Rent reviews: How to handle a rent increase on your commercial lease
Rent reviews on commercial leases can be complex processes. We explore how they work - and how you can negotiate against a rise
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So, you’ve signed a commercial lease and moved your start-up into a new business premises. You know exactly how much rent you’ll be paying each quarter – but what happens when that changes?
Any long-term commercial lease will likely be subject to rent reviews, during which your landlord might decide to change your rent – potentially introducing a rent increase.
Of course, as a tenant, you want to keep rent on your business premises as low as possible, so it’s fortunate that you don’t have to accept your landlord’s proposed rise without debate. But it is important that you understand how to properly contest an impending rent rise, and how to negotiate effectively for a fairer rent.
So, read on for everything you need to know about commercial rent reviews and how negotiating through them works…
What is a rent review?
At regular intervals – usually every three to five years – your commercial lease will be subject to a rent review.
In other words, your landlord will value the premises and review the rent they’re charging you for it, with a view to adjusting the amount so that it better aligns with current market conditions and the state of the property.
Unfortunately, most commercial leases specify that rent can be adjusted “upwards only”, which means your rent can only either increase or stay the same with each review. Even if market prices are falling, your rent will remain static rather than decrease.
How do rent reviews on commercial leases work?
There are several methods by which your landlord might carry out a rent review.
The process your landlord is required to follow will be set out in the rent review clause of your commercial lease. So, to get the clearest idea of how yours will work, the best thing to do is thoroughly read that clause.
In general, though, it’s likely that your landlord will look to work out your new rent in one of two ways:
- According to open market rental value. This refers to the rent your landlord can reasonably expect to receive for the property, based on its value and the rents that are being paid for similar properties – with similar lease terms – in the local area. The majority of commercial rent reviews are carried out in this way.
- According to the Retail Prices Index (RPI). The RPI measures average changes in the prices of goods and services across the UK. Therefore rent that aligns with the RPI reflects general inflation levels rather than changes in the rental market specifically.
While regular rent increases might sound like a poor deal, the good news is that you don’t have to accept the new rent your landlord proposes. Any increase at all can be subject to review, debate and negotiation…
Negotiating a rent review: The process
While each rent review can differ, in general, a rent review negotiation is likely to follow these stages:
- Your landlord will send, in writing, a trigger notice – in other words, they will inform you that they’re going to increase your rent and detail how much by.
- You and your advisor (more on them below) will respond to the rent increase notice with a counter notice that says you do not accept the landlord’s proposed rise.
- Your advisor will negotiate with your landlord on your behalf. At this stage, a new rent amount that both parties are happy with may be agreed.
- If you and your landlord can’t agree on a new rent, a third party will need to be appointed to solve the dispute (more on this below).
But that’s far from all there is to it. Before a negotiation can get going in earnest, you’ll need to understand some crucial elements of the rent review process…
Understanding your rent review clause
The rent review clause of your commercial lease will explain everything you need to know about your reviews, so it’s worth reading and digesting it even if you’re not expecting a review any time soon.
The clause should explain:
- How your landlord is to conduct the rent review process
- The process that any negotiations need to follow
- How any disputes between you and your landlord are to be solved
As well as this, the clause will detail some crucial dates and timescales that you’ll need to make note of in your diary. These include:
Your rent review dates
It’s important that you’re well aware of the dates on which your rent reviews are going to take place. It may seem unnecessary but it’s actually worth considering your rent review strategy as far as 18 months in advance.
This will show you the best time to start negotiations: if the market is rising, you should look to initiate negotiations as early as the lease permits. If market rents are falling, you should wait as long as possible before starting negotiations, collecting as much evidence as you can that prices are dropping.
When you can hire a rent review advisor
Having the help of a professional advisor or surveyor throughout the review process will likely prove invaluable. But it may be that your rent review clause specifies a particular time frame in which you’re permitted to hire one.
It’s best to get the assistance of a professional as early in the process as your lease allows so that they can start monitoring your local rental market and gathering evidence for what they believe your rent should be.
You don’t want to miss out on the opportunity to have a professional on your side – so be sure not to miss your deadline for hiring one.
The notice your landlord has to give
Your landlord will need to inform you in good time if they’re planning to increase your rent. Typically, they’ll be required to send the trigger notice with three months’ notice, although this won’t be the same for everyone.
You should be aware of this timescale as it may be that, if your landlord doesn’t inform you of an impending rise ahead of the deadline for doing so, they no longer have the right to impose the increase.
How long you have to start negotiations
Your commercial lease will only give you a certain amount of time in which to respond to your landlord’s notice, contest an impending rise and initiate negotiations for a new rent.
It has been known for tenants to end up paying inflated rents because they’ve failed to respond to their landlord within the time limit given – avoid this fate by being fully aware of your deadline so that if the time comes, you can respond well in advance.
