Rent Reviews

It is common for landlords to offer ‘starter rents’ – that is a temporary reduction in rent to get the tenant to sign – followed by a period at a higher rent, and then a rent review at which the ‘market rent’ will be set.

But ‘market rent’ is not always what it seems. The words suggest the market will decide what the rent will be: i.e. the rent may go up or down depending on market conditions. But, as you may notice, rent never goes down. Why is this?

It is because the modern rent review clause has a ratchet built into it which prevents any fall in rent, whatever the evidence from the market suggests. So a rent 'review' is usually a rent hike.

Commercial Property v Residential Property

We tend to have a property crash, or ‘realignment’ every ten years or so. In a property crash there are two different property markets and they respond differently. The freehold market – largely residential – is governed by price, and in a recession, of course, freehold prices fall. 

The commercial market behaves differently. It deals mainly in leases, not freeholds. It can resist the tendency of prices to fall by various techniques. Instead of reducing rent, a landlord might offer a rent-free period or a ‘starter rent’. The aim of the rent-free period or starter rent is to get the rent agreed at the pre-recession rental value so that when rent does become payable (after the rent-free period or starter period is over) the pre-recession value remains the baseline to be used when the rent review comes around. 

The result can be seen in the behaviour of commercial property prices in the 2008 crash. While freehold prices fell by 35% plus, commercial leases continued to deny reality. And, because of the existence of ‘no-reduction’ rent review clauses, these leases were able to keep their pre-recession rental value. 

A standard rent review clause will contain something like this: “The rent will be revised on any review date. The revised rent shall not be lower than the rent existing at the time of the rent review. A memorandum recording the revised rent will be signed and the amount payable will be the revised rent. Six months before the review date the parties will begin negotiating but if by the review date no revised rent is agreed then the revised rent will be settled by an independent valuer in accordance with clause 12 [clause appointing an independent valuer ] below..”

Tips:

1. The first rent review must be after the first break date. Ensure that if necessary you can get out of the lease before the rent review.  

2. Whatever the ‘starter rent’ is, ignore it. Take the advice of a RICS valuer on the likely market rent and base your business plan on the likely market rent after the rent review. 

3. If L will not remove the ratchet clause, offer to agree to a ‘cap’ instead. Eg: “And the revised rent (whether reached by agreement, arbitration or Order) shall not be more than 1.5% higher than the rent existing immediately before the relevant rent review date.”

4. The independent valuer/arbitrator clause: - ensure that the valuer is appointed either by agreement or by appointment by the RICS.