Open Market Rent Review in Commercial Leases

Understanding how rent adjustments work is essential when signing or negotiating a commercial lease. One of the most common methods used to review rent is the open market rent review, a mechanism that ensures the rent reflects current market conditions. This approach is widely used by landlords and tenants to maintain fairness and transparency, while also protecting rental income and property investment value.

In this guide, we explain what an open market rent review is, how it works, the key considerations for both landlords and tenants, and why it plays a crucial role in commercial leases.

Table of Contents

What is an Open Market Rent Review in a Commercial Lease?

An open market rent review is a method used in commercial leases to adjust rent so it reflects the current market value of the property at the review date.

This approach imagines a "hypothetical lease" as if the property were vacant, allowing a professional valuer to determine a fair rent based on comparable properties and prevailing market conditions. The aim is to ensure landlords receive reasonable rental income while tenants pay a rent aligned with the open market.

How Does an Open Market Rent Review Work?

During an open market rent review, the rent is calculated using a formula defined in the rent review clause. The process assumes the tenant has complied with all obligations, like maintaining the property in good repair, while ignoring certain tenant improvements. A valuer then sets a market-based rent, which can be agreed upon by both parties or determined by an independent surveyor if there's disagreement. This makes the process both transparent and fair for landlords and tenants.

Here's how it typically works:

1. Hypothetical Lease

The review starts by imagining the property is vacant and available to let on the open market. This "hypothetical lease" assumes the same terms as the existing lease, with adjustments as specified in the rent review clause.

2. Market Valuation

A professional valuer or surveyor determines the appropriate rent for the property based on comparable properties in the area and prevailing market conditions. This ensures that the new rent reflects current demand and local rental trends.

3. Assumptions and Disregards

The lease will outline which factors should be taken into account and which should be ignored. For example:

• Assumptions: The tenant has complied with lease obligations, such as maintenance.
• Disregards: Tenant-funded improvements, temporary market anomalies, or certain unusual conditions.

4. Negotiation or Determination

Once the valuation is carried out, the landlord and tenant may negotiate and agree on the new rent. If they cannot agree, the lease usually provides for an independent surveyor or arbitrator to determine the figure. This helps avoid lengthy disputes and gives both sides certainty.

Key Considerations in Open Market Rent Reviews

While the concept seems straightforward, there are several important issues that both landlords and tenants must keep in mind.

1. Upward-Only vs. Upward-Downward Reviews

Traditionally, most open market rent reviews in the UK have been upward-only, meaning the rent can increase or remain the same, but never decrease. This has long been criticised for being unfair to tenants, particularly when market rents fall.

In fact, new legislative proposals under the English Devolution and Community Empowerment Bill aim to restrict upward-only rent reviews, allowing rents to adjust downward as well, bringing them more in line with true market conditions. If this becomes law, it could significantly reshape how commercial leases are negotiated in the future.

2. Standard Lease Terms

The rent review is always carried out based on the existing lease terms, but with certain agreed modifications.

This is why the wording of the rent review clause is crucial. Small differences in drafting can lead to very different outcomes, so both parties should seek expert legal advice before signing.

3. Flexibility and Negotiation

Although the main purpose of a rent review is to reset rent levels, the process often provides a chance for landlords and tenants to discuss wider lease-related issues. For instance, tenants may seek to negotiate caps or more flexible review provisions, while landlords may use the opportunity to strengthen long-term rental income.

4. Importance of the Lease Clause

No two rent review clauses are exactly the same. The specific drafting in your commercial lease will dictate how the review is conducted, what assumptions are made, and how disputes are resolved. This makes professional advice from a commercial lease solicitor invaluable.

Why Open Market Rent Reviews Are Used

Despite their complexity, open market rent reviews remain the most widely used method because they strike a balance between reflecting real-world market conditions and maintaining fairness between landlord