A Guide to Rent Reviews for Commercial Leases
The commercial rent review process can be complicated for both landlords and tenants alike, and needs to be carefully dealt with to avoid ending in dispute.
Rent reviews are a procedure that is laid out in the relevant clause in a commercial leasing agreement. It is important that tenants and landlords are familiar with their lease to ensure an opportunity to renegotiate a new rate of rent is not missed.
What is a Rent Review Clause?
Most leases for commercial property will include a rent review clause which states that the rent payable be reviewed every specified number of years, usually 3 to 5 years, in line with market values. It is important that the wording of the rent review clause make clear that the rent review is recurring every 5 years (or specified time) and not a once off event after the first 5 years.
What is an ‘Upwards Only’ Review?
Prior to 2010 commercial leases included an ‘upwards only’ clause which meant that the rent could not drop below what it was on the date of review. In essence this meant that even if market value deemed a rental rate below what a tenant was paying the rent was not adjusted downwards.
However since the enactment of section 132 of the Land and Conveyancing Law Reform Act 2009 ‘upwards only’ rent reviews are prohibited in all leases created after 28 February 2010. Therefore, parties may agree to a lower or higher rent or remain at the same level depending on a review of market conditions.
How is a Rent Review conducted?
Rent reviews are usually initiated by the landlord who appoints a Chartered Surveyor to assess the market value of the property and serves a rent review notice in writing to the tenant with a revised rate of rent. However if the landlord does not take action when a rent is due for review the tenant is entitled to initiate the process and engage a Chartered Surveyor to conduct the review. It is important to be aware of any deadlines to not miss the rent review opportunity.
Once a review is initiated the opposing party must reply in writing if they are not in agreement with the newly proposed rental amount. The recipient of the offer is entitled to ask for evidence as to how that new figure was reached. This is usually in the form of comparable evidence, i.e. rental value of other similar properties in the same or a comparable area.
Whether you are a landlord or a tenant a Chartered Surveyor’s experience in assessing rental market value and negotiating on your behalf is invaluable in what can be a complex and time-consuming process.
What is Market Rental Value?
Market Rental Value forms the basis of the rent review. The proposed new figure must reflect open market rental value which is essentially what the property would be expected to achieve if it were available to let on the open market.
The recipient may ask for an explanation of how the proposed new rate of rent was arrived at i.e what measures were taken to ascertain market value. This could be as simple as comparable evidence whereby a similar property in the same or a comparable area is available at a specific rate of rent.
Solving a Dispute
If an agreement between landlord and tenant cannot be reached the case can be referred to the Society of Chartered Surveyors who appoint an independent arbitrator to negotiate with both sides to settle the dispute.
Appointing a Chartered Surveyor
Rent reviews can be a complex process, an experienced chartered surveyor is perfectly placed to undertake the task of representing either a tenant or a landlord. They will have expert knowledge of the current market trends and be well acquainted with similar property types. They will fully understand the process and timelines involved ensuring that opportunities to negotiate a new rate of rent are not missed.
O’Neill and Co have many years of experience conducting rent reviews on behalf of both landlord and tenants. Our team of chartered surveyors are valuation experts and stay up to date with current market trends and predictions to ensure we deliver the most accurate advice to our clients.
We are members of the Society of Chartered Surveyors Ireland (SCSI), Royal Institution of Chartered Surveyors (RICS) and the RICS Valuer Registration Scheme.
If you have a rent review due or have any other query in relation to a commercial lease we’d be happy to help. Contact us on 045 856604 or email darac@oneillandco.ie