Understanding the Commercial Rent Review Process: A Guide for Tenants and Landlords
The commercial rent review process is a crucial part of many commercial leases, ensuring that the rent reflects the current market conditions as at the rent review date. It typically occurs every five years. While the process can seem complex, understanding how it works can help both landlords and tenants navigate potential challenges. Below is an overview of the commercial rent review process and what both parties can expect.
The Timing of Rent Reviews
The timing of rent reviews depends on the specifics outlined in the rent review clause of the lease. Usually, the process is initiated by the landlord or their agent, who sends a rent review notice to the tenant. Once this notice is received, the rent review officially begins.
Tenant Representation
When the rent review is triggered, tenants may choose to appoint a representative, such as a tenant rep agent or rent review surveyor, to act on their behalf during the negotiations. Having an agent can be particularly helpful, especially when navigating the complexities of rent reviews, to ensure the rent adjustment aligns with current market conditions and the lease’s terms. Similarly, the landlord will often engage an agent to represent their interests during this process.
The Rent Review Clause
The terms of how the rent is to be reviewed are typically set out in the lease agreement under the rent review clause. This clause outlines the methodology for adjusting the rent and may specify whether the review is based on factors such as open market value, or a fixed increase. The rent review clause also dictates how often reviews can occur, the timing for issuing notices, and the process for resolving disputes between the landlord and tenant.
Impact of Tenant Works
A key consideration in the rent review process is that tenant works, which improve the floor or property, are generally disregarded. The rent is reviewed based on the landlord’s original specification of the space, when the tenant initially leased it.
This is why it is important to have a Schedule of Condition attached to your lease as a reference point to the landlord’s original specification.
Negotiation of Rent
Once the rent review is triggered, both the landlord and tenant (through their respective agents) will engage in negotiations. These negotiations are typically based on comparable market evidence of similar space and location. This evidence helps both parties determine a market rent for the property.
In an ideal scenario, both parties come to an agreement on the revised rent. In this case, each side will pay their own agent fees, and the new rent will be documented via a Rent Review Memorandum.
However, reaching an agreement is not always possible, especially if there are significant differences in expectations.
Dispute Resolution: Third Party Determination
If the landlord and tenant cannot agree on the revised rent, the next step is to proceed to third party by appointing either an independent expert or an arbitrator. This will be determined based on what is set out within the rent review clause. The parties involved will each submit a Precis of Evidence to the third party, outlining their respective positions.
In some cases, the third party may hold an oral hearing where both sides can present their arguments in person and cross examine the other party. Alternatively, the third party may make a decision based on written submissions only. The expert or arbitrator will then make a binding decision on the revised rent based on the arguments presented by both sides which would include comparable evidence and other relevant factors.
Conclusion
The commercial rent review process is a vital aspect of many leases, and understanding how it works is essential for both tenants and landlords. While the process can seem daunting, it’s important to approach it with a clear understanding of the lease terms, market conditions, and the role of agents and third parties. By navigating the rent review process effectively, both parties can ensure that the rent remains fair and reflects the true value of the property. Whether through negotiation or third-party determination, the goal is to reach a resolution.
If you would like assistance with your upcoming rent review, please contact us.
