Index Linked Rent Reviews - What is it and who benefits?

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26 January, 2017

Rent reviews can give a landlord the ability to ensure that they are charging the market rent for their given commercial premises. They can also prove to be a useful bargaining tool for landlords and tenants when negotiating Heads of Terms.

The rent review clause sets out when each review will take place, the method of review, may include assumptions and disregards to be made when valuing the premises for the purpose of an open market rent review, the procedure to be followed, and provisions for dealing with disputes if they arise. As one of the most common areas of dispute in commercial leases, it is imperative that you enter any agreement to review the rent with open eyes.

Index linked rent review is commonly used as an alternative to open market rent review, most frequently by reference to the 'Retail Prices Index' (RPI), measuring the average change from month to month in the prices of goods and services purchased by most households in the UK. The rent will therefore increase in line with increases in the RPI (most clauses are on an upward only basis, so don't reduce the rent in the event of negative inflation).  As of March 2013, the UK recognises a new form of index known as the RPIJ. Despite the update in indexation, rent review clauses primarily continue to be measured by reference to RPI. 

RPI linked leases have in some cases shown to provide greater returns for landlords because the rent increases with general inflation rather than the rental market, which may have been less buoyant, though in a booming property market the open market rent is likely to outstrip general inflation. In contrast, an RPI linked increase is often disliked by tenants as a result of the lack of connection between the inflationary increase and the local property market though the tenant may prefer the perceived greater certainty of inflationary increases rather than the vagaries of the property market.  When a tenant takes a lease with an RPI linked rent review, there is a risk that over time they could end up paying too much rent for the property compared with a "market rent".  As a result of the potential issues caused by this, the tenant should consider measures to protect themselves from a long term commitment.  A solicitor can help here by seeking to negotiate break clauses in their client's lease agreements, to lever their client's bargaining position more favorably.  For short leases this is perhaps less important, because they do not commit tenants in the same way.

For more information on the different types of rent review in commercial leases or for advice on commercial property matters generally, please contact our Commercial Property team on Freephone 0800 689 0831 or send any questions through to Forbes Solicitors via our online Contact Form.

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