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A commercial lease is where a landlord grants a business owner, as their tenant, the right to sole occupation of their commercial property for their business premises. The tenant pays rent to the commercial landlord in return. A lease agreement contains many different terms and clauses regarding rent. It is a legally binding contract between a landlord and tenant, so both parties must adhere to this. One such provision is a stepped rent review clause that seeks to review rent periodically, and this article aims to help you understand these types of clauses.
Rent Review
A rent review clause in a commercial lease is a provision in the lease agreement that covers the rent a tenant pays. It allows a commercial landlord to periodically review how much rent they charge their tenant intending to raise this. The longer a lease, the more likely it will contain a rent review clause. A rent review will typically occur every three or five years, and the lease agreement will specify the exact time.
When a rent review occurs, the rental amount will stay the same or rise. There are various methods by which a landlord can review the rent. These differ in terms of the technique they use to assess the rent level. Rent review methods include:
- open market rent review;
- index-linked rent review such as a Retail Price Index (RPI); and
- a stepped rent review.
A rent review clause will specify the steps to take regarding the rent review. This includes how the commercial tenant appeals a decision they disagree with.
Stepped Rent Review
A stepped rent review is very different from other rent review methods. It reviews the rent based on an agreement between the commercial landlord and tenant as they enter the lease. This details an agreed fixed amount that the rent can increase at specific times agreed upon by both parties. It is, therefore, not strictly a review of the rent but more an approved anticipated rent increase at particular intervals.
For example, a landlord and tenant may agree that the rent will increase by £500 each year.
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Suitability
A stepped rent review is the easiest and cheapest form of rent review. This is mainly because when and how the rent increases is pre-agreed between a commercial tenant and their landlord. This avoids spending time assessing the rent level using the rent review method type. It also avoids disputes relating to the rent increase.
As the parties to the lease agree on the rent increase and timings of this in advance, the rent increase does not relate to either party’s financial position or in terms of value for money.
Issue
Whilst stepped rent reviews appear uncomplicated and unproblematic, they can cause unintended effects. The nature of the rent increase as an agreed fixed increase means that if you use them for a long-term lease, the result can be an issue.
This is because as the lease progresses and the rent rises multiple times, it could result in a rent level towards the end of the lease term that is critically high for the commercial tenant. The amount of rent to pay could reach a figure much higher than inflation.
This cheat sheet outlines what you should be aware of in your lease agreement.
However, as the tenant agrees in advance to the stepped rent review amount and times for it to change, there is little that they can do about this. It is, therefore, essential to take legal advice before a commercial tenant agrees to a stepped rent review for their lease.
Key Takeaways
If your commercial lease contains a rent review clause, a landlord will assess their tenant’s rent from time to time to raise it. There are various methods by which they may determine the rent level, and the lease agreement will detail which.
This article notes that a stepped rent review clause is an easy and cheap rental method and is suitable for short-term leases. However, it can be problematic as the rent increase will often favour one party only and can result in an absurd level of rent at the end of the lease term.
If you need help understanding stepped rent review clauses in a UK commercial lease, LegalVision’s 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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