A rent review clause allows a landlord to reassess rent at certain times during the term of a lease. The initial annual rent in a lease may be at below market rates after a certain period of time and having rent reviews at regular intervals allows the rent to be assessed in light of this.
Most modern rent review clauses will be upwards only, meaning that a reviewed rent will only increase or stay the same. Some older leases may allow for the rent to decrease when being reviewed, but this is increasingly rare.
The timing of a rent review is a point for negotiating and including in the Heads of Terms. It is common for these to be every 3 or 5 years.
There are a number of different types of rent review but the most common are open market and index linked.
An open market rent review is where the reviewed rent is assessed as the rent for a new lease on similar terms as the existing lease on the open market at the rent review date. This allows the landlord to assess the current market rate at the review date.
When drafting these clauses in a lease, it is often worthwhile obtaining the input of a surveyor on the what to include in or exclude from the hypothetical lease in any rent review.
In an index linked rent review the rent is increased in line with the increase in a specified index, typically the retail prices index. Such review clauses essentially increase the rent by the same percentage as the index has increased over the rent review interval, for example the term commencement date and the date of the first rent review.
It is important that index linked clauses are read very carefully as lawyers are not mathematicians and simple mathematical mistakes can easily lead to provisions that compound increases and artificially inflate or deflate rents.
Typically a rent review clause in the lease will state that time is not of the essence for a rent review. This means that if the rent is not reviewed on the rent review date it can be reviewed at a later date and backdated to the rent review date, whilst during the intervening period the current rent remains payable. This could leave a tenant with large backdated rents to pay together with interest. It is important therefore that a tenant has the ability to instigate a rent review, in order that they do not find themselves in the situation of having a very large invoice from a landlord for backdated rent.
Unless there are drafting errors, it should be fairly simple for the parties to agree the reviewed rent where the rent review is indexed linked. However, if there is an open market rent review the parties may not be able to agree the new rent. If this is the case, then most rent review clauses will allow the parties after a certain period to appoint a surveyor, to determine the rent.
If you need any advice on rent reviews, please contact a member of our commercial property law team in confidence here or on 02920 829 100 for a free initial call to see how they can help.
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