4 Common Methods for Reviewing Rent in a Commercial Lease

When entering a commercial lease, one of the most important aspects to understand is the rent review clause. Rent reviews ensure that payments stay fair for both landlords and tenants over the long term, reflecting changes in the market, inflation, or business performance.

There are several methods to review rent, depending on the property type, market conditions, and lease structure. The four most common approaches are: Open Market Rent Review, Index-Linked Rent Review, Stepped or Fixed Rent Review, and Turnover Rent Review. Each method has its own advantages and considerations, making it essential to understand them before signing a lease.

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What Is a Rent Review in a Commercial Lease?

A rent review in a commercial lease is a process that allows the rent to be adjusted at agreed intervals during the lease term. It ensures the rental value remains fair for both landlord and tenant, reflecting either market conditions, inflation, or the tenant's business performance. The method of review is always outlined in the rent review clause of the lease.

What Are the Four Common Methods for Reviewing Rent in a Commercial Lease?

Four common methods for reviewing rent in a commercial lease are the Open Market Review, Index-Linked Review, Fixed Review, and Turnover Rent Review.

1. Open Market Rent Review

An open market rent review sets the rent based on the current market rate for comparable properties in the same area. Typically, a professional surveyor is appointed to assess what a willing tenant would pay for the property if it were available to let on the open market at the time of review.

This is the most common rent review method in commercial leases because it accurately reflects the property's actual value. However, disputes can arise if the landlord and tenant have different opinions on the valuation. In such cases, an independent valuer or arbitrator may need to be involved, which can increase costs.

2. Index-Linked Rent Review

With an index-linked rent review, the rent is adjusted in line with inflation, usually tied to the Retail Price Index (RPI) or the Consumer Price Index (CPI). For example, if inflation rises by 3%, the rent will increase by the same percentage.

This approach ensures that rent keeps pace with the broader economy rather than local property values. To protect both parties, leases often include a cap and collar mechanism. The "cap" sets a maximum increase, while the "collar" ensures the rent won't drop below a set minimum.

3. Fixed Rent Review

A fixed rent review (also called a stepped rent review) specifies exactly how much and when the rent will increase during the lease term. For example, the agreement may state that rent will rise by £2,000 every three years or by 5% annually.

This method provides certainty and predictability for both landlord and tenant. Tenants can plan their budgets with confidence, while landlords are assured of gradual rent increases. However, because it doesn't reflect market trends or inflation, the rent may eventually become higher or lower than similar properties in the area.

4. Turnover Rent Review

Turnover rent in a commercial lease is calculated as a percentage of the tenant's gross sales or turnover, rather than being set at a fixed amount.

A turnover rent review bases the rent on the tenant's business performance, usually calculated as a percentage of their turnover (total sales revenue) or net profit generated from the premises.

This approach is especially common in retail and hospitality leases, where income can fluctuate throughout the year. It benefits landlords by giving them a share in the tenant's success during profitable times, while tenants gain flexibility if sales dip during leaner periods.

What Is the Difference Between Stepped and Fixed Rent Reviews?

A stepped rent review, also known as a fixed rent review, sets out predetermined rent increases at specific intervals. For example, the rent might rise by a fixed percentage every three years. This method provides certainty for tenants planning their budgets and guarantees landlords steady rent growth, though it doesn't always reflect changes in the property market.

How Often Are Rent Reviews Carried Out in Commercial Leases?

Most commercial leases include a rent review every three to five years, although the exact timing depends on the commercial lease agreement. The frequency should always be clearly set out in the rent review clause, so both landlords and tenants know when adjustments may take place.

Which Rent Review Method is Best?

The choice of rent review method in a commercial lease will depend on the type of property, the nature of the tenant's business, and the landlord's long-term objectives. For example, open market reviews are best for reflecting real estate values, while index-linked reviews work well for long-term agreements where inflation is a concern. Retailers, on the other hand, often prefer turnover-based rent reviews for their flexibility.

Before signing a lease, both landlords and tenants should review the rent review clause carefully and, ideally, seek legal advice. A well-structured rent review mechanism can prevent disputes, provide financial stability, and ensure the lease remains fair for both sides.

Why Understanding Rent Review Clauses Matters

The rent review clause in a commercial lease has significant long-term financial implications. A poorly understood or unfavourable clause could lead to higher costs, budgeting challenges, or even disputes between landlord and tenant.

For this reason, it's always wise to seek professional legal advice before agreeing to a rent review method. An experienced solicitor can ensure the terms are fair, transparent, and suitable for both parties.

What Happens If a Landlord and Tenant Cannot Agree on Rent During a Review?

If a disagreement arises during a commercial lease rent review, the lease will usually outline a resolution process.

To challenge a commercial rent increase, first review your lease's rent review clause, gather market evidence, and review dispute resolution procedures. After that, negotiate directly with your landlord, presenting evidence like market data for comparable properties.

If this fails, seek professional help through legal advice, independent valuation, expert determination, or arbitration.

Final Thoughts

Understanding the different methods of rent review in commercial leases is essential for both landlords and tenants. Whether it's an open market rent review that reflects property values, an index-linked rent review tied to inflation, a stepped or fixed rent review for certainty, or a turnover rent review based on business performance, each approach has its own benefits and considerations.

The right method will depend on the type of property, the length of the lease, and the financial goals of both parties. By paying close attention to the rent review clause and seeking professional advice where necessary, landlords and tenants can avoid disputes, plan more effectively, and ensure their commercial lease agreement remains fair and sustainable in the long term.

Need guidance on commercial lease rent reviews or drafting rent review clauses? Speak to our expert commercial lease solicitors today at 0203 959 7755.

We can guide you through the process, protect your interests, and help you make informed decisions.