PROPERTY costs are often one of the biggest outgoings of a business, and as companies face rising cost pressures elsewhere, including wages, energy, and materials, making sure they negotiate the right commercial property lease is more important than ever.
When agreeing a new commercial property lease, the initial rent is negotiated and agreed between the landlord and tenant based on market value at the time. Where the term of the lease is longer than a few years, the initial rent may not represent the true value of the premises for the whole term and so most leases contain a rent review clause that allows for the rent to change over time, in line with the changing value of the premises and the lease.
The most common type of rent review clause provides for the rent to be reviewed to the best rent available on the open market – an open market rent review. Of course, there are other ways to carry out a rent review and it is important to understand these from the outset.
:: Indexation – where the rent is increased in line with the increase in a published index, such as the Retail Price Index. This offers the advantage of simplicity and ease of calculation, but may not accurately reflect changes in the value of property, which is influenced by different factors and can move up and down depending on the market conditions at the time.
:: Turnover rent – where the tenant pays a (lower) basic rent, plus a percentage of the turnover of the business (usually in retail) carried out at the premises. This can be a way of sharing the risk of an uncertain new venture between the landlord and tenant, and also provides an incentive for the landlord to help ensure that the tenant’s business is a success. However, the burden of producing accounts and demonstrating the level of turnover falls on the tenant, and can be onerous. The rent payable can vary from year to year, dependent upon the success of the business.
:: Stepped increases – where the rent increases are agreed at the outset. This offers the advantage of simplicity and certainty, but may not reflect actual changes in the value of property over the term.
Typically in Northern Ireland, a commercial lease will provide for an open market rent review, i.e. rent is reviewed to the level of the best rent obtainable for the property on the open market, often at 2 or 5 yearly intervals.
To establish the open market rent, it is assumed that there is a willing landlord and a willing tenant (not necessarily the current landlord and tenant), and that the hypothetical lease is to be granted (usually) for a term equivalent to the unexpired residue of the term of the existing lease.
The hypothetical new lease to be valued is usually broadly on the same terms as the existing lease other than rent, although some specific provisions of the existing lease may be expressly excluded, particularly if some personal concessions have been given to the original tenant.
A standard rent review clause will also contain various assumptions (e.g. that the tenant has complied with its obligations under the lease so far, and that the property is ready for immediate occupation and use), and disregards (e.g. any improvements made at the tenant’s cost, and any goodwill attributable to the tenant’s current occupation).
Rent reviews often give rise to disputes – after all there is much at stake for both parties – so every effort should be made to ensure that the rent review is carried out correctly with input from an experienced surveyor who can suitably assess and represent you, either as landlord or tenant, in the process.
Once agreed, the reviewed rent should be recorded in a rent review memorandum, which should be signed by the parties in duplicate, and attached to the original and counterpart lease.
If agreement can’t be reached, then it's off to the Northern Ireland Lands Tribunal where an expert tribunal member has the final say.
:: Garrett O’Hare is an RICS member and managing director of Bradley NI, a commercial and residential property agency with offices in Belfast and south Down
