Rent reviews are an inevitable part of renting or letting a commercial property. A review offers both landlords and tenants the chance to negotiate their rental rate, and when handled well, can be a beneficial arrangement for both parties.
Here’s more information about what a rent review involves, and why it matters to you.
What’s a rent review?
A rent review is an evaluation of the current commercial lease. The review system was introduced after World War II (in a bid to counteract the impact of high inflation levels), and by the 1960s, was carried out by commercial property landlords every seven or 14 years.
These days, rent reviews typically occur every three to five years, and are usually initiated by the landlord.
The focus of the review is to assess the current value of the property. Then, the rental rates are adjusted, based on the condition of the premises and the current market. For example, if average local rental prices have risen steeply in the last couple of years, most landlords will want to increase their rent to reflect this.
Tenants should note that most commercial property contracts state that rent can only be adjusted upwards. This means that the rates can only rise or stay the same; they’ll never be lowered.
How do rent reviews work?
Usually, the rent review process is already outlined in the contract. It’s carried out in one of two ways:
- Based on RPI price. The landlord might use the Retail Prices Index (RPI), which monitors the changes in the prices of products and services in the UK. The rental rate is adjusted to reflect the current RPI, meaning that it’s based on typical levels of inflation across the board, rather than the rental market itself.
- Based on the rental market. Alternatively, the landlord may choose to refer to similar properties in the area, which offer the same sort of lease terms. The rent will be amended to reflect the average rates. This is the more popular way to approach a review, as it relates specifically to the rental market.
It’s common for tenants to be concerned about rent reviews.
However, it’s important to bear in mind that notice needs to be given before the rent review happens (and this has to be in writing). Tenants also have the right to negotiate. The negotiation process sometimes takes place with the help of a third party (such as an advisor or letting agent), and this is especially the case if an agreement can’t be reached.
Landlords should always aim to offer fair terms – i.e. rates that are in-line with the current market or RPI. The same applies to tenants – while negotiating is acceptable, it’s also vital to recognise that the landlord may need to put the price up.
What happens if an agreement can’t be reached?
This is unusual, but does happen from time to time. If an agreement can’t be reached it becomes a dispute, and will need to be resolved, one way or another.
In most cases, there will be a dispute resolution process in place. For example, the majority of commercial contracts include clauses covering dispute resolution, and most require a third party to be brought in to assist with the process.
The worst-case scenario is if the situation escalates. If this occurs, the dispute is usually taken to court. This is a situation that both tenant and landlord want to avoid, as it is costly, time-consuming and stressful.
What are your responsibilities?
Most rent reviews come with certain legally-binding requirements.
A rent review will come with a deadline, which the tenant must adhere to. Failure to respond by the set date counts as a breach of contract, and then becomes a legal matter.
Notification (in a timely manner)
Landlords are expected to give their tenants plenty of notice before a rent review. The industry average is three months.
Continued rent payment
While the negotiations are ongoing, the tenant is expected to continue paying the original sum of rent. They cannot pause their payments, nor can the landlord ask them to pay the suggested higher amount until it’s formally in the lease agreement.
Tenants should note that the new agreed rental rate will be backdated to the original review date. So, if both parties have spent a few months negotiating before coming to an agreement, the tenant will need to pay an extra amount to cover the additional rent not paid during this period. Landlords can also charge interest.
Preparing for a rent review
Both the tenant and the landlord should take the following steps to prepare for the rent review:
- Analysing the market
Both parties should ensure they’re familiar with the local commercial property market. Focus especially on premises that are in the local area, and which offer similar features (e.g. are a comparable size and condition).
- Assessing finances
Although your financial situation shouldn’t directly affect the rent review, it’s a good idea to keep it in mind when you’re agreeing to a new rental rate. If the tenant can’t afford the new rate, then it might be time to look for new premises.
- Considering improvements
If a landlord has made improvements to the property, then it’s likely that these will be factored into the rent review. If the tenant is the one that’s made the improvements, then the landlord may try to use them as a reason to raise the rent, which isn’t entirely fair. Always keep written records of any improvements that have been made, in case evidence needs to be produced during a dispute.
- Keeping it swift (and painless)
If you’re well prepared for a rent review, the entire process could take as little as a month. This is beneficial for the landlord and the tenant. Do your research and gather relevant information before the rent review happens, not during.
Getting professional assistance
Most rent reviews are straightforward, but this isn’t always the case. A good letting agent or property management expert will be able to assist with the process, which reduces the likelihood of any disputes or ‘stalemate’ situations. It’s also a more cost-effective option than hiring a professional arbitrator.