Key Points a Landlord Should Know About Rent Review Clauses

As a commercial property owner, you may choose to rent out your property in exchange for rental income. If so, the business owner becomes your tenant, and you will both sign a commercial lease agreement. This agreement specifies that you grant your tenant sole occupancy of your property in exchange for rent for a specific lease term. To ensure that rent remains fair during the lease term, including a rent review clause can be valuable. This article will explain three essential points a landlord should know about rent review clauses. 

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Rent Review Clause

A rent review clause is a commercial lease provision that allows the landlord to periodically assess the rental amount for the lease. This means that you will check whether your commercial tenant pays the right amount of rent for the commercial property. 

Several methods exist for reviewing the level of rent, and the rent review clause will specify which method you use. Additionally, it will detail how often you will review the rent. Usually, a rent review occurs every three to five years, with the interval increasing as the lease term lengthens. 

The results of your rent review will mean that the rent will remain the same or increase. Rent rarely goes down after a rent review, and your rent review clause may state this.

Key Points for Landlords 

As a commercial landlord, you must understand the importance of a rent review clause in your lease. Below are three key points about commercial leases with a rent review clause. 

1. Why?

As a commercial landlord, a rent review clause is essential to ensure that you do not miss out on potential rent. This is especially crucial when you have a tenant in a long-term lease. 

For example, if your commercial tenant takes a 15-year lease term, the rental market will likely change during that term. A rent review clause will allow you to change their rental amount to reflect this. However, you should not include a rent review clause if your lease is less than seven years.

2. Types

If you decide to include a rent review clause in your commercial lease agreement, it is essential to know which types you can choose. There are three main types of rent reviews as follows:

• index-linked – rent changes according to a form of index, such as the Retail Prices Index (RPI);
• stepped rent – you and your commercial tenant agree for the rent to increase by a specific amount at agreed intervals; and
• open market rent review – the open market price or what it would be if you were to lease on the same terms to a new tenant on that day.

3. Backdated Rent

Notably, while your rent review clause will specify when you can conduct the review, you are not obligated todo so then. As a commercial landlord, it is within your discretion to skip the review, possibly due to other commitments or busy periods.

When you do decide to review the rent, if there is an increase, you can apply it retroactively to when the review should have been done. If your lease allows it, you can also charge interest on this backdated adjustment. The ability to do this ensures you do not miss out on a rental increase simply because you could not conduct the rent review when the lease specifies. It is crucial that your commercial lease agreement details this possibility so that your tenant is aware.

Key Takeaways

As a commercial landlord, having a rent review clause is crucial in your lease. This provision in the lease agreement allows you to periodically review the rent your tenant pays. At these specified intervals, you can employ various rent review methods, including index-linked rent, stepped rent, or an open market rent review. The inclusion of a rent review clause not only enables the adjustment of rent but also ensures that you do not miss out on potential income from your tenant.

If you need help understanding a rent review clause, 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. Call us today at 0808 196 8584 or visit our membership page.