How to manage rent reviews on your commercial property
Carrying out regular rent reviews on your commercial properties will help you to maximise rental income by ensuring the prices you charge tenants fall in-line with current market values.
Given the rate of inflation, most reviews result in rent prices increasing, which will need to be sensitively negotiated with your tenant. With this in mind, here are some top tips for managing your commercial rent review.
- Have a clear agreement about the review procedure
Transparency is key to keeping your tenant happy, so make sure the terms of your review procedure are made clear from the outset of the contract.
The commercial lease should include a rent review clause which details when reviews will take place; how you will conduct them; assumptions to be made when valuing the premises; and terms for dealing with potential rental disputes.
Typically, rent reviews take place every three to five years, with a clause in the lease stating that the tenant must receive the notice in writing. The date of the review set out in the lease is the date at which the new rental sum can be charged.
- Leave plenty of time
The deadlines for issuing the review notice – which will be stated in the clause – are often strict, so don’t leave planning to the last minute. Preparing for the review a few weeks in advance will help to ensure you have the resources for negotiations and decision-making in place.
It’s worth bearing in mind that you or the tenant could face serious consequences if either of you breach the contract terms by not responding within the determined deadline.
- Consider using a professional consultant
One of the simplest ways to calculate new rent for your premises is to consider rents being charged locally for similar properties. This will help you to uncover the best possible rate your property could achieve, known as market rent.
At this stage, you could find it beneficial to use a professional consultant, who will help to confirm market rent value to ensure you are charging the maximum rental.
Your lease may include additional clauses that will need to be considered when calculate accurate rent. An example would be a clause for change of property use; if the premise is changing from an office to storage space, then this could affect the rental price.
While it’s possible for rent to fall following a review, most leases include ‘upward only’ review terms. However, these terms are proving to be controversial and it is possible that they could be banned in the future.
What to do if you have a dispute with your tenant
If you and your tenant reach stalemate and simply cannot agree on a new rental price, there are set processes in place to help you resolve the issue. Seeking the help of a solicitor could be useful if you find yourself in this position.
Most leases make a provision for alternative dispute resolution (ADR) in rent reviews. This means that a third party can be nominated to evaluate the property and set the new rate. There is also the option of taking the issue to court if an ADR is not possible or proves unsuccessful.
Your tenant will pay the old rate of rent until a new rate is agreed. If the rate is increased, the tenant will owe you a lump sum of the difference in rent, dated back to when the review was carried out. Interest may also be charged on the lump sum.
A poorly-conducted rent review will not only mean you lose out financially, but you could end up upsetting your tenant, who may terminate their contract. On the contrary, a transparent and well-structured rent review process will help keep your tenants happy ensure you are generating the highest returns from your commercial property investments.
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