Premises in the right location, adequately sized with good facilities cannot just help to attract and retain quality staff, but also play a major part in helping a company grow. Therefore, once you are established in the location, you are unlikely to want to find some-where new, unless you are forced to.
For landlords of commercial properties, keeping a good tenant is equally important. A company prepared to pay the market rate and who doesn’t default on their rent is invaluable as an empty building simply burns money.
However, regardless of how much both parties would like the situation to continue unchanged, most leases provide for a rent review at regular intervals, and this can cause friction in an otherwise amicable relationship.
Here’s a guide to ensuring any rent review is conducted professionally and with the best interests of all parties in mind.
Rent reviews – why bother?
If all parties are happy, it can seem like a very bad idea to rock the boat and jeopardise the relationship by carrying out a rent review.
But regardless of how well the landlord and tenant get on, the nature of the relationship is business and that means the landlord is entitled to ensure they are receiving the right level of income for the premises they are providing.
In the current economic climate where mortgages for both domestic and corporate premises are much harder to get approved, the demand for rental properties has sharply increased. This has led to a shortage in the market; a state of affairs which has sent the rental rates soaring. It is therefore only fair to the landlord that the rates are reviewed periodically to make sure they are in line with other similar properties in the area.
Check the contract
The exact nature of rent reviews and when they can be carried out will be specified in the contract so it is important to take a closer look.
If market rates have increased but a rent review is not due, the landlord cannot simply hike up the price because they are aware they are receiving less than others in the area. A contract protects both parties; it stops the landlord from simply increasing the amount as and when they see fit, and also schedules rent reviews at reasonable intervals to ensure the tenant is not paying far less than they should for prolonged periods.
Although technically a rent review means that the amount payable could reduce, in practice many contracts actually specify that a reduction is not permitted. This means that if no increase can be justified, the rates will not drop, even if other similar properties in the area are being rented for less.
How does it work?
The best way to manage a rent review is with the help of professional commercial property specialists.
They can help to determine the correct rate which should be charged for the premises when the rent review is due, a process which is often far from simple and needs to take into account a multitude of factors including local pricing, case law and market factors.
Because the amount of rent payable can have a significant impact on the profits of a business, many tenants dispute the results of a rent review, which means it is even more important to ensure it is carried out independently and professionally.
If the tenant and the landlord cannot reach an agreement about the increase, it is possible to obtain a Third Party Valuation. The right to request this should be set out in the contract. Using a commercial property expert can help you present your case to the Third Party, whether you are the tenant or the landlord. Having the experience in pulling together the relevant arguments, using technical aspects of the contract as well as quoting case law can make a compelling point of view which could potentially influence the outcome of the arbitration. And unless you have expertise in those areas yourself (which is unlikely) the only way to access this is via the use of a professional commercial property service.
To provide both parties with the reassurance that the suggested figure has been calculated fairly and not inflated falsely, getting professional help is an excellent idea. Commercial property consultants can be retained by either a tenant or a landlord but either way should be committed to reaching a fair result for everyone.
Samantha Wood is an experienced Financial Services writer and enjoys writing about lease and rent reviews.