What is Rent Review?
A rent review provision in a commercial lease allows the landlord to review the rent payable by the tenant at certain times during the term of that lease.
By way of example, if the landlord grants the lease for a period of say 10 years, then it is likely that the lease will contain one or more rent review provisions. In the current market, we would expect to see a rent review at year 5. Whether that rent is on the last day of the 5th year of the term or on the first day of the 6th year of the term is down to negotiation between the parties and may have commercial implications.
Either way, a rent review provision allows the landlord to re-assess the rent in accordance with a given mechanism set out in the lease. We discuss the three most common mechanisms below.
Open Market Rent Review
Open market rent review is when the rent is determined by the open market rental value of the property at the date of review. Open market rental value is the hypothetical rent which would be expected for a new lease for the property on the same terms as the lease under review as if it was granted on the date of review.
The open market rental value for a lease is calculated using certain assumptions and disregards. Those assumptions and disregards are generally set out in the lease. By way of example, the lease could assume that the tenant has complied with all repair obligations under the lease or disregard the goodwill of the tenant.
As with any legal document, every assumption or disregard has a commercial implication for each party and ordinarily, the extent of such are negotiated between the parties prior to the lease transaction.
Index-Linked Rent Review
Index-linked rent review is where the rent is increased or decreased in accordance with a particular economic index such as the Retail Price Index or the Consumer Price Index.
The two most common ways to draft the formula is either applying the percentage change in the index to the initial rent since the term commencement or applying the percentage change in the index to the current rent over the past year.
However, drafting the formula for the index-linked rent review provisions in a lease must be reviewed carefully as failure to draft the wording correctly may lead to unintended consequences such as an inflated rent.
Turnover Rent Review
Turn over rent review is calculated with reference to the turnover of a tenant. This mechanism is fairly common in the retail sector and fosters a sense of cooperation between the tenant and landlord. This mechanism is often used in combination with other rent review mechanisms.
For it to work, full disclosure of the tenant’s accounts is required. Moreover, turnover rent review is often more time consuming than other methods, given the difficulty in agreeing what is included in the turnover calculation.
This article is provided by Burlingtons for general information only. It is not intended to be and cannot be relied upon as legal advice or otherwise. If you would like to discuss any of the matters covered in this article, please contact Caroline Turner or write to us using the contact form below.