In the post-pandemic era rent reviews are going to be crucially important for both tenants, looking to reduce costs, and landlords trying to maximise the value of their assets.
Rent reviews are a contractual procedure which is outlined in the lease. It is important that landlords and occupiers are familiar with the lease and the rent review clause if they are to optimise their position.
Below are our top tips to get the most out of the rent review process:
1. Gather all the documentation
Before beginning, it is important to have a copy of the lease to hand as well as any other licences, deeds or memoranda. By doing this you can confirm all the details of the property including the demise, the level of rent and if there have been any improvements which should be disregarded.
2. Is time of the essence?
Arguably the most important element of a rent review is whether it has to be operated at a particular time and whether any formal notices or counter notices are required. This is termed ‘time of the essence’ and could mean that the opportunity to review is bound by the review clause.
For example, a tenant may have to serve a counter notice on the landlord within one month of the landlord’s trigger notice, but in failing to do so the tenant is deemed to have agreed to the landlord’s proposed rental increase – a costly error!
3. Be aware of the rent review date
It is important to know when the rent review date is to avoid strict ‘time of the essence’ provisions, but also because you need to know the date of valuation.
4. Is it an upwards only rent review?
Many rent review clauses provide for upwards only reviews, which means that the rent cannot decrease. However, don’t assume that this is the case, check the lease in its entirety for an upwards/downwards clause.
5. Assumptions and disregards
The rent review clause dictates exactly how the property will be valued at review. You will need to make a number of assumptions (e.g. the property is available to let on the open market) and you must also disregard certain things (such as any improvements a tenant has made themselves). It is important to read all of these and understand them as they are a big factor when determining the rent.
6. Know the market
The rental value of the property will depend on the market and deals being done in the locality. Use a surveyor who is familiar with the market to advise you on property values and negotiation strategies.
If you cannot agree the rent review with the other side, appoint a surveyor who will be able to negotiate on your behalf. Make sure you select your surveyor carefully and find one with the right experience for your market.
8. Third party
If a rent review cannot be agreed via negotiation it can be referred to a third party, who will act as an Arbitrator or Independent Expert. This can be a costly process, so proper consideration should be given before proceeding down this route. Appoint a surveyor who will be able to produce a detailed third party report. They may even be able to save you the costs of the third party referral.
9. Calderbank offer
Depending on the situation there may be merit in serving a Calderbank offer to try to limit your exposure to third party costs if the review has reached that stage. It can be a good strategic move, although the notice is legally binding. Your appointed surveyor will be able to advise you on the benefits and risks of doing so.
10. Late settlement
A prolonged negotiation will incur interest charges and back rent. Try to settle the review at the earliest opportunity and budget for the increased costs and rent should the negotiations run past the review date.
And after all of that...document it. Once the rent review has been settled, make sure you have a memoranda signed by both parties stating the new agreed rent and attach it to your copy of the lease, this way you have proof that the review has been agreed and formalised.
If you’re starting a rent review and need assistance navigating the process get in touch with our Business Space Lease Advisory team. We have 12 offices across the UK providing local market expertise and experience.
About the Author:
Amy Bracey is head of the Business Space Lease Advisory team in the South West, who regularly advises occupiers and investor clients on lease events. She specialises in offices, industrial & logistics as well as healthcare assets. She is also an experienced third party for dispute resolutions.
Contact Amy by emailing Amy.Bracey@colliers.com