Commercial lease: upward only rent reviews

I've been reading that rent reviews in leases for commercial premises are only upwards.

Are the reviews not based on the market rate? How are they calculated.

I'm amazed at the story of a rent increasing from 40K to 90K, what tenant could afford such a hike and what landlord would demand it in today's climate.

I realise the landlord is one of the bigger banks but is this not just going to put people out of business?

Re: Upward only rent reviews

They are usually worded in the lease as upward only, but it can still be contested. It will generally go to arbitration and both sets of auctioneers must put forward their evidence to support the rent increase/drop and the arbitrator will make a decision based on this evidence. There is enough evidence out there now to support a freeze or drop but there are some instances where an increase may be possible.
In January I dealt with a landlord who wanted to increase rent by 100%, his agent had some evidence to support the increase but it was more a case of trying to get rid of the tenant because he had a new tenant that was willing to pay top dollar to basically put their competitor out of business.

Re: Upward only rent reviews

Moved from Askaboutbusiness to Property Investment which is where Landlord/Tenant Commercial Rent arrangements and practices are discussed.

Thanks MrMan, what would the actual clause say, would it have a percentage or refer to market rents or to arbitration? What evidence would the auctioneers use, recently rented properties in the same vicinity I assume? How much does an auctioneer cost for this and who pays the arbitrator?

I guess if the lessee wasn't able to pay the increased rent (assuming it increased) they would be taken to court by the landlord.

One I have in front of me here states:

"THe revised rent to be determined by the Surveyor shall be such as in his opinion represents at the relevant Rent Review Date the full open market yearly rent for the demised premises let as a whole without fine or premium" and then adds some legal points about disregarding goodwill for the tenant etc.

That is one which is not upwards only, and is to be set by an Arbitrator (the Surveyor) following submissions of evidence by both parties. The costs of the arbitrtator are usually agreed in advance, and paid equally by both parties, generally just before he issues his decision. His decision is binding (except on a point of law which can be challenged).

In terms of appointing valuers, each side can do what they want and at their own cost. Usually the cost is a percentage of the difference from what the suggested new rent is and the actual achieved new rent is - but sometimes subject to a minimum fee.

Bronte said:

Thanks MrMan, what would the actual clause say, would it have a percentage or refer to market rents or to arbitration? What evidence would the auctioneers use, recently rented properties in the same vicinity I assume? How much does an auctioneer cost for this and who pays the arbitrator?

I guess if the lessee wasn't able to pay the increased rent (assuming it increased) they would be taken to court by the landlord.

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It wouldn't refer to percentages, in the review section of the lease it will be worded in some form or another that it is basically upward only with the viewpoint of market rents at the time (usually 5 years since previous review) will have increased.
Evidence that cannot be used will be set out in the lease i.e if the unit is used as a bookmakers the lease may state that fast food joints, restaurants and chemists cannot be used in evidence. Once you have taken out the exclusions you work with what's in the vicinity of similar size and you will need to have knowledge of recent reviews of similar properties. If nothing in that area, you move to look a areas with similar qualities, footfall etc.

As Lobby said the fee can be % or set fee. The arbitrator has the final say but cannot ignore strong evidence. A good auctioneer will be able to put forward a strong submission.
If a lessee was not able to pay up because of an increase then the increase would suggest that there is a market for the unit so the possibility of a sublet or termination of the lease could arise. The legal route is slow and expensive and suits nobody.

MrMan said:

It wouldn't refer to percentages, in the review section of the lease it will be worded in some form or another that it is basically upward only with the viewpoint of market rents at the time (usually 5 years since previous review) will have increased.
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But what happens currently as rents have decreased and not increased?

As long as the lease doesn't stipulate "upwards only" then the arbitrator can set the rent below the passing rent.

However, in my experience, even with strong evidence, most arbitrators literally take the arguements of each side then just split the difference.