could be because their costs increase or simply to reflect the increase in market value over time. Rent reviews will generally take place at fixed times during the length of the lease. This may be every five years for longer leases. However, it could be as little as every three years for shorter leases.

If you are a tenant seeking to lease commercial premises, you should check that you are happy with the rent review process proposed by the landlord. Likewise, if you are the owner of commercial property that you seek to lease, you need to be satisfied that you can adjust the rent to reflect the appropriate market value. Rent review provisions are vital for lease negotiations. Therefore, both parties must be comfortable with the finalised rent review clause before the lease agreement is signed.

What Should the Rent Review Clause Contain?

The rent review clause in a commercial lease agreement should set out the following:

• when the rent review can take place during the lease term;
• the method of calculating the rent review;
• the process to follow;
• specifics regarding the valuation, such as key assumptions and factors to disregard; and
• the appropriate method to resolve a dispute if the landlord and tenant cannot agree on the new rent. This is usually a third-party dispute resolution procedure.

Methods for Calculating Rent Reviews

There are three methods for calculating rent reviews of commercial property in England and Wales, which are:

• open market rent review revaluation;
• rent review based on tenant’s business turnover; and
• periodic rent increase.

Whichever method of rent review they use, both the landlord and tenant must agree to the proposed new rent amount. This is why there is usually a provision in the rent review clause, to provide a mechanism for dispute resolution. The tenant will pay the previously agreed rent amount until the parties agree. Once the landlord and tenant agree to the appropriate rent, they will backdate the increase with interest.

Open Market Rent Review

The most common method for conducting commercial rent reviews in England and Wales is to revalue the property’s open market value. As its name indicates, this essentially means that an independent surveyor will calculate the rent value of the property at the time of the rent review. However, if you are looking to rent commercial property, it is essential to note that commercial landlords often want to make sure that rents can only be reviewed ‘upwards’. This means that the landlord will not reduce your rent should a revaluation show that the market rent value has decreased. Your rent will stay the same as it was previously. If the market value has increased, the landlord will seek to increase the rent amount.

Review Based on Business Turnover

If you have a retail business renting retail premises, your rent review may change based on your business turnover. You will usually pay a minimum level of rent, with reviews and increases taking place periodically as your business income increases.

Periodic Rent Increase

If your lease provides for periodic rent increases, these will usually mean your rent will increase at particular intervals, calculated using the Retail Price Index (RPI). This is the standard measurement of inflation in the UK. Therefore, it is a good reflection of the appropriate increase for commercial rents. As with rent reviews based on market values, a landlord who agrees to this method of rent review will usually want to ensure that upwards-only rent reviews are possible. This is the case even if the RPI shows that inflation has decreased.

Whatever method of rent review the landlord and tenant agree, there may be key assumptions and factors to disregard. These may include assuming the tenant’s compliance with the lease terms, including repair and maintenance responsibilities. If the tenant has potentially increased the property’s value through alterations to the property, they would want to disregard this. This is because any increase in rent due to improvements they have made would be unfair.

Key Takeaways

Whether you are the landlord or the tenant of commercial property, rent review provisions are one of the most important things to negotiate when agreeing to a commercial lease. As a landlord, you will want to be comfortable with when and how you can increase the rent of your property and obtain the best rent possible. As a tenant, you will want to ensure that your landlord cannot raise your rent inappropriately. Both landlord and tenant will also need the comfort of knowing how they can resolve potential disputes regarding rent review. Most rent reviews occur by revaluing the property at the appropriate time. However, other methods of rent review may be more suitable for you.

If you need help with commercial rent review negotiations, our experienced commercial property 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