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As a tenant with a commercial lease, you occupy a property as your business premises in return for rent. A commercial lease agreement is a legally binding contract between you and your landlord. It details the terms and conditions of your lease, including the lease term and the rental amount. However, the rental amount for your commercial lease can change during your lease if it contains a rent review clause. Rent clauses can vary between commercial leases – some may detail an open market rent review or retail price index (RPI) rent review. This article will explain what you should consider as a commercial tenant regarding retail price index rent reviews.
Rent Review
A rent review is where a commercial landlord reviews the amount of rent a commercial tenant pays to occupy their commercial property. It will occur periodically and typically every five years. A rent review will usually only result in a rent increase.
One type of rent review is a retail price index rent review.
Retail Price Index Rent Reviews
A retail price index rent review is a type of rent review that uses the retail price index (RPI). RPI is a method with which to measure inflation. The price of goods and services determines RPI, and these can change monthly. Where inflation rises, so do RPI figures, and where it decreases, the same occurs for RPI figures.
Where RPI determines a rent review, the rent is based on the inflation level when the landlord carries out the rent review. Therefore, the percentage of your rent increase will reflect the percentage increase of inflation.
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Key Considerations
If, as a commercial tenant, you are about to enter a commercial lease agreement, be sure to review any rent review clause. If the lease agreement specifies that the rental amount is subject to change per the RPI, there are key considerations to note.
Current Inflation Levels
RPI rent reviews mean your landlords will assess the rental amount based on inflation. Consequently, before you enter a commercial lease with an RPI rent review, you should consider current inflation levels. In the past, RPI has not changed too dramatically. However, since 2022, it has risen sharply. This means that there is the potential for your rent to increase considerably.
Importantly, your commercial lease agreement is a legal contract you must follow. So, if your rent increases and any appeal of this is unsuccessful, you have to commit to a higher rental price.
A “Cap”
If your landlord includes an RPI rent review in the commercial rent agreement, consider negotiating a “cap” on any increase. This means that where inflation suddenly rises rapidly, you can be confident that the rise will never go above a specific figure, that is, a cap. However, your landlord may only agree to this by including a rent review “collar”, which states a minimum amount the rent must increase.
Break Clause
Where your landlord wants to include an RPI rent review clause in your commercial lease agreement, you might negotiate to include a break clause. This grants you the right to terminate the lease before the rent review clause date if you have concerns that the RPI rent review may cause a rental increase that you cannot commit to.
Property Value
Another key consideration with an RPI rent review clause is that it means your rent review will not consider the property’s value. Your rent may rise, yet you may pay less rent for the commercial premises if the landlord assesses it on the market value. Therefore, you may not be getting value for your money in terms of your commercial premises.
This cheat sheet outlines what you should be aware of in your lease agreement.
Key Takeaways
An RPI rent review is where your landlord reviews the rental amount you pay in line with the retail price index. The RPI is based on inflation, that is, changes to the price of goods and services. As an outcome, your rental costs will change, and you will have to pay an increased cost.
Before you commit to a lease with an RPI rent review, you should consider recent increases in inflation. Rapidly rising inflation will impact the rate at which your rental amount increases. Therefore, you might wish to negotiate a cap on the rental increase or a break clause. A break clause allows you to terminate a lease before an end review date and, thus, before the rent increases.
If you need help understanding retail price index rent reviews as a commercial tenant 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 a commercial landlord assesses the amount of rent their tenant must pay and then adjusts it.
A retail price index rent review is a type of rent review where the landlord assesses the rent on the retail price index (RPI).
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