_Commercial property: My landlord wants to raise my rent – what should I do?

Commercial property

Most commercial property tenants have their rent reviewed at least every five years. If a rent-rise letter has just dropped on your doormat – here’s all you need to know.

In the aftermath of the crash in 2008, most businesses became used to their rents reducing or staying the same.  But in recent years the market has seen a boost and rents have generally gone up as a result.  

Despite a challenging worldwide economic environment and uncertainty because of Brexit, sentiment generally continues to improve and decent commercial properties in the North East - particularly Grade A city centre offices and quality industrial stock - are in short supply. 

This is putting upwards pressure on rents for the foreseeable future.

Knight Frank predicts that prime office rents in Newcastle will increase to £25 per sq. ft. by the end of 2019, and £7.25 per sq. ft. on prime industrial units. 

However, this is not the case everywhere.  Many retail properties located beyond the main thoroughfares are seeing rents stagnate or go into reverse. 

There may have been a transaction at a particularly low level on your industrial estate or within your office building, which could limit the rent the landlord can realistically argue for your space. 

Or you may have a particularly onerous quirk in your lease which could counteract the landlord’s argument for the extent of the rental rise.

When will my rent change?

• There are two triggers that can change the rent on a commercial property held under a lease – rent reviews and renewal of the lease.  Rent reviews are generally on an upward-only basis to open-market rent.  In other words, the rent will either stay the same, or go up – not decrease. 

Your lease sets out various assumptions you need to make to establish the market rent but usually it’s based on what rents similar properties are achieving on the open market.

• A lease renewal is where both parties can agree on a rent based on prevalent market forces, local supply-demand dynamics and other factors. 

Which means the rent could go up, or down, when the time comes to renew your lease.

What to do if you’ve been quoted a rental increase:

1. Ask your landlord for the justification for the level of rent increase proposed.  Landlords generally don’t just pluck a figure out of the air - the proposed new rent will generally be based on the measured area of your property and a rental rate in line with what rents are being agreed on similar premises around the time of your rent review date, or within the last 12 to 18 months, i.e. comparable rental evidence. 

• The best ‘comparable evidence’ is a recent open market letting, followed by a rent agreed at lease renewal, followed by a rent agreed at another rent review - all ideally on properties of a similar size, age and type and located in the same area.
• But be warned, much of the comparable evidence at the moment supports rent increases, especially in prime locations. So you need to carefully weigh-up the benefits and the risks of challenging your rent. You could end up paying more than the proposed rent if the evidence for an uplift is strong and transactions take place at higher rents during your negotiations.  

2. Get a copy of your lease. The devil is always in the detail. The exact terms of your lease are always a key consideration.

3. Get advice from a commercial property agent with knowledge of the property and local market who is best placed to advise you on whether you should argue or agree the new rent.  

• A lot of SMEs consult a solicitor but knowledge of the current market is key to negotiating rent reviews successfully – not just knowledge of the lease and the law.
• Sometimes savings can be made simply by getting the unit properly measured and agreeing an area less than the landlord’s quoting area.
• An agent will often agree to work on an incentivised-saving basis from the landlord’s quoting rent, subject to a minimum fee level.
• The Royal Institute of Chartered Surveyors (RICS) has a database of surveyors you can contact or you could ask other tenants nearby for their recommendations.

4. Keep an eye on what’s happening – are there any new tenants that have taken space similar to yours? Talk to them. 

• Look online – new tenants are sometimes covered in press stories that quote the rent they agreed. 
• Speak to your neighbours.  You should help each other.  Whatever rent you each agree will inevitably impact on everyone else’s rent at some point in the term of each tenant’s lease.  It will also have a knock-on effect on business rates.

5. Know when your rent review is due. Don’t let it be a bombshell you are not prepared for.

• Landlords often don’t trigger rent reviews on time. If your rent review date has passed and hasn’t been actioned by the landlord don’t think it won’t be triggered at a later date – at which point you will usually be liable for the increased rent and interest backdated to the date the rent review was due.

6. Look at the bigger picture 

• Whatever rent you agree will be payable at least until the end of the lease which could be in 3, 5, 10 years’ time, or longer. You may think you’re saving yourself money by negotiating it yourself and cutting out an agent’s fees but if they’re able to shave even £1,000 off the agreed rent then that could be a total saving of at least £3,000 - £10,000 over that 3 - 10 year remaining term, under the lease.  
• If it also keeps the rental tone of the estate/building down for the other tenants then you will all benefit at future reviews/renewals and when it comes to reassessment of the business rates.  

7. If you can’t agree a new rent, consider going to a third party – an independent expert or arbitrator at rent review or Court or Professional Arbitration on Court Terms at lease renewal.  Other mediation methods are also available.

• You need to carefully consider the risk and costs of pursuing any of these routes as if you are unsuccessful you could be liable for nearly all the third party costs plus the costs of the other side, which could be a real sting in the tail. 
• A lease advisory surveyor will properly advise you on the risks/benefits and likelihood of success on pursuing these routes. Always bring them into negotiations as early as possible to avoid any nasty surprises/unnecessary further expense.

Above: Emily Seager, associate at Knight Frank Newcastle

The Author:

Emily Seager, an associate at Knight Frank has 15 years’ lease advisory experience specialising in rent review, lease renewal, lease re-gear and third party dispute resolution representation.  She acts for landlords and tenants on all types of commercial property in the North East.

Get hold of Emily on 0191 594 5046 or email her.