Lease management: Rent reviews

Your commercial lease provides for a rent review, and the review date is approaching. What happens next?

The first step is to check the rent review provisions in the lease. These should set out when the review takes place, how the revised rent is calculated, the procedure to be followed and what happens if the landlord and tenant cannot agree.

Depending on the wording of the lease, the parties may agree the revised rent directly. In other cases, surveyors will negotiate on their behalf. If agreement cannot be reached, the lease will usually provide for referral to an independent surveyor or another third party.

However the revised rent is determined, it is important that the outcome is properly documented. A clear written record can help prevent future uncertainty about the amount payable, the date from which it applies, and that the rent review process was completed – even if there is no change to rent.

Considerations for landlords

A landlord should diarise each review date and begin the process in good time. Even where a late review may still be possible, delay can affect cash flow, make agreement more difficult to achieve and impact valuation.

The landlord should consider:

• The review mechanism: Is the rent assessed by reference to open market value, inflation, turnover or another formula?

• Notice requirements: Does the lease require a formal notice, and must it be served in a particular way?

• Timing: Are any deadlines strict, or can the review be initiated after the review date?

• Backdated rent: Does the revised rent apply from the review date, even if it is agreed later?

• Interest: Does the lease allow interest to be charged on the shortfall between the old and revised rent?

• Documentation: The agreed rent should be recorded clearly and retained with the lease documents.

Landlords will generally want the review concluded promptly so that any additional rent is invoiced and paid as soon as possible. Recording the agreement also reduces the risk of uncertainty when dealing with arrears, refinancing the property or selling the landlord's interest.

Considerations for tenants

Tenants should not assume that continuing to pay the existing rent means that a review has been abandoned. Where a revised rent is agreed after the review date, it may take effect retrospectively.

This can result in a substantial balancing payment becoming due, potentially together with interest if the lease permits it. Tenants should therefore review their lease, budget for a possible increase and consider making an appropriate financial provision while negotiations are continuing.

A tenant should consider:

• Budgeting: What increase could reasonably arise under the review formula?

• Cash flow: Could the business meet a backdated payment if the review takes time to conclude?

• Professional advice: Would a surveyor's assessment assist in challenging or negotiating the landlord's proposal?

• Interest: Could interest become payable on any rent shortfall?

• Finality: Does the written agreement make clear the revised rent, its effective date and whether any balancing payment remains due?

• Tax: Will the revised rent affect the tenant's Land and Buildings Transaction Tax position?

Once the review has been settled, documenting the outcome gives the tenant certainty that the revised rent has been agreed and helps avoid the matter being reopened later.

LBTT considerations

A change in rent can affect the Land and Buildings Transaction Tax (LBTT) calculation for a non-residential lease.

Tenants are generally responsible for submitting an LBTT lease review return on every third anniversary of the lease's effective date, even where the lease has not changed and no further tax is due. Changes in rent arising after the effective date should normally be reflected in the next three-year review return, when the lease's net present value is recalculated.

Different rules may apply in particular circumstances, including where a previously non-notifiable lease is varied so that it becomes notifiable. Advice should therefore be taken on the specific lease and any applicable filing or payment deadline.

How we can help

Rent reviews are a routine part of commercial lease management, but delays or uncertainty can have significant financial consequences for both parties.

We advise landlords and tenants on the lease requirements and documenting any revised rent.

Taking advice at an early stage can help ensure that the correct procedure is followed and that the agreed position is recorded clearly.