Rent Review Clauses in Commercial Leases-What You Should Know

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Do you occupy a retail, industrial, or office premises?

If you do you will probably have you a commercial lease?

If you have, it will almost certainly provide for a rent review.

And you could be in for a very nasty shock.

Let me explain.

Over the last few years, since the property crash at the end of the Celtic Tiger years, quite a few commercial property owners were just happy to get their commercial premises let.

Any rent is better than an empty commercial unit or office.

Many of the leases granted then were on initially favourable terms for tenants, simply to get them let.

However, many of these leases are coming up to their first rent review, typically 5 years after commencement. The big problem for small business owners is that these rent reviews provide for “market rental value” which is causing a nasty shock, and in some cases unaffordable rents, for small business owners.

Because in some cases they are seeing their rents double, or more.

What is the legal position?

Is there anything you can do about it?

How does a rent review work?

Let’s take a look.

The purpose of a rent review clause is

  1. to protect the value of the landlord’s property
  2. to reflect the changing value of the property during the term of the lease.

What will normally happen is the landlord will serve a notice on the tenant seeking a significnatloy higher rent. Generally, time is not of the essence in relation to the service of notices by either landlord or tenant.

The tenant should then write back indicating his disagreement and asking what is the basis for the figure sought, and how was it arrived at.

Landlord and tenant will then instruct representatives such as valuers/surveyors/auctioneers to engage with the other side and attempt to agree the new rent.

Reviewing the Rent

The rent review clause will normally provide for the rent to be reviewed by an independent expert if the landlord and tenant cannot agree on the new rent. This independent expert will either act as an arbitrator or expert; in practice, the difference is not hugely significant.

Generally, the appointment of the expert will be the prerogative of the landlord if the landlord and tenant cannot agree on who to appoint.

If the landlord fails to make the nomination the tenant may be able to nominate, or the rent review clause may provide for appointment by the President of a professional body such as the Law Society or the professional bodies for Chartered Surveyors or Auctioneers/Valuers.

If there is a delay in agreeing the rent the tenant will be liable for the back-dated rent, plus interest at a “base rate” provided for in the lease.

The basis for reviewing the rent will almost certainly be to “current market rent” or “market rent”.

Up to the passing of the Land and Conveyancing Law Reform Act, 2009 rent review clauses provided for “upward only” rent changes.

However section 132 outlawed “upward only” rent reviews in leases created after 28th February, 2010.

Therefore, it is possible, albeit unlikely, that the rent can be decreased to reflect market value. This was never the case with leases before the passing of the 2009 Act.

The critical date is 28th February, 2010; leases before this date can have “upward only” rent review clauses. After this date such clauses are of no effect.

Assumptions and Disregards

The basis on which the new rent will be determined will be on the basis of certain assumptions and disregards:

  1. that the premises will be let as a whole
  2. what it would fetch on a free and open market
  3. with vacant possession, that is, as if the premises was being let with full vacant possession as it was at the granting of the lease
  4. for a term of the greater of 15 years or the residue of the lease
  5. on the same terms and conditions as the present lease, including with a rent review clause
  6. that the tenant has fulfilled all his repairing and decorating obligations as provided in the lease, and has fulfilled all covenants in the lease
  7. no work has been carried out on the premises that diminishes its rental value.

Also, the following will be disregarded:

  1. any effect on the rent of the fact that the tenant has been in occupation and disregarding any goodwill he has built up and is attaching to the premises
  2. any effect of improvements or works carried out on the premises by the tenant.

In summary, the lease to be valued at rent review time is a hypothetical lease identical to the existing lease so that the rent will be calculated on the same basis as the existing lease.

Conclusion

Leases can be confusing, technical documents which require careful drafting and interpretation. Mistakes and oversights can be made in drafting them, including in relation to the rent review clause.

If you are facing an eye-watering increase in your rent on foot of a rent review it would probably make sense to have your solicitor take a close look at the lease.

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