FAQ: Rent reviews FAQs
19 FAQs people ask about rent reviews
- When will the rent on my lease be reviewed?
- How will the new rent be determined?
- What is open market rental value?
- What are the main factors which affect open market rental value?
- Will rent reviews take into account any improvements made to the premises?
- What will happen if the premises are being used for a different purpose?
- Will the new rent be affected by any initial discounted rental or rent-free period?
- If the open market rental value has fallen, will the rent be decreased at the rent review?
- Who determines the new rent?
- How much notice will I be given of the new rent?
- What can I do if I disagree with the new rent?
- What factors will help me negotiate a lower rent?
- How should I handle a rent review negotiation?
- Can a rent review include a change to the terms of the lease?
- What happens if the landlord and I cannot agree on the new rent?
- How much is resolving a dispute likely to cost and how long will it take?
- Do I have to pay rent while the level of rent is being disputed?
- What should I do if I can't afford the new level of rent?
- How do rent reviews affect sub-tenants?
1. When will the rent on my lease be reviewed?
The dates of frequency of rent reviews will be included in the lease agreement.
Typically, rent reviews occur every three to five years. For short-term leases, there may be no rent review.
2. How will the new rent be determined?
The basis on which the rent will be determined will be specified in the lease agreement.
The new rent is usually the 'open market rental value' (see 3) of the premises at the date of the rent review. Some leases link the new rent to the increase in the Retail Price Index instead.
3. What is open market rental value?
The open market rental value is the rent the landlord could reasonably expect to receive if the premises were leased to a third party, on similar terms to your lease.
4. What are the main factors which affect open market rental value?
The open market rental value will be affected by the general level of rents for similar premises in the area.
The use of the premises can have a significant effect on the open market rental value. If your lease allows you to use the premises for a variety of purposes, the open market rental value will be calculated as if they are being used for their most valuable purpose.
Suppose, for example, that office rents are higher than rents for storage space. If your lease allows you to use the premises as either offices or storage, the rent will be calculated as if the premises were offices - even if you are in fact only using them for storage.
5. Will rent reviews take into account any improvements made to the premises?
The rent review will normally be based on the condition of the premises when the lease was originally signed. Improvements you have made to the premises will not usually be taken into account in calculating the new rent. It is essential to keep a record of any improvements you make, to ensure that you are not charged extra rent for them.
However, if you negotiate for the landlord to make improvements to the property during the term of the lease, these improvements may well be taken into account in the new level of rent.
6. What will happen if the premises are being used for a different purpose?
The rent will not normally be affected if the premises are being used for a different purpose, so long as the purpose is one of those allowed by the lease and local planning restrictions. This is because the rent will already be based on the assumption that the premises are being used for their most valuable purpose (see 4).
If you negotiate a change to the allowed uses, this could increase the rent.
If you use the premises in a way which is not permitted in the lease, this will not in itself increase the rent. However, you will of course be in breach of the lease and could face legal action.
7. Will the new rent be affected by any initial discounted rental or rent-free period?
Once the discounted or rent-free period expires, rent reviews will not be affected. If you have negotiated a discounted rent until the date of the first rent review, you could face a significant increase in rent thereafter.
8. If the open market rental value has fallen, will the rent be decreased at the rent review?
It depends on the terms of the lease. Many leases include an 'upwards only' clause, which means that the rent can only ever be increased at a rent review. If the rent would be lower (for example, if the open market rental value has fallen), the rent stays the same rather than being reduced.
9. Who determines the new rent?
Typically, the landlord will inform you of the proposed new rent. You will, however, have the opportunity to object if you feel that the new rent is unreasonable (see 11). In cases of dispute there are often arrangements for a referral to an independent expert or to arbitration (see 15).
10. How much notice will I be given of the new rent?
The lease will usually specify what notice you must be given of any rent review. Typically, the landlord is required to give you three months' written notice.
Leases can be very specific about the deadlines by which the landlord and you must give notices and so on. Check what the consequences are if a deadline is missed. For example, if the landlord misses the deadline for giving you notice, he may no longer be entitled to propose an increased rent.
11. What can I do if I disagree with the new rent?
If you think that the new rent is unreasonable, you should inform the landlord in writing immediately.
