Commercial property contracts - to review or not to review? That is the question

A key question facing both landlord and tenants when negotiating commercial property lease terms is whether to fix the rent across the whole term, or whether to include a rent review clause/s mid-term, and if so whether those rent review clauses should be on a fixed basis or an open market basis.  As this is a crucial aspect of any commercial lease,  careful consideration needs to be applied during negotiations to ensure the contract works to your business’ benefit. The best way to ensure your interests are protected is to consult with one of our Commercial property expert lawyers, who will work to ensure the contract works for you. What is the difference between the three (main) options?

The benefit to the tenant for this option is that it provides absolute certainty that the rent will remain the same, which is excellent for cashflow and budgeting purposes, particularly for new businesses.  However, from the landlord’s point of view, it can be disadvantageous, particularly on longer-term leases since the rent will remain the same even though market rents may have shifted considerably since the lease was granted.  This option is usually best for the tenant but worst for the landlord, however the landlord may accept such an arrangement for a low-demand property or for shorter leases or maybe where the landlord believes that the rent is agreed at a good level in any event and therefore is relaxed about the lack of review.

This option allows the rent to be staged across the term, so that for example the tenant can benefit from a lower initial rent (i.e. for the first year) but with the knowledge that a pre-determine increase/s will apply at a set point/s during the term.  The benefit to the tenant in this option is that they have certainty of knowing what the applicable rent will be throughout the term, which again is good for cashflow and budgeting purposes. It may also allow them to agree a very good concessionary rate in the first year or two, which can be vital for start-ups and SMEs.  The landlord has the benefit of knowing that the rent will increase, when it will increase and to what level. The potential downside for both parties is that the pre-agreed fixed rent increase may not correlate accurately to market rents; there is the risk that one party may be left disadvantaged during the term as a result.

These are very common in modern commercial leases and are usually applied on an ‘upwards only’ basis.  This means that if open market rents have increased by the time of the review, then the passing rent will be increased in line with the open market rent.  If, on the other hand, open market rents have remained constant or even decreased by the time of the review then the passing rent will remain the same. Therefore, it operates like a form of ratchet in the landlord’s favour, such that at no time the rent will decrease, but it will keep pace with open market rents if they go up.  As you may well imagine, this option is very attractive to landlords, but less so for tenants who have the uncertainty of not knowing what their rent will be until the time the review comes about and a ‘rent review Memorandum’ can be agreed and signed. If the parties cannot agree on what the rent review should be, usually the rent review provisions in the lease will provide a mechanism for third party expert determination.

Therefore, if you are new to commercial leases or unsure about how to negotiate rent review terms or clauses, it is advisable to contact one of our expert Commercial Property LawBriefs to protect yourself. The author of this article is expert LawBrief Ashley Gurr. For further business legal advice, please enter an enquiry or call us today on 020 3808 8314 and speak to a member of our friendly Client Care Team.