Commercial rent review: What does it include?
In this article we look at various aspects of a commercial rent review including the purpose, how often they occur, whether rent can increase during the lease and other things to consider about a commercial rent review.
What is the purpose of a commercial rent review?
When a commercial property is being leased, it is in the landlord’s interest to increase the rent in order to maintain the commercial viability of the lease; conversely, it is in the tenant’s interest to keep the cost of the lease low.
Negotiation over the rent cost is therefore necessary in order to satisfy both parties. These negotiations – known as rent reviews – are formally arranged in advance.
How often is a commercial rent review?
Rent reviews first became common practice after the Second World War and were initially conducted every seven or 14 years. Since then commercial leases (and residential ones) – have shortened considerably and rent reviews have decreased proportionally.
Most modern leases have rent reviews at intervals of between three and five years. Choosing the ideal length for a lease term should be a matter of careful consideration for you as a commercial landlord, as it involves weighing up two factors:
- The cost of the rent review and how often you wish to bear that expense
- The advantage of a potential increase in the price of rent
You should clarify the lease term with your prospective tenant before signing the commercial lease contract.
The lease payment itself is almost always quarterly, on four Old English quarter days:
- March 25th
- June 24th
- September 29th
- December 25th
Lease payments do not impact the regularity of commercial rent reviews.
Commercial rent review: can rent increase during a lease term?
Whether rent can legally increase during the term of a commercial lease agreement without a rent review is dependent on the terms and conditions outlined in the initial commercial lease agreement.
Rent review provisions are almost always included in commercial lease terms of more than five years, with the lease documentation specifying the exact terms.
Other things to consider about a commercial rent review
When a commercial rent review is pending, there are a few things to bear in mind:
- Many leases have an upwards-only provision incorporated in their rent review. This means that the rent can only ever rise; even if the market rate has dropped, the rent will not decrease to match it
- The rent review clause should make provisions in the event of any disagreement or dispute between you and our tenant arising during a commercial rent review. If negotiations are fruitless, the clause may call for an experienced third party such as a commercial property surveyor or arbitrator to value the property and set a lease rate
- Any change in rent can be backdated to the initial review date. If commercial tenants dispute an increase for several months or years, only for a third party to raise the price of rent, they will have to pay the difference, plus interest
At Martin Slowe, our team of landlord and tenant service experts have more than 50 years of experience in the commercial property industry.
If you’re a commercial tenant or landlord with any questions or concerns about commercial rent review, get in touch and we’ll be happy to advise or help you to find a solution.