The lease may specify a deadline by which you must respond to the landlord's proposal. Failure to meet the deadline may mean that you are no longer entitled to challenge the proposed new rent, and must accept it. It is therefore essential to check the terms of the lease and ensure that you meet any deadlines.
12. What factors will help me negotiate a lower rent?
Any evidence that the fair rent is lower than what has been proposed will help.
A good starting point is to collect information on the rents for other, similar premises. Remember to adjust for any incentives (or premiums) being offered. For example, if a new five-year lease has just been agreed on similar premises at an annual rent of £20,000, but with a one-year rent-free period, then the effective rent of those premises over the five years is only £16,000 per year. (One year rent-free, plus four years at £20,000, averaged over the five years.)
You may also be in a stronger position if:
- the landlord has failed to live up to his obligations in some way
- you have been a good tenant, paying promptly, and the landlord is therefore keen to reach agreement with you
- the local property market is slow and the landlord would face difficulties if you defaulted on your obligations
13. How should I handle a rent review negotiation?
Expert advice is essential.
Many businesses use a surveyor to compile evidence on what the rent should be, and to handle initial negotiations. They involve their lawyers if the negotiations become acrimonious or legalistic.
Wherever possible, aim to reach a settlement with the landlord at an early stage.
14. Can a rent review include a change to the terms of the lease?
A rent review does not include any changes to the terms of the lease. However, you can change the terms of the lease by negotiation with the landlord at any stage.
15. What happens if the landlord and I cannot agree on the new rent?
The lease will usually specify that a third party should resolve the disagreement. Typically, you and the landlord would agree a suitable third party, such as a local chartered surveyor specialising in rent reviews. Otherwise, the lease should specify how an independent appointment will be made.
The lease also usually sets out the procedure, including whether the third party should act as an 'arbitrator' or an 'expert'.
If the third party acts as an arbitrator, you and the landlord will each present your case. Your professional adviser will help you.
If the third party acts as an expert, they usually decide the new rent based on their own knowledge, and without necessarily consulting with you and the landlord.
If you are unhappy with the decision, it may be possible to appeal to the court. The grounds on which you can do this will depend on the terms of the lease. In any case, an appeal is likely to add significantly to your costs.
16. How much is resolving a dispute likely to cost and how long will it take?
You and the landlord usually agree the third party's fees when they are appointed. Typically your share will be at least £1,000.
Usually you and the landlord will also each pay your own advisers' costs, though exceptionally an arbitrator might award costs to you (or to the landlord) if the other is seen to have been behaving unreasonably.
The process is usually relatively quick, taking perhaps one or two months.
17. Do I have to pay rent while the level of rent is being disputed?
You must continue to pay rent at the old rate while the new rent is being disputed.
Once agreement is reached, you will have to make up any difference that you owe and may have to pay interest on the overdue amount.
18. What should I do if I can't afford the new level of rent?
The lease may allow you some way of exiting. For example:
- the lease might include a 'break clause', allowing you to surrender it to the landlord
- you might be able to sell the lease to someone else, or sublet part of the premises
Even where there is no solution like this, you may be able to negotiate a compromise with the landlord. Landlords often prefer a compromise to the prospect of chasing you for payment, taking legal action against you, finding new tenants and the possibility of being unable to recover money you owe if you become insolvent.
Professional advice is essential.
19. How do rent reviews affect sub-tenants?
A sub-tenancy is a separate agreement, and is therefore not usually directly affected by a rent review for the 'superior' lease.
However, it is standard practice to ensure that sub-tenancy agreements match the terms of the superior lease. For example, if you are a sub-tenant with a long-term agreement, your agreement is likely to provide for rent reviews at the same dates as the superior lease.
Similarly, if you are granting a long-term sub-lease, you should ensure that it incorporates appropriate rent reviews. Otherwise you could be obliged to pay a new increased rent while continuing to receive only the original lower level of rent from your sub-tenant.
Where sub-tenancies are offered on a short-term basis, after a rent review any new sub-tenancy is likely to be offered at a new rent which reflects the impact of that rent review.
The article above was written with considerations from Corporate Law tutors in Lancaster and Commercial Law advisors based in Wigan. In relation to the article above our solicitors who serve areas such as Southport, are able to offer expert legal advice on this subject.
Stay in Touch
Stay in touch and up to date with our new focus newsletter
Events and Seminars