Commercial leases generally contain an initial rent and then a mechanism for regularly reviewing the rent. The rent reviews are generally annual and if the lease contains an option for a further term then there is generally a mechanism for reviewing the rent at the commencement of the second and subsequent terms.
The most common types of commercial rent reviews are set out below:
Percentage increase – It is common for a lease to contain a mechanism for increasing the rent by an agreed percentage each year. It is in the landlord's interest for that percentage to be high (perhaps 4% or 5%) whereas a tenant will usually seek a lesser percentage (such as 3%). Percentage rent increases can be useful for a tenant seeking to budget their lease for the term
- Consumer Price Increase (CPI) reviews or increases – in an effort to keep the true cost of a lease the same often leases will contain a mechanism to review the rent in accordance with the annual change in CPI. Landlord's will often seek to make that review only occur if it will result in an increase, although specifying a review will only occur if it is an increase is not possible in most retail leases as it is generally prohibited by the relevant retail legislation
- Market rent reviews – market reviews are most common at the commencement of a lease for a subsequent term but they can also be used mid-term particularly with longer term leases. Market reviews can be expensive to conduct as they usually contain a dispute mechanism that involves appointing a valuer to determine the rent. The terms of a market review clause in a lease can be extremely important, as depending on the terms a tenant could end up with a hugely increased rent merely because of the terminology in the clause
- A combination of the above
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
