Rent reviews have become less common in recent times, but they are still a crucial process for both landlords and occupiers to negotiate new terms. In this two-part series, rent review expert Conrad O’Neill offers his advice for landlords – helping them to successfully navigate the process.
In today’s ever-evolving working world, rent reviews are becoming less prevalent. This is particularly true as we move towards a new era of work, where businesses are preferring to adopt a more short to medium-term planning approach.
The pandemic has had a lasting impact on the industry, prompting prudence among occupiers who spent much of 2020 and 2021 paying for vacant office spaces. As a result, businesses are now approaching commercial property agreements with more caution, favouring shorter leases which offer greater flexibility to adapt to their changing needs.
Proactive landlords have recognised this shift and are now more willing to offer leases with shorter terms that allow businesses to find a workspace which aligns with their changing culture. These workspaces are often designed to be more personalised and less reliant on desk spaces.
It’s a world away from where we were in the 1980’s when almost every commercial letting was done on a 25 year lease with 5 yearly rent reviews. Shorter leases started appearing in the early 1990’s, prompted by the combination of an economic & property market crash and an influx of US corporates into the UK. Leases were already getting shorter but the Pandemic fuelled an appetite amongst occupiers for even greater flexibility. But while many want shorter agreements, there are still plenty of occupiers who take comfort in the security of the longer-term arrangements of old, and for them, rent reviews are very much a reality.
This area of work has become my speciality, having handled rent reviews for landlords and tenants throughout my career. In this article, I want to offer my top tips for landlords going through the process.
So, what is a rent review? Essentially it is a process that allows landlords and tenants to adjust the rent of a commercial property during the term of the lease – typically every three to five years. They were created because rents wouldn’t always cover inflation during the lifespan of a longer agreement; rent reviews countered this, allowing landlords to accommodate adjustments, and reflect changes in the local property market and economy.
Determining new rents
Working through the rent review process can be complex, with several methods for determining the new rent during a rent review, including market rent, index-linked rent, and turnover rent.
Market rent is the most common method and involves assessing the rental value of the property based on comparable properties in the local area. A good partner will be able to bring relevant data to negotiations, especially the nuances of particular markets.
For example, in Manchester city centre, prime rents currently headline at over £40 psf, but when you start digging you’ll see there’s a degree of artificially in that, because behind it is often a big rent free period.
Expert surveyors can analyse such evidence and help landlords as they formulate their case. In some cases, the rent review discussions can be a catalyst for wider discussions on the lease. In a recent case I was involved in, the landlord accepted a slightly lower increase in rent on review in return for the tenant agreeing to remove an upcoming break option in the lease.
A good rent review surveyor not only provides the landlord with market evidence and data but can also advise on the interpretation of the rent review clause, identifying strengths and weaknesses therein. Landlords may be aware of the role of the hypothetical lease – a term used in rent reviews that assumes certain conditions or circumstances that may affect the rent payable for a property.
The hypothetical lease may make certain assumptions about factors such as the length of the lease, the state of repair of the property, the tenant’s covenants and obligations in the lease, treatment of incentives and tenants improvements. These assumptions can sometimes conflict with actual market conditions at the time of the rent review. It’s another complex area that adds to the myriad of considerations in a rent review.
Ultimately though, rent reviews provide both landlord and tenant with an opportunity to recalibrate and assess the market. Done right, with informed advisors, they can deepen trust and long-term relationships.
For landlords, the priority is protecting their assets and ensuring that happy tenants want to remain in their spaces. This is why the rent review process is so delicate, and experienced landlords – with the support of knowledgable surveyors – understand how to negotiate and keep an occupier happy where they are.
As the world continues to change, and occupier demands shift radically from what they were, landlords also need to address other areas – investment into their buildings to ensure that they remain of a high standard and appeal to tenant needs. They should consider sustainability and ensure that they create exemplary working environments that meet – or exceed – green standards, while also allowing occupiers to operate in an energy efficient manner.
Landlords also need to be open to the flexibility required by modern occupiers, and instead of looking at rent reviews, many are offering shorter term leases where the future negotiations are lease renewals instead.
Whatever the requirement, I am here to help landlords nurture great workspaces for a modern workforce.
Conrad’s top tips for landlords:
- Understand the complexities of rent review clauses and seek advice from surveyors or solicitors if you’re unsure.
- Consider your timing when triggering a rent review. Working with a surveyor can help you understand a broader landscape.
- Be strategic where you can; if you’re a landlord managing a bigger scheme with multiple occupiers, you can monitor trends in your own ‘micro market’ and use that insight when establishing new rents.
- Don’t assume that the rent will go up! Most of the time, rent reviews lead to increased rent, but that doesn’t mean it’s a given. Much depends on the state of the market and a landlord has to provide evidence to justify an increase.
- Work with a trusted advisor with experience in this field; I have handled many rent reviews but with a background as an office letting agent, I am ideally placed to interpret and utilise the market evidence.