Upwards reviews unfair to tenants

May 20 2008 by Karen McLauchlan, Evening Gazette

WHEN entering into a lease for longer than five years it is likely that the tenant, and especially the landlord, will want to include some mechanism for varying the rent.

Landlords in particular want to be able to increase the rent over the term, so they can benefit from any increase in the lettable value of the property, meaning reviews are often “upwards only”.

In the Government’s Code of Practice for Commercial Leases 2002 this position is challenged. It states upwards only reviews are unfair to tenants who should be able to benefit from a decrease in a property’s lettable value just as the landlord might benefit from an increase. The voluntary code does not however seem to have had a great impact; most new leases still contain upwards only clauses.

Reviews are usually set for three or five-year intervals throughout the period of a lease. There are a number of types of rent review clauses that are used:

Index-linked, where rent is reviewed by linking it to, for example, the General Index of Retail Prices.

Fixed increase, where rent increases by a fixed amount on certain dates. These are quite rare as both landlord and tenant must agree in advance what the increases will be with the risk that they may not reflect actual market conditions at the time of the review.

Turnover rent review, which links the level of rent payable to the turnover of the tenant company. Here the tenant can fix the rent as a steady percentage of their overheads but can end up paying substantially more, or less, than the actual lettable value of the property. A turnover rent review is often linked with a fixed rent element.

Open market rent review is the most widely used. The rent is set at a value equivalent to that which the property would attract on the open market. Landlord and tenant must agree the rent based on a hypothetical lease as defined in the clause, often with provision for third party involvement should agreement not be reached. It is advisable to seek professional advice in matters relating to property and leases.

James Wharton is a member of the commercial property team at BHP Law in Darlington. He can be contacted on 01325 466794.