Most commercial property tenants have their rent reviewed at least every five years. If a rentrise letter has just dropped on your doormat - here's all you need to know
In the aftermath of the crash in 2008, most businesses became used to their rents reducing or staying the same. But in recent years the market has seen a boost and rents have generally gone up as a result.
However, this is not the case everywhere. Many retail properties located beyond the main thoroughfares are seeing rents stagnate or drop. There may have been a transaction at a particularly low level at a nearby property, which could limit the rent the landlord can realistically ask for your space. Or you may have a quirk in your lease which could counteract the landlord’s argument for the extent of the rent rise.
When will my rent change?
There are two triggers that can change the rent – rent reviews and renewal of the lease. With a rent review, your rent will usually either stay the same, or go up – not decrease. Your lease sets out how to establish the market rent but it’s generally based on what rents similar properties are achieving on the open market.
At lease renewal both parties can agree on a rent based on rents for similar properties but it’s also affected by local supply-demand dynamics and other factors and not just the lease. Which means the rent could go up, or down.
What to do if you’ve been quoted a rent increase:
Ask your landlord to justify the level of rent increase proposed. Landlords don’t generally just pluck a figure out of the air – the proposed new rent will usually be based on the measured area of your property and a rent in line with what rents are being agreed on similar premises around the time of your rent review date, or within the last 12 to 18 months. This is called comparable evidence.
But be warned, much of the comparable evidence at the moment supports rent increases, especially in prime locations. You need to carefully weigh-up the benefits and the risks of challenging your rent. You could end-up paying more than the proposed rent if the evidence for an uplift is strong and transactions take place at higher rents during your negotiations.
Get a copy of your lease. The devil is always in the detail. The exact terms of your lease are always a key consideration.
Get advice from a commercial property surveyor
A lot of SMEs consult a solicitor but knowledge of the current commercial property market is key to negotiating rent reviews successfully – not just knowledge of the lease and the law.
Sometimes savings can be made simply by getting the unit properly measured and agreeing an area less than the landlord’s quoting area.
RICS has a database of surveyors you can contact.
Keep an eye on what’s happening – are there any new tenants that have taken space similar to yours nearby? Talk to them.
Look online – new tenants are sometimes covered in press stories that quote the rent agreed.
Speak to your neighbours and help each other. Whatever rent you each agree will inevitably impact on everyone else’s rent at some point. It may also have a knock-on effect on business rates.
Know when your rent review is due. Don’t let it be a bombshell you are not prepared for.
Landlords often don’t trigger rent reviews on time. If your rent review date has passed and hasn’t been actioned by the landlord don’t think it won’t be triggered at a later date – at which point you will usually be liable for the increased rent and interest backdated to the date the rent review was due.
Look at the bigger picture
Whatever rent you agree will be payable at least until the end of the lease which could be in three, five, 10 years’ time, or longer. You may think you’re saving yourself money by negotiating it yourself and cutting out an agent’s fees but if they’re able to shave even £1,000 per annum off the agreed rent then that could be a total saving of at least £3,000 – £10,000 over that three – 10 year remaining lease term.
If it also keeps the rental tone of the estate/ building down for the other tenants then you will all benefit at future reviews/renewals and any reassessment of business rates. If you can’t agree a new rent, consider going to a third party – an independent expert or arbitrator at rent review or Court or Professional Arbitration on Court Terms at lease renewal. Other mediation methods are also available.
You need to carefully consider the risk and costs of pursuing any of these routes as if you are unsuccessful you could be liable for nearly all the third party costs plus the costs of the other side, which could be a real sting in the tail.
A lease advisory surveyor will properly advise you on the risks/benefits and likelihood of success on pursuing these routes. Always bring them into negotiations as early as possible to avoid any nasty surprises/unnecessary further expense.
Emily Seager can be contacted on 0191 594 5046 or emily.seager@knightfrank.com
