Managing Upward-Only Rent Reviews: A Guide for Commercial Landlords

What do you do as a landlord where the lease for commercial premises allows an upward only rental increase?

Firstly you should check the terms of the lease but you should also consider commercial factors such as the current economic climate and comparable rents in the local area in reaching your decision to increase the rent.

Following these practical steps can uncomplicate the process:

Check the lease for:

• The date when the rent can be increased – for example, is it to be every 3 or 5 years?
• The method of how the rent can be increased (upward only market rent, or fixed increases, RPI linked, or increases with caps and collars).

Calculating the rent increase:

• Check the wording of the lease to see which assumptions and/or disregards, can be made or what other factors can be taken into account in calculating the rent increase.
• Ascertain whether any improvements have been made to the premises by the tenant since these are usually disregarded.
• You may need to consider factors outside the lease such as the financial health of the tenant. If a rent increase is too high could this cause the tenant to become insolvent triggering forfeiture of the lease, resulting in the premises being empty.

Appoint a surveyor:

• By using a surveyor to calculate the level of rent increase, you get the benefit of professional and market knowledge, together with the potential of strengthening your position during any negotiations.
• The surveyor may need to inspect the premises together with the preparation of a report. Your surveyor should be instructed as early as is necessary to avoid delays.

Negotiate:

• Offer your new rent proposal to the tenant by starting negotiations slightly higher to allow space to settle.
• Alternatively, consider instructing your surveyor to carry out the negotiations, taking the stress out of doing this yourself.

New rent agreed:

• It is usual for landlords and tenants to record the new rent increase in a memorandum of rent review signed by both parties.

Rent increase not agreed:

• Check the wording of the lease to see the procedure to follow if parties cannot agree on a rent increase.
• In standard leases, it is common for disputes over rent increases to be referred to an expert appointed by the Royal Institute of Chartered Surveyors.
• The procedure is likely to incur costs, and there might be strict time limits to follow.

The recommendation is to take professional advice and to be realistic on what increase can be achieved. The professional advice would incur costs which cannot be claimed back from the tenant. Depending on where the premises is located landlords may need to think whether the rent increase justifies the time and expense incurred together with current economic factors. The Commercial Property team at Pinney Talfourd will always be happy to discuss any issues you may have and make a referral where alternative professional services are required.