Hiring a professional advisor
We would strongly advise enlisting the professional services of a rent review surveyor or advisor.
Such an expert can:
- Help you research the local rental market, value your property and objectively determine the rent you should rightfully pay
- Negotiate with your landlord on your behalf
Hiring professional help will of course be more expensive than doing it yourself, but an advisor/surveyor should easily make up for what they’ve cost by securing you the best rent possible.
How to find the right surveyor/advisor
To find a suitable rent review surveyor/advisor, try consulting:
- The RICS. This organisation, the Royal Institution of Chartered Surveyors, can provide a list of suitably experienced chartered surveyors in your area.
- Other business tenants in your area. They may be able to provide recommendations for surveyors/advisors they’ve worked with.
- Your property agent. If you used an agent to acquire your property, they’ll probably have, or be able to recommend, a suitable surveyor/advisor (they’ll also have the benefit of knowing how the original transaction was brokered, which can also assist negotiations).
Before you choose an advisor/surveyor, ask all of your options for a written proposal 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.
How much will a rent review surveyor/advisor cost?
The fees you pay a rent review advisor will largely depend on:
- The size of the premises in question
- The complexity of the case
It’s often useful to agree a success-related element – for example, they can charge you more if they win you a good result – to ensure they’re incentivised to work for the best possible outcome.
Understanding the market
Understanding the rental market around you is key to negotiating your rent – and coming up with a fair rent to suggest to your landlord.
In order to do this, you’ll need to research local premises that are similar to yours – with similar lease terms – and see what their rents are, and how they compare to yours.
It’s a good idea to have done this research well in advance of your rent review date. That way, if your landlord proposes a rent that seems high compared to what similar properties are achieving, you’ll have the information you need to kick negotiations off already.
For this research to be as accurate as possible, you (or your advisor) should only be researching properties that are truly similar to yours.
You can determine how similar a premises is to yours by comparing:
- How old it is
- The condition it’s in
- The building’s specifications
- Its amenities, for example air conditioning, central heating, good plumbing
- The location it’s in
- The property’s most valuable potential use
When it comes to retail premises in particular, the building’s location can make a huge difference to rent. In some cases, even different sides of the same street can fetch different valuations.
There will be an assumption in place that the property is being used for its most valuable purpose (i.e. that which achieves the highest rent and charges) even if it isn’t. So, no matter what you’re using it for, rent for your space will usually be based on its most valuable potential use.
For example, say that office spaces achieve higher rent than storage space. If you’re using your premises to store stock but it could be used as offices, your rent will be calculated as if you’re using the premises as office space. So, you’ll need to take potential uses into account when looking into other properties.
What other factors will help my negotiations?
Alongside the expertise and negotiating prowess of your advisor – plus the reasonableness of your new rent request – there are several other factors that might help your cause.
For example, your counter proposal is likely to be considered more favourably by your landlord if:
- You’ve been a good tenant who always pays rent and charges on time
- Your landlord hasn’t always lived up to their obligations
- The local property market is slow, and your landlord would find it difficult to find a new tenant if you ended your lease
Solving an ongoing dispute
It may be that you and your landlord are unable to agree on a new rent. Perhaps you even suspect that your landlord is employing delaying tactics; refusing to agree now in order to better capitalise on a rising rental market (this is frustrating for a tenant, but has been known to happen).
The good news is that such disputes can be solved – and your commercial lease will tell you exactly how it should be done.
In most cases, however, your lease will instruct that you appoint a third party, such as a local chartered surveyor specialising in rent reviews, to make the call.
This third party can be placed in one of two roles. Your lease will explain whether they need to act as:
- An arbitrator. In this case the third party would consult both you and your landlord, and listen to and assess your arguments. They would then decide on the new rent based on these cases.
- An independent expert. In this case the third party would use their own expertise to decide on the new rent, often without consulting you or your landlord at all.
Once a third party gets involved, it’s often the case that the dispute is solved within a couple of months. But be aware that it may cost both you and your landlord around £1,000 each to appoint this party.
If you’re still not happy with the result, you might be able to appeal to the court, although this may be an expensive process for you.
A rent review can take as little as a month or as long as several years to negotiate, depending on whether the review leads to an early consensus or a continuing dispute.
So, it’s in your best interests to resolve the matter quickly – which is why recording important dates and thinking about your strategy as early as possible is key.
Once the new rent has been agreed, you’ll need to keep a signed copy of the rent review memorandum – which details the new rent that’s been confirmed – for your records. It’s best to keep this with your copy of your commercial lease.
Negotiating a rent review can be a stressful process – after all, it concerns your hard-earned money and your all-important business premises.
But by being prepared, knowing your stuff and getting the advice and help of a professional (and, of course, being a stellar tenant in general), you’ll give yourself the best chance of success!