Rather than setting a fixed rent for the entire term of the lease, most leases (particularly longer leases) include rent reviews which allow the rent to be adjusted periodically. The terms of the lease will set out how the rent reviews work, including when rent reviews will take place (eg every three years) and how the new rent will be calculated. The lease will usually also specify what notice the landlord must give you of the new rent and how disagreements will be resolved.
Most leases base the new rent on the 'open market rental value' at the date of the rent review - ie the rent the landlord could reasonably expect to receive if the premises were leased on that date to a third party, on similar terms to those in your lease. Some leases link the new rent instead to the Retail Price Index.
Key pitfalls to look out for in the lease's rent review terms include:
- An 'upward only' clause. This states that if the open market rental value has fallen your rent will remain at the same level rather than falling as well.
- Low initial rent. Agreeing a low rent for the initial period of the lease will not protect you from a steep increase at the first rent review date if the lease specifies, for example, that the new rent will be at open market value.
- Terms of use. An important determinant of the rental value will be how the premises can be used. This could be to your disadvantage if, for example, you use premises for storage but the lease also allows them to be used as office space - and their rental value as office space would be higher.
- Improvements. The rent review agreement should specify that the new rent will not reflect the value of any improvements you have made to the premises.
Appropriate professional advice can be invaluable for negotiating the rent review terms of the lease and the initial rent, and also for negotiating the new rent at the time of each rent review (see 19).
