Market Insight

Rent reviews: Upwards-only, RPI-linked, fixed or turnover?

Commercial leases that are longer than five years normally have rent reviews at regular intervals, which is the landlord’s opportunity to change the rent and put it back to the market.
July 20, 2021
Since the 1960s, the UK has become accustomed to upwards-only rent reviews in commercial leases, so at rent review, rents will only ever go up and never down, during the term of a lease.

But why do upwards-only rent reviews prevail despite calls by industry, the RICS and tenants for its removal? Arguably, it would create a fairer approach to suit both the landlord and tenant.

Upwards-only rent reviews

Lease events represent the perfect opportunity for investors to enhance commercial property value over time, enabling them to improve income security. That is why this approach is so advantageous and sought after by investors.

It is also what makes the UK commercial property market such a unique and exciting place to invest in – both by domestic as well as international investors.

Of course, upwards-only rent reviews are great for landlords and investors, but for tenants seeking to keep their rent as low as possible, the story can be somewhat different.

Yes, it can be more adversarial, but it does provide the opportunity for both landlord and tenant to discuss future intentions and renegotiate or extend lease terms, whilst enhancing asset value.

The same cannot be said for RPI-linked rent reviews and fixed rent reviews. Both have their place in the UK market, particularly for unique assets that are difficult to value.

Inflationary linked rent review

Inflationary linked rent reviews are, as the name suggests, linked to the rate of inflation. The lease sets out a mechanism whereby the rent is reviewed at intervals by government indices such as Retail Price Index (RPI) or Consumer Price Index (CPI).

These are invariably less contentious, as they are based on a calculation at a given point in time and can also be upwards-only, giving investors guaranteed income security.

Fixed rent reviews

This is where the rent throughout the term of a lease is pre-agreed and set out in the lease terms, so there is no need to negotiate or calculate a new rent during the lease term.

The challenge with fixed rent reviews comes with predicting the market, particularly in the current climate. What level should you fix the rents at and when? Whilst it offers certainty for both the landlord and occupier, it could result in a rent that is not aligned with the market.

Turnover rent reviews

This is where the landlord and tenant share the burden of market fluctuation, as the tenant pays rent as a percentage of their turnover, rather than a fixed monthly or annual rent to the landlord.

This approach is seen in retail property, but much less elsewhere.

When the tenant’s business does well and their turnover rises, the rent they pay will increase. Should turnover fall, the landlord will receive less rent.

Turnover rent reviews are attractive for retail tenants, particularly at the moment.

However, turnover rent review clauses do need to be carefully considered to avoid a number of potential pitfalls for landlords.

In the current market, landlords of retail property will need to debate the benefits of keeping a commercial unit occupied, but with lower income, versus the challenges of having an unoccupied retail asset in the current market.

What does the future hold for rent reviews?

The truth of the matter is that the UK investment market is not geared up to have rent reviews that can go up and down – it is driven by predictability and income certainty from the landlord side.

We do not see this changing a great deal in the future.

Whilst we are likely to see a shift to turnover rents in retail property, where landlords and tenants will share the burden of market performance, for offices and industrial property, market rents will prevail. Indeed, such is the demand for industrial property currently, that the market continues to outperform RPI, so landlords are unlikely to move away from upwards-only rent reviews any time soon in this sector.

For occupiers, upwards-only rent reviews should be used as an opportunity to align your lease with your business needs.

Meanwhile, for landlords and institutional investors, every lease event – whether rent review, break option or lease expiry – should be an opportunity to enhance asset value.

Whether you are an occupier of commercial property or the landlord of one, our lease advisory experts can help you to get the most out of the rent review process, no matter which rent review option is involved.

For more information about our rent review and lease advisory services, get in touch.