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Leases and Rent Reviews | Don’t leave it too late!

The purpose of a rent review is to regularly reassess the rent that the landlord is offering at different intervals within the lease, usually, every three to five years. It enables the landlord to review the current value of the property and the level of rent payable.

The most common rent review provisions found in leases today are:
  • Upwards-only rent reviews

This states that the rent can only be adjusted upwards.The rates will either rise or stay the same.Within the lease these clauses are usually phrased so that the reviewed rent will be the higher of:

- The market rent at the date of the review
- The rent that was being paid at the rent review date

BEWARE:  The Commercial Rent (Prohibition of Upward-Only Reviews) Bill was presented to Parliament in June 2021.  If enacted, this Bill will prohibit the use of upward only rent reviews in commercial leases.  Shockingly, the proposal is for the bill to apply retrospectively which would void existing leases with such clauses.  It may be beneficial for landlords with long leases to review their options now to protect against the effects of this legislation being introduced.  The Bill will have its second reading in March 2022.  Contact our Commercial Property team if you have concerns about your lease on 01926 491181 and we await with interest to see if this will be passed.

  • Fixed Increase Rent Review

This is when the rent is based on a fixed increase at pre-agreed intervals.Figures will have been agreed between the landlord and tent when negotiating Heads of Terms.Whilst this provides the parties with transparency and clarity on payments, it may be restrictive on both parties depending on the economic climate.

  • RPI/CPI  Index Rent Review

An RPI rent is one which increases in line with the Retail Prices Index (RPI).RPI is based on changes to retail prices which may not always be an accurate reflection of the value of real property especially if any improvements have been made to the property.The Consumer Price Index (CPI) measures the average change in prices over time that a consumer will pay for goods and services purchased in households.This approach remains quite popular with landlords who have seen rent levels rise even during the pandemic.

  • Open Market Rent Review

This is when the rent is set to a level reflected by the open market and what the ‘reasonable’ person would consider the rent to be for the same lease, on the same terms and in the same area.  This type of review is obviously hugely affected by the state of the property market at the relevant review date.

Each type of review has its merits and our experienced Commercial team will provide clear and transparent advice on your individual circumstances to protect both your financial and commercial interests.

What happens if there is a dispute?

Whilst the Government’s Code of Practice published in June 2020 encouraged landlords and tenants to provide best practice when discussing rental payments and negotiating solutions, there will be occasions when this cannot be achieved.  In these circumstances an Arbitrator will usually become involved but if the situation escalates, the dispute is usually taken to court.  Effective drafting of leases will reduce the likelihood of disputes occurring and provide a long-term solution to the rent review process.

A recent Court of Appeal case MonSolar IQ Ltd v Woden Park Ltd highlighted that the court will intervene to correct mistaken drafting when the contractual provisions are “nonsensical or absurd”.  This case involved a 25 year lease which provided for a starting rent of £15,000 and included a formula for calculating future rents that referenced the General Index of Retail Prices (RPI).

The effect of the formula was not to increase the rent annually in line with RPI but to increase the rent at a much higher rate.  Assuming an annual increase in RPI of c.3%, the effect of the literal interpretation of the formula would be for the year 25, rent under the lease to increase to £76 million as opposed to £30,000 if the rent increased in line with the RPI.  The dispute concerned the effect of that calculation.

The Court of Appeal found for the Tenant.  The rent review formula should be corrected as a matter of construction under the “Chartbrook principle” whereby clear drafting mistakes can be resolved.  In this instance the calculation should be construed so that the rent increased in line with RPI.

For details of the full judgment, please click here

If you have any queries in relation to rent reviews or an existing lease, please contact our experienced commercial property team on 01926 491181.

Christopher Houghton                                       Sat Bhandal                                               James Williams




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