Commercial Leases - Rent Reviews and Break Clauses

When a tenant engages in a new commercial lease, the temptation can be to get in and start trading as soon as possible, and while this is of course on its own a good idea, a commercial lease’s terms can hold legal time-bombs in the form of unpalatable rent review and / or break clause provisions that only become apparent years later. At Mary Monson Commercial Law Solicitors, we take nothing for granted in our initial consideration of a lease. We have included a free guide to how the rent review and break clause provisions generally work. Our commercial property lawyers apply their experience to provide an efficient yet effective service in checking and negotiating new leases.

Rent reviews and Break Clauses – The Basics

Even though the trend is for new commercial leases to be for shorter terms e.g. 5-10 years, as opposed to the 25 year leases (or sometimes longer terms) that used to be more common, there are fewer leases that now have rent review provisions and/or tenant only break clauses. However, there can still be occasions, particularly for a large new building, where the tenant requires a long period to amortize its fit-out and building expenditure over a long period, and may therefore be happy to accept from a landlord a 25 year lease with rent reviews.

The Rules on 'Upward Only' Rent Reviews

The landlord will generally seek to negotiate ‘upward only’ rent reviews. This means that the rent cannot fall below the earlier rent. E.g. a bank premises in a high street cannot see their rent go down at a rent review simply because the market has collapsed and rents are cheaper for new leases. Even though the tenant may require a 25 year lease, he would be ill-advised not to negotiate at least one or two break clauses. A break clause is, as one might expect, a right to end the lease early.

Time Limits and Conditions in Break Clauses

However, if a lease contains break clauses, these clauses have very strict time limits for implementation. Generally speaking, a break clause will require one party (normally but not always the tenant) to serve notice in writing on the other party, determining the lease at a specified date – usually a notice will not be less than 6 calendar months, but can be longer, depending on the terms of the lease. Of course, a landlord is likely to want this notice period to be as long as possible, while a tenant will usually not. One generally finds with any break provisions that the tenant must have paid up to date all rent and service charge due and payable up to and including the break date (not just the notice date), and will yield up (hand over) the premises on that date in good condition as specified in the original schedule of condition negotiated when the lease started.

'Assumptions' and 'Disregards'

The rent review provisions generally incorporate a number of assumptions and disregarded factors. They might assume that the tenant has always paid the rent on time, and has always properly maintained the building, but may disregard the fact that the landlord has elected for the rent to be subject to payment of VAT, or the fact that the tenant is particularly good or blue-chip. The initial lease will have a set number of assumptions and disregards and these have to be considered by the valuers in the rent review.

Triggering the Break Clause to Force a Renewed Lease to be Negotiated

If a lease contains a tenant break clause, but with an upward-only rent review provision, the tenant can’t then trigger the break, bring the lease to an end, and then rely on the renewal provisions of the 1954 Act to negotiate a new lease, at a rent which is the market rate but much lower than he would have paid under the old upward-only rent review provisions. There are a number of cases in the Court of Appeal on this point, and the courts are dismissive of attempts to manipulate the renewal procedure to escape contractual obligations under the existing lease.

Crucially, either party should be speaking to their surveyor or valuer as soon as possible. They will negotiate the review and dilapidations matters at the end of the lease.

It is often the case that a landlord will ‘forget’ to serve a rent review notice in a recession where it knows that the rent will not be higher than the present value. However, almost all rent review clauses do not make time of the essence and therefore a landlord can always serve that notice any time after the review date has passed in the hope that within an improved market it can seek a rent increase. That said, the main consideration must be the property as it was at the time of the rent review date itself, not when the rent review notice was finally served.

A Commercial Property Lawyer's Role

A solicitor's role in the negotiation of a rent review is usually small unless there is a big disagreement between the two parties. In certain circumstances a valuer may require a solicitor’s advice in relation to one or more of the assumptions and disregards. However, usually a solicitor will be required to put together the rent review memorandum, which is a document confirming the outcome of the review signed by both parties.

For our services relating to Rent Review and Break Clauses , please select one of the following:

If you would like us to act for you in one of these matters, please call us on 0207 936 1967 (London Fleet Street Office) , 0121 5350012 (Birmingham Office), 0808 155 4870 (Salford Office) or 0161 615 5562 (Manchester Office) and ask to speak with one of our Commercial Property solicitors.