Graham Horsman: Interest rates and rent reviews

Graham Horsman: Interest rates and rent reviews

Graham Horsman

Interest rates are on the rise and expected to hit unprecedented levels with some observers predicting a recession on the horizon – both of which will impact commercial tenants and landlords undertaking rent reviews.

An open market rent review is where the new rent is calculated as what a tenant would be willing to pay and a landlord willing to accept for premises that are vacant and available for let as at the date of the review. Assessed using comparable evidence and market analysis, it is also conducted on an “upward only” basis normally meaning that the rent cannot be reduced, only increased or kept the same.

In the current climate, a recession usually results in property prices falling, which in turn could result in market rents reducing. However, if demand is still high for rental property (offices and the logistics sectors are performing well) this could still drive rental growth, but these competing arguments are likely to cause more disputes in respect of rent reviews.

An index linked review is linked to inflation, rather than what is happening in the open market for the property at that time. It is seen as an easier means of calculating a new rent and usually tracks either the Retail Price Index or the Consumer Prices Index.

These indexes are increasing at an unexpected and disproportionate rate, higher than in the last 40 years and if rent is to be increased in line with these indexes, it is likely to jump up significantly. There can be caps agreed in a lease to limit the extent that it increases, but if not, tenants might struggle to pay disproportionately increased rents.

Proper notice has to be served under the lease to initiate a rent review and it is not normal for a lease to provide for a timescale by which the landlord should initiate a rent review. The default position is that time is not of the essence on initiating a rent review and it is more common that the rent can be reviewed after a certain date.

However, disputes have arisen where the landlord has accepted payment of the “old” rent after the period in which the landlord can initiate a review. In certain circumstances, the courts have held that the landlord has waived its right to review the rent (losing the chance to increase rent until the next review date, which is normally around 3-5 years’ time). This can be protected against if there are proper saving provisions in the lease, or through correspondence with the tenant.

Normally, the lease will have built-in mechanism for resolving a dispute. This will usually be by referring the dispute to arbitration, or to be determined by an expert. The arbitrator or expert will normally be a surveyor, with additional arbitration qualifications (if arbitration), who hears argument from both parties and makes a decision.

Expert determination is less contentious, as the expert will provide a decision based on the information presented to them. Decisions from either forum can be made binding and final on the parties), however there are limited circumstances where such decisions can still be reviewed by the courts.

Graham Horsman is a senior associate at Pinsent Masons.

Share icon
Share this article: