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When you occupy a property as your commercial premises, you likely have a commercial lease. The business premises you lease from your landlord will be subject to many terms, which your lease agreement will detail. One of these may be a rent review clause. A rent review clause allows your landlord to review your rental amount from time to time. Rent review provisions will detail the type of rent review your landlord will carry out, such as an open market rent review or an index-linked rent review. One type of rent review is a retail price index rent review. This article will explain what a retail price index rent review is in the UK.
Commercial Lease
A commercial lease is when you have the sole occupation of a property or part of it for permitted business use over a specified period. The details of your lease are in your commercial lease agreement. This contract will contain, for example:
- the lease term;
- the terms of use of the premises;
- repair obligations for the commercial premises; and
- the rental amount you must pay.
Rent Review
If you have a rent review clause in your commercial lease agreement, your rent will change throughout the lease period. A rent review is where your landlord assesses the amount of rent you pay according to a formula in the lease. Commercial landlords will include rent review clauses to account for future economic factors, for example, increases in general expenditures over time.
The rent review clause should include details on:
- how often a rent review may take place;
- the process of the rent review;
- how to dispute a change to the rental amount; and
- what the landlord bases the rent review on, i.e. how they assess it.
A landlord will generally assess the rent using:
- an open market rent review which, among other factors, looks at the value of properties similar to yours in the area; or
- an index rent review (normally using the Retail Price Index (RTI) as the applicable index).
Other ways the rent can change include:
- turnover rent assessments, where you may have to pay an additional amount of rent because your turnover went above the threshold documented in the lease; or
- fixed or stepped rent increases, where the increase is calculated automatically.
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Retail Price Index Rent Review
When a landlord carries out a retail price index rent review, they base it on inflation. The RTI measures inflation and is a monthly published figure from the Office for National Statistics. It reflects how inflation fluctuates every month, determined by changes in the prices of goods and services. You refer to the percentage of this change as the ‘index amount’.
Your landlord will generally take the current rent you pay and multiply this by the index amount as a percentage. Therefore, where prices of goods and services have increased by 5%, the rent you pay will also rise by 5%. However, some landlords will detail in their rent review clause that they include a cap on the maximum amount the rent can rise, as well as potentially a collar which is a minimum amount the rental amount must increase by.
Whilst your landlord will base this type of rent review on the RPI, it is possible to have a similar rent review based on a different index. Combining an RPI rent review with the open market rent review is also possible.
Key Takeaways
Commercial lease agreements contain many terms. Although only a few will change during the course of a commercial lease, the rental amount on a commercial lease can change if the lease agreement has a rent review clause.
A commercial landlord will base increases in rent on a particular method of review. One method is the retail price index rent review. For this type of review, a landlord bases the rental amount on the RPI, set from goods and services inflation. However, a landlord may cap any increase by an ascertained amount and ensure the rent does not fall below a minimum amount. Retail price index rent reviews are not particularly popular in the UK, and since the increase in inflation from 2022 onward, they are not a popular choice for tenants.
If you need help understanding retail price index rent reviews in commercial leases in the UK, 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 for a low monthly fee. Call us today on 0808 196 8584 or visit our membership page.
Frequently Asked Questions
A rent review is where your landlord assesses the amount of rent you pay to ensure that it remains a suitable amount. They will assess this on a specific method of review.
A retail price index rent review is where your landlord bases their assessment of the rent you pay on the inflation of goods and services in the UK. The rent price rises according to the percentage these have risen by.
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