Table of Contents
When you enter a commercial lease as a tenant, there is a lot you must consider. Obvious considerations include the commercial property’s location, rental amount and the lease term. However, a commercial lease agreement contains many lease provisions which detail the rights and obligations of parties to the lease. One lease provision you may find is a commercial rent review clause. This has significant implications for you, as a commercial tenant, as it affects the rental amount, often causing rent increases. This article will explain four essential considerations where a commercial lease has a rent review clause.
This cheat sheet outlines what you should be aware of in your lease agreement.
Rent Review Clause
A rent review clause is a provision in a commercial lease that allows a landlord to assess the amount of rent their tenant pays periodically. Not all commercial lease agreements contain this clause, but the longer the lease term, the more likely it will contain one. As the rental market changes over time, landlords want to ensure they get a fair price for their commercial property. Below we consider points you should consider in a rent review clause.
1. Rent Increase
As a commercial tenant, you must understand that rent will only increase or remain the same after the rent review. While some agreements explicitly detail this, others may not. A rent review will generally never result in a rent decrease. It is necessary that you watch out for a rent review clause during the heads of terms stage of a commercial lease. Here, you can discuss the rent amount. As it is likely to rise as the lease proceeds, you can try to ensure that it does not reach an amount you will not be able to afford.
2. Rent Review Interval
If you have a rent review clause in your lease, you must watch out for the rent review interval. A rent review will typically occur every three to five years in a commercial lease. However, this period may be longer when you have a lengthier lease. It is important to note that a commercial lease of less than seven years, should not contain a rent review clause. It is generally industry standard that a lease of this period or less does not require a rent review.
3. Rent Review Type
When commercial leases have a rent review clause, how the landlord assesses your level of rent will vary depending on the type of rent review. Therefore, it is important that you look out for the rent review type when considering a rent review clause.
Four main types of clauses are:
- index-linked;
- stepped rent;
- turnover rent; and
- open-market rent review.
4. Assumptions and Disregards
If you have an open market rent review clause in your commercial lease, you need to watch out for assumptions and disregards. An open market rent review bases your rental amount on the rent of similar properties on the market at the time. It, therefore, looks at a hypothetical lease with the same terms and features as the existing lease.
However, the property your lease covers may not be in an ideal state. This would mean the rent would work out at a lower rate than the market rate. Therefore, your landlord must assume and disregard certain points about the commercial premises, including:
- an assumption that all repairs to the lease have taken place;
- a disregard for any improvements you have made;
- not to increase the property value as your business is booming; and
- to disregard the length of the lease term.
Key Takeaways
A rent review clause allows commercial landlords to assess the level of rent you pay from time to time. As a commercial tenant with a lease, you should know what to look for when your lease agreement has a rent review clause. It is important to recognise that rent will typically only increase, as well as the different types of rent review. Additionally, understanding assumptions and disregards are essential when looking at a rent review clause.
If you need legal assistance drafting or reviewing your commercial lease, 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 on 0808 196 8584 or visit our membership page.
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