Different Types of Rent Review
Types of rent review
A standard commercial lease will provide for an open market rent review. However, sometimes a different method of rent review will be specified. Alternatives include fixed increases, an index-linked review or linking rent to the turnover of the tenant business.
Open market review
An open market review means that the rent is adjusted (usually upwards only) to reflect the rent the landlord could achieve on a letting in the open market.
The rent review provisions will specify the terms of a “hypothetical lease” that must be valued in order to arrive at the new rental figure. The length of the term of the hypothetical lease needs to be specified, because the rental value may differ according to whether a 5 year or 10 year term is on offer. There will also be various “assumptions” and “disregards” to ensure fairness.
Assumptions generally include compliance by the tenant with its covenants (so that the tenant does not benefit from a reduction in rent because it has failed to keep the premises in repair) and that, if the premises have been damaged by an insured risk, they have been reinstated.
Disregards usually include any goodwill generated by the tenant’s business and any alterations carried out and paid for by the tenant (so that the tenant is not paying for works and then paying a higher rent because they have increased the rental value of the premises.
Fixed rent increases
Fixed rent increases are rare but they can be found in short leases or leases of unusual premises or premises that are hard to value. The rent for each year or number of years is specified in the lease, e.g. £10,000 for year 1, £12,000 for years 2-4 and £15,000 for years 5-7.
Index-linked rent review
With index-linked reviews, the rent is increased (or sometimes decreased) by reference to an index such as the Retail Prices Index or Consumer Prices Index. Such reviews are not common but, as with fixed rent increases, they may be found in short leases or leases of premises that are not easy to value.
Occasionally rent is linked to the turnover of the tenant business. The rent could be entirely turnover-linked, or there may be a mixture of a percentage of market rent and an “uplift” of turnover rent.
For a turnover rent review to work, the landlord needs full and prompt disclosure of the tenant’s trading accounts. A turnover rent review is more difficult and time consuming to administer than other types of rent review but in some circumstances the sense of partnership it fosters between landlord and tenant will be attractive to the parties.