It is very common for commercial property leases to include rent review clauses that allow a landlord to revisit the rent payable, typically on the anniversary of the lease's start (often the fifth anniversary).
As of the date of this article, it is also very common to find upwards only rent reviews in commercial leases, but the government is intending to ban upwards only rent reviews in the very near future, and landlords are therefore going to have to think again about how they can achieve uplifts in their rent.
What can you do if you have a commercial rent review dispute?
The starting point is always to look at the lease document, because it sets out the process for the rent review and, if applicable, contains provisions on how any dispute should be resolved.
In any dispute of this nature, attempts should first of all be made through negotiation, and if that fails, alternative dispute resolution. However, it is also very likely that the lease will set out specific contractual provisions about how a rent review dispute is to be resolved. That might include appointing an arbitrator or an expert to determine the level of rent payable in the absence of an agreement between the parties.
Should you use arbitration for commercial rent reviews?
Again, the starting point is to review which provisions are included in the lease and whether the parties can appoint an arbitrator. It is often more beneficial to appoint an expert because an independent expert can conduct their own market research to determine the level of market rent, rather than simply relying on evidence submitted by either party.
If the parties can appoint an arbitrator, the advantages of that process include a final, legally binding decision, often quicker than traditional court proceedings, and arbitrators are usually experienced commercial property surveyors who are very familiar with rent reviews and market rent.
However, arbitrator’s fees can be expensive, and appointing an arbitrator means that the decision on the market rent payable will be completely handed over to the arbitrator, and their final rent figure may not accord with what either party's surveyor was recommending. An arbitrator also has the power to award costs, and if the arbitrator's decision did not go your way, then you could find that you are on the receiving end of a significant costs order. It is also very difficult to appeal an arbitrator's decision.
What is expert determination in commercial rent reviews?
This is where, if the lease permits, an independent expert is appointed who has the power to review their own research materials regarding the level of rent payable and is not bound to consider only the evidence submitted by the landlord and the tenant. It is common for rent review clauses to provide that any disputes be referred to an independent expert, and their fees are often lower than those of an arbitration process.
Should you use arbitration or expert determination?
The starting point is always the lease's provisions and whether they permit the appointment of an arbitrator or an independent expert. In very general terms, a party would want to appoint an independent expert for a valuation issue and an arbitrator for a more complex legal issue that needed to be decided.
Independent experts are very good at making simple, quick decisions about market rent and can determine the new rent using a process that is faster and less expensive than arbitration. It is also beneficial to use an independent expert, as they usually have no power under the lease to award legal costs to the winning party. This means that a landlord or tenant can make a reference to an independent expert and have the comfort that, even if it does not go their way, they will not end up with a significant adverse costs order.
Arbitrators are used mostly for complicated lease interpretations or when there is extensive evidence to consider. They act more like a judge and do not conduct their own investigations into market rent, but will make a final decision based on the evidence and submissions presented to them by both sides. The arbitration process is much more formal than an independent expert determination and can be time-consuming and costly.
What factors influence the choice of process to use?
The lease will determine which process can be used, and then, taking into account the points made above in relation to how quickly the decision needs to be made. Whether it is in your interests for an independent expert to undertake their own review of the market rent, and the potential for an adverse costs order, those factors determine which process ought to be adopted.
If the lease is silent on whether an arbitrator or expert can be appointed, then it is for the parties to agree.
How do you prepare for your rent review case?
Whether you are a landlord or a tenant, you will always want to take early advice from a surveyor on the level of rent payable. Although many commercial leases currently benefit from an upwards only rent review, which means that even if the rent cannot be increased, it cannot decrease below the current level of rent payable, that is going to change in the next few years, and a surveyor’s input on what the market rent actually is is going to become much more significant.
You should seek early advice from a surveyor on the market rent and then propose that figure to the other side. If that is not accepted, it would be beneficial for the surveyors to have an early conversation to see if they can reach any agreement on the level of rent payable, and if that is not possible, then regard needs to be given to the dispute resolution clause in the lease and whether an arbitrator or an independent expert needs to be appointed.
What happens in a rent review hearing?
A hearing would only be relevant if it were conducted by an arbitrator, a tribunal, or a court that was reviewing the evidence to determine the fair open market rent. It is usual for an independent expert to receive written submissions from each party on what they think the market rent should be, then to conduct their own investigation and review the market to make the decision, without a hearing. It is still possible to have a hearing with an independent expert, but it is less common.
If there is a hearing, it is usual for the landlord to present their case and evidence first, followed by the tenant. The arbitrator or tribunal panel may ask questions of each party, and then decide on the level of market rent payable.
How can you challenge rent review decisions?
If a decision has been made at a final hearing by an arbitrator, it is very difficult to appeal against that decision. If an independent expert has been appointed, it is very likely that the terms of appointment provide that they will make a binding decision, and if those terms have been agreed, it will again be very difficult to appeal or overturn the decision.
What is cost management in rent review disputes?
There is nothing specific to cost management in rent review disputes, as the general principles apply in this field as they do with many others.
An early view needs to be taken on the potential costs of a reference to an independent expert or the appointment of an arbitrator, and the total likely costs of those processes, balanced against the potential savings that might be accrued if the decision were to go in your favour. For example, appointing an independent expert and having a surveyor support you throughout the process could easily incur £20,000- £30,000 in costs. A similar amount, if not more, might be incurred if an arbitrator were to be appointed, especially if you also had legal advice. Remember also that if the arbitrator decides against you, they can also make an adverse costs order.
If costs of say £30,000 are going to be incurred, and even if the reviewed rent was going to be £10,000 less than the current market rent, then an early evaluation needs to be undertaken at an early stage as to whether it is worthwhile incurring those costs to challenge the proposed new rent that the other side is putting forward. Often, however, there are broader considerations beyond the new rent, which means that a challenge does need to be made, even if it does not prove to be cost-effective.
What are the alternative approaches to rent review disputes?
Early negotiation is key, as are considerations of early, without prejudice settlement negotiations and offers. If an offer is made in writing at an early stage, it could provide a party with significant cost protection if no agreement is reached and the matter proceeds to be determined by an arbitrator, the tribunal, or the court.
How can I prevent rent review disputes?
Again, early negotiation with the other party is always preferable, and it is essential that the parties are well advised from an early stage by a professional surveyor and do not try to cut corners or form their own view of the level of market rent payable.
This information is for guidance purposes only and does not constitute legal advice. We recommend you seek legal advice before acting on any information given.
