Landlords will agree a rent with you when you take the premises. But they have no intention of losing out on any future increases in rent levels. If you take a lease for more than a few years, the landlords will require to have a rent review at periodic intervals. The most usual rent review “pattern” is every five years, but for shorter leases, every three years is common.
Exactly how a rent review will operate will depend on the exact wording of your lease. But rent review clauses normally conform to a standard pattern which has been created as a result of court cases over the years.
The landlords will propose a new rent to you. Tenants often complain about landlords “imposing” a higher rent. But they are not imposing, they are proposing. The landlord has no right to determine the new rent. You can negotiate. If negotiations fail then the rent review procedure set out in the lease will have to be activated. That ultimately leads to some form of decision-making, where an independent third party will decide the rent. The landlord cannot choose the third-party who will make the determination. Unless it’s a person both sides agree to, it will usually be an official body such as the Royal Institute of Chartered Surveyors who will appoint an independent surveyor. Both sides will be free to submit arguments and evidence, and then he or she will decide the new rent.
Much of the rent review provisions in the lease will be taken up with detailing how the revised rent is to be worked out. It’s not simply the rent the premises would be likely to get if they were put on the market at the time. It’s more complicated than that for reasons which I will explain.
The purpose of the rent review is to arrive at the “open market rent” which the property would achieve if it were let at the rent review date – but with a number of assumptions attached to that.
Let’s say that the premises when you took them were a shell – no fittings, just brick walls, exposed wires, screed floors. That’s what your original rent was assessed on. Let’s say that after five years you have turned them into a miniature Palace of Versailles. You shouldn’t have to pay rent based on the value you personally have added to the premises at your own expense. The revised rent should reflect the increase in rental value for a shell-finish property.
Another factor is that the rent for premises is not necessarily precisely rent “for” the premises. It’s actually for all the terms surrounding the letting of the premises. For example, you might have negotiated a rent-free period. A rent-free period was only an initial incentive to you, it should not be assumed to be repeated at every rent review. Instead, it will be assumed for the purpose of calculating the open market rent that there will be no repeat rent-free period.
There are many other assumptions which might either increase or decrease the new calculated rent (all of which are intended to arrive at a figure which is fair for both sides).
You might have to go down that route of having an assessment by an independent third party. Far more likely, you will eventually reach agreement with the landlords. To do this, you will need to have a surveyor to fight your corner.
You will almost inevitably find when you negotiate your lease in the first place that it will state that rent reviews are “upwards only”. This is an example showing how it works. Assume that your starting rent is £10,000 per annum, and rent at the review is assessed at £9,000 per annum. You will continue paying £10,000 per annum. If the reviewed rent is assessed at £12,000 per annum, then £12,000 is what you will pay until the second rent review. If, at the second review, the rent is assessed at £11,000 a year, you will continue to pay £12,000 a year. It doesn’t sound fair, but that is how the property market operates.
Rents are not always assessed on the open market value basis I have described. There can also be “turnover rents”. It involved rent being a specified percentage of the tenant’s turnover at the premises. This was sometimes used by landlords of shopping centres, for example. It is less popular with landlords now that online sales are eating into traditional shops’ turnovers.
Another method which is sometimes used is to link the rent to an index. With that kind of rent review, the rent per square foot will be increased according to the increase in the official index. It is crucial for tenants to verify the exact number of square feet the premises actually occupy.
Although there will be a fixed date at which the rent review occurs stated in the lease – such as, every fifth anniversary of the term – there will be no fixed timetable which the landlord or tenant have to operate under. This is because landlords learned to their cost that they might miss a stipulated date for serving the notice to start the procedure and lose the right to have that rent review. Tenants equally ran the risk of having the landlords’ proposed figure automatically imposed on them if they failed to serve a counter notice disputing the proposed figure in time. So, landlords can start the rent process even after the rent review date has passed; and the third party’s decision on it will be backdated to the rent review date. That could lead to you having to pay the difference between the new and old rent, backdated to the rent review date. Normally, of course, landlords want to review the rent as soon as they can.
Landlords do not benefit by delaying the process in a rising market, because the expert always has to work out what the rent should have been as at the rent review date, not later.