Most commercial leases which last longer than ten years will include a ‘rent review’ clause. This gives the landlord an opportunity to adapt the rent to current market conditions, and is a sort of payback for the security given to the tenant by having a longer lease.
A rent review can either be ‘stepped’, so that the rent rises by a fixed and pre-arranged amount after a certain period of time (e.g. by £5,000 every five years), ‘turnover’, so that the rent is linked to the tenant’s income or turnover (obviously this is most applicable for retail tenants) or, most usually, ‘open market’. In any case, a rent review is usually ‘upwards-only’, which means that the rent will either stay the same or rise, but will never drop below the original rent. In the recent difficulties, these leases have been more flexible and landlords have been more willing to renegotiate.
Open market rent review involves a revaluation of the rent, based on what the rent would be if the property was re-let to a new tenant. Often, rent review can be heavily negotiated and give rise to much debate, since the tenant and landlord have completely opposite intentions! An independent surveyor or valuer is often called in to make the final decision if the parties cannot agree, and this independent body will consider not only the size and location of the property, but also the lease itself; if the lease is very restrictive, a new tenant might not be willing to pay as much than if the lease is really flexible. Therefore, the amount is based on local market figures, adapted to a list of ‘assumptions’ and ‘disregards’ to make the new rent a fair amount. There are plenty of usual assumptions, such as that the property is in a good condition, and disregards, such as goodwill and reputation generated by the tenant; however, there are also plenty of ones that landlords will try to sneak in to unfairly increase rent, such as that the rent is ‘best’ rent (meaning that the potential tenant is desperate to move in and so would pay more)or that the tenant can claim back its VAT on rent (which is not applicable to financial service providers like banks, and so they would expect a lower rent). Hopefully the solicitor who reviewed your lease when you originally agreed it was eagle-eyed!
Usually, you will pay the original rent until a decision is made. However, it is a good idea to plan ahead, as once your new rent is agreed you may need to make back-payments and if your rent has greatly increased this could be a large sum, due all at once.
If your lease is a residential one, there will very rarely be a rent review clause. This is because usually you are only paying a ‘nominal’ small ground rent, which would not vary by enough to make review worthwhile. In addition, the lease itself is usually longer and therefore has a larger capital value.