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Next up in our series on commercial leases is the thorny issue of rent reviews. Rent reviews have historically been bad news for tenants, as, prior to the passing of section 132 of the Land and Conveyancing Law Reform Act 2009, it was illegal to arrive at a rent which was less than the passing rent.
This was a bitter pill for tenants to swallow, as, following the property crash, many found themselves paying more than the market rent for their commercial premises – considerably higher. According to the Investment Property Databank (IPD) indices, rental levels for retail fell by as much as 63 per cent, office by 59 per cent, and industrial by 68 per cent. Even if the landlord acknowledged the gap, he or she could not legally agree to a reduction in the rent.
Leases entered into since 28th February 2010 (when section 132 of the Act came into force) are obviously exempt from that proviso and, at review, the parties may agree to a lower rent, a higher rent or to remain the same, depending on market conditions.
Market rental value
This is the basis of the rent review. Be aware that you cannot just pick a number out of the air. You will have to be able to show that the proposed new rent is what the property would be expected to achieved if the property were available to let on the open market.
When and how do rent reviews occur?
The interval at which rent reviews occur is stated in the lease. Three or five years are common. Be sure you are clear on the conditions of the rent review clause before entering into a lease, particularly a medium- to long-term one.
That a review is stipulated in the lease doesn’t mean it automatically happens. One or other party to the lease must initiate it in writing and should include a proposed figure for the new rent. Remember that it must reflect open market rental value. It is important to be aware of any built in deadlines or you may miss your opportunity to look for a change.
The other party must reply in writing immediately if it is not in agreement with the proposed figure. The recipient of the offer may ask for the basis for the figure to be supplied, in other words how it was arrived at. This could be comparable evidence – for example, that a similar property in the area or a comparable area is available at a similar rent.
Whether you are a tenant or landlord, a Chartered Surveyor may negotiate on your behalf, or indeed offer advice on the procedure or the appropriate rent.
What happens if we cannot agree on the new rent?
Check your lease to see what procedure is stipulated for resolving a rent review dispute. Generally speaking, the opinion of an independent third party should be sought on the new rent, where agreement cannot be reached between the tenant and landlord. An independent third party could be a Chartered Surveyor specialising in valuation, for example. You’ll find a list of independent third party resolvers here on the SCSI (Society of Chartered Surveyors of Ireland) website. Both parties must agree on the independent third party. The lease will probably say who should pay for the services of the third party – often it is split equally between both parties.
Where you are sub-letting or dealing with an assignee, things can get more complicated. Read our blog on commercial leases for more information on these types of arrangements.
O’Neill & Co are Chartered Surveyors specialising in valuation and as such are perfectly positioned to advise on rent reviews and commercial leases in general and to negotiate on your behalf. We can also act as an independent third party expert. Contact us on 045 856604 with your query, or read through our recent blogs to find out more about commercial leases.
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