Handling a rent review: Key questions answered
Nelson Bakewell’s Margaret Walsh looks at how you should tackle a rent review
The key to a good rent review negotiation is preparation.
Rent reviews most typically occur every five years, but don’t leave it until the due date to plan your response. The vast majority of rent reviews are ‘upward-only’ in nature and enable the landlord to benefit from any rental growth that has taken place since the last review. This means if market rents have gone up, then your rent will probably increase too. If rents are static or have fallen, your rent will remain the same until the next review or expiry of your lease.
However, any increase is subject to debate and negotiation. Naturally, as a tenant you will be focused on minimising any uplift.
When should I start preparing?
The rent review clause in your lease will direct how and when the rent should be reviewed. Usually by reference to a hypothetical letting of the subject property having regard to open market rents paid for comparable properties let at or close to the rent review date. It makes sense to start considering your rent review strategy about 18 months before the review date stated in your lease. If you haven’t already, make a diary note of this date now.
Even if you don’t engage professional advice at this juncture, you should check your lease to ensure it does not stipulate a time limit within which either the landlord or tenant has to issue, or respond to, notices instigating the review. It has been known for tenants to end up paying inflated rents simply because they have failed to respond within the time limit. This is particularly pertinent if your lease has a break option with strict time limits around the same time as your rent review.
About 12 months before the review date, either you – or more likely your appointed agent – should start to monitor the local rental market. This will allow you to set a budget rent and to establish in which direction market rents are moving and therefore the best time to start negotiations. If the rental market is rising you should instigate negotiations as early as the lease permits. Conversely, if rents are falling you will want to wait as long as possible. This strategy will help furnish you with the most favourable comparable market evidence.
How long will it take?
The length of time it takes to negotiate is dictated by the stance of the parties and how aggressively they negotiate. Depending on the level of either consensus or dispute, a rent review can take as little as a month or as much as several years to negotiate.
What happens if we can’t agree?
If a rent cannot be agreed or your landlord is employing delaying tactics – a common occurrence in a rising rental market – the lease will have a dispute mechanism. Normally, this can be operated several months before or at any time after the review date and involves the appointment of either an arbitrator or independent expert to determine the rent. Once appointed, the third party will usually direct a timetable for making representations to him to determine what the new rent should be.
In the majority of cases the landlord and tenant will agree the rent within this timetable, thereby achieving the desired result of reaching a swift conclusion to negotiation. Where the parties do not agree the revised rent, a third party will determine it following representations from both sides. An arbitrator has the power to award costs against the losing party. Consequently this can be an expensive exercise.
How is rent calculated?
It is a common error to assume that the market rent achieved on other properties should be directly applied to your property at review. This is the approach your landlord will take to achieve the highest possible rent. They will always quote the highest rents achieved on the best buildings for the most favourable terms.
However there are various factors that can be brought into the negotiation which may help counter proposals to increase the rent. Tenants are often unaware of these factors. The rent review clause will usually contain various valuation assumptions and disregards to be made. These will relate to matters such as improvements you have made to the property at your own cost that the landlord attempts to ‘rentalise’.
What else might they use to increase the price?
In addition, the terms of your lease when assessing open market rental value can be critical. If the terms differ from those being agreed on new lettings then the rental value of your property may also differ. This covers a variety of factors from repairing liability to differences in the length of lease agreed.
Also, when considering open market rental transactions, allowances may be needed to account for differences in the properties with which you compare the subject. These factors can be wide and varied but some that regularly arise are property age, specification and amenities.
For example, offices that have air-conditioning will usually attract a higher rent than those that don’t; a brand new property in the same location will attract a higher rent than an older property offering equivalent amenities. Location is also important particularly with retail property where the difference in value for one side of the street to another can be substantial.
What should i watch out for?
Another interesting feature of a rent review clause is that while it may appear to direct you to do one thing, in reality it can mean something else entirely. The length of term is a classic example. It is often expressed by reference to the original number of years granted but has been construed by the courts in a number of welldocumented cases to mean the unexpired residue of the lease. In today’s market, shorter leases are becoming the norm and therefore it may be that if the length of your lease is longer than the market norm this could result in mitigating any proposed rent rise.
Is it worth appointing an agent?
When you arrive at the intricacies of the process it becomes clear that taking the advice of a professional rent review surveyor is advisable. Most tenants are specialists in running their businesses but not rent review negotiators. Anyone can agree a revised rent but it takes an experienced advisor/negotiator to agree the best possible rent for you. It is for this reason that we strongly advise appointing an agent from day one of the process.
The RICS can provide a list of suitably experienced chartered surveyors in your area. Recommendations from other occupiers in your area can also be a useful guide. If you used an agent to acquire your current property they will probably have or be able to recommend a suitable advisor. They will also have the benefit of knowing how the original transaction was brokered and this can also assist negotiations.
What do they cost?
The fees you pay a rent review advisor will depend on the size of property and complexity of the case. It’s often useful to agree a success-related element to your fee agreement to ensure that the agent is sufficiently incentivised to get you the best possible result. Before you appoint an advisor, get a written proposal from two or three agents outlining what they will do for their fee. This is a good way to establish who will work best on your behalf. Remember the agent offering the lowest fee may not always be the best candidate.
Margaret Walsh is a divisional director specialising in rent reviews at property consultants Nelson Bakewell.
RENT REVIEW TIPS
1) MAKE A DIARY NOTE Start putting together a negotiation strategy 18 months before the review
2) CHECK NOTICE AND TIMING PROVISIONS
3) MONITOR THE MARKET Are rents rising or falling?
4) ALWAYS REMEMBER While you are seeking to minimise your rental liability your landlord is seeking to maximise theirs
5) DON?T TAKE YOUR LANDLORD?S QUOTED RENT AT FACE VALUE There are bound to be factors affecting value that they have purposely overlooked
6) CONSIDER YOUR PROPERTY AND ITS LOCATION How does it compare to other properties let recently?
7) BE CAREFUL There will be issues in the rent review clause and lease that will impact on rental value
8) YOUR LANDLORD MAY EMPLOY STALLING TACTICS Consider the merits of appointing a third party to assist the process
9) PITFALLS The review process is full of them
10) GET THE MOST FROM YOUR NEGOTIATION Seek professional advice as early as possible
Read more on what to consider before signing a lease on a commercial property here.