Now and then, lease agreements are reviewed. To the landlord, it is an opportunity to probably increase his rent, why the tenant may rarely look forward to the exercise because he knows what to expect from it. Can tenants control landlord excesses in rent review, especially as on its clause and memorandum? Maybe, maybe not, however, having a clear understanding of the rent reviewing exercise will curb and limit disagreement when it is time to review your rent. Also, cap and collar rent review is an amazing deal in commercial lease property. So do you have a good understanding of what rent review is about and how to handle it when it’s time?
What is Rent Review?
Originally, rent review started after the second world war II with the view of mitigating the impact of high inflation levels, however, it is now a general practice between landlords and tenants.
Generally, rent review is a time in which both landlords and tenants meet to review the terms of their tenancy agreement as well as rent payable. Presently, rent review takes place every three to five years as landlords are no longer interested in lengthy tenancy agreements. Also, it allows landlords to raise their rental costs in line with market values regularly. Even if you decide to lease the property for 25 years, you may have to review your rent every 3-5 years depending on the landlord terms.
Most agreements allow for rent reviews in the event of unforeseen events, such as economic downturns.
Landlord Security In Reviewing Rent
Property owners generally love to protect themselves against economic downturns. Therefore, the review provisions normally only allow for rent increases to protect landlords. As a result, if the property’s market value is assessed to have declined, the rent charged will remain the same except for special cases.
How Does It Work?
The agreement oftentimes specifies the date, and where the review will take place. Although, the landlord at times seizes the opportunity to inspect the property as well.
The agreement may likely include clauses that contain how the property owner intends to review the lease agreement. Having reviewed the rent by the clause, a new agreement is reached as the rent price. This new agreement is presented in another document known as the rent review memorandum. Once this takes place, the tenant and landlord become bound by the new agreement.
Process of Reveiwing Rent
- The landlord send a notice to the tenant
2. The tenant replies to the landlord’s either accepting or rejecting notification.
Note: When the tenant fails to reply the notification within 28 days, he become bound to the landlords’ decision.
3. Negotiation takes place on the agreed date and a new rent is decided on
4. The new agreement is presented in a memorandum document
5. The new agreed rent becomes effective.
Rent Review Clause
Clauses generally have to do with provisions for adjustment. This may be in favour or against any of the parties involved in it. In rent review, a clause set out the conditions or provisions under which rent is subject to change. Most often, the rent review clause will entail some of the following.; when your rent will be increased, the increasing amount, how you will be notified of the increase, date, and in some other cases, onerous demand that may not be favourable to tenants as well as where the review will be carried out. That is why it is advised that anyone who intends to get a lease agreement have a solicitor. Your solicitor is expected to go through the terms of the contract and agreement before the deal is finally concluded.
This is mostly because onerous clauses may not be clear to you until it is time to review the rent. However, most of the landlord who uses a rent review clause agreement does so in order not to commit themselves to a long term tenancy agreement especially during inflation. Moreover, the rent review may likely favour tenants in a downturn economy.
Rent Review Memorandum
Immediately after reaching a new agreement on a lease property, what follows next is a rent review memorandum. A rent review memorandum is a document that accepts the application of a new rent for lease properties. While both parties will keep a copy of a memorandum document, it is paramount to review the clauses in the new lease agreement.
The amount of the revised rent agreed on after a rent review is recorded in a memorandum document.
Legal Implication of the Rent Review Memorandum
The memorandum document binds both the tenant and the landlord to the new lease agreement. Whether it comes after the review or is seen as a seal that binds the new rent, once a new agreement is reached, the old contract between the landlord and tenant ceases to be effective and the new one takes effect.
Rent Review Memorandum Template
Remember, this document is an agreement between the landlord and tenant. Therefore, the following template is guidelines and does not stipulate it must be followed exactly.
Commercial lease Rent Review
Initially, inflation was the basis of calculating a commercial lease review. However, other indices such as Retail Price Index and Open Market and CPI consumer price Index.
How to Use RPI in Commercial Lease Rent Review
RPI is a formula that takes into account the rate of inflation at the time of the assessment. RPI measures inflation based on the current price of goods and services. Also, It does this monthly. That is to say that a 15% increase in price will result in an equal increase in the rent. The present state of the properties is not taken into consideration. This method favours the landlord in inflation and favours the tenant in downturns. However, the RPI method was termed a flawed measure of inflation and this gave rise and attention to CPI
How To Use Open Market In Commercial Lease Rent Review
The goal of an Open Market rent review is to represent the property’s market worth at the time of the reviewing. To do this, it compares the rent of similar properties within the same location. It is also determined by the situation of the real estate market at the time of evaluation.
Cap and Collar Rent Review
Over time, a lease agreement with a cap and collar clause appears to be the best. This is because it favours both parties. Cap and collar rent review is a provision that seeks the interest of both the tenant and the landlord. The cap and collar protect the interest of landlords and tenants by minimizing their risk and maximizing profits. In a lease agreement that includes a cap and collar rent review, the landlord is certain there will be a rent increase. This is irrespective of whether other factors are favourable or not. The tenant on the other hand is certain that his rent will be favourable after each review. Simply put, A “cap” restricts how much rent will rise during a rent review, whereas a “collar” prevents rent from falling below a specific level.
Conclusion
Rent on lease property must be reviewed irrespective of who the review will favour. However, to be saved from an unnecessary outburst, it is important to understand the clause in your lease agreement. That is one of the reasons why it is important you get a solicitor involved to break down onerous clauses.
Rent Review FAQS
How is rent review calculated?
The lease provided that ‘the annual rent for a review period is to be determined at the relevant review date by multiplying the initial rent by the index for the month preceding the relevant review date and dividing the result by the base figure‘.
How do I dispute a rent review?
At rent review, there are two methods of dispute resolution to a third party: (1) arbitration; (2) a surveyor acting as an expert (known as an independent expert). Whether you would have a choice and the riming for a decision depends upon the wording of the lease: generally, a lease will state one method only
How often should rent be reviewed?
Every three to five years
The dates of frequency of rent reviews will be included in the lease agreement. Typically, rent reviews occur every three to five years.
Can a rent review be backdated?
The Landlord is able to carry out the rent review after the specified date should they wish and any rental increase can be backdated to the date on which the review should have taken place.
