Review and Renew in 22
Published 17 March 2022
For many, business premises rent represents one of their biggest costs. Whether it’s paying for a high profile retail unit, taking a lease on modern offices, or renting enough factory and warehousing space to operate efficiently, almost every business will spend a significant proportion of its budget on the building it occupies.
In the current climate of high inflation, cost control is crucial, so understanding how to negotiate a rent review is vital if a business is not to be lumbered with an ongoing cost above what it could have been.
The rent review is a necessary and fundamental part of any lease, and yet something which can cause a disproportionate amount of hassle. And yet it doesn’t have to be if landlords and occupiers alike approach every rent review with a rather more collaborative attitude.
Of course, investors will want to maximise their returns, while businesses will want to minimise their costs. Ultimately a balance has to be found which is fair to both parties – and which, in these uncertain times, is sustainable as well.
Unless the amount of the rent increase is written into the initial lease (fixed or linked to RPI, for example), then each rent review will be a negotiation process after careful understanding of the market forces. Usually the landlord, with the help of a surveyor, will assess what the market rent should be, based on what comparable properties are achieving.
If landlord and tenant cannot find common ground, a rent review can be referred to arbitration or independent determination (depending on the terms of the lease), but only as a last resort. Not only is it time-consuming, but it is costly, and those costs can be awarded against either party. Generally, it is better to reach a negotiated settlement which works for both.
It is the quality of that evidence which is key. A compelling case in such negotiations will be based on clear examples of the rents that comparable buildings in comparable locations are achieving. Obviously this is easier in the case of a parade of identical retail units, or a business park of similar sized industrial units, and more difficult for larger, unique buildings. As ever, expert advice is key, and can save a lot of money in the long run.
A commercial rent review is a technical process which needs careful consideration based on available evidence reflecting the detailed lease terms. Whilst an element of negotiation is required, it should not be a continuous exchange of figures in an attempt to reach agreement.
One aspect which is currently causing a lot of heartache is a rent review that is backdated. If such a review is written into the terms of the lease, then just because it isn’t implemented on the stated date does not mean that the landlord cannot implement it at a later date and backdate any increase to the stated review date (provided the terms of the lease allow this, which is usually through the phrase ‘time is not to be of the essence’). Interest can usually be levied on the backdated sum too.
Tenants, therefore, need to make sure they fully understand the terms of their lease, and not assume that just because a rent review date has passed, that it won’t happen, nor that they won’t have to pay the increased rent from the rent review date.
Landlords, on the other hand, need to consider the likely effects of presenting their tenants with an unexpected bill for a backdated rent increase. If this will endanger the tenant’s business, it could put at risk the viability of the lease itself, which would be a rather counter-productive strategy. As in all negotiations, the best result is always a win:win.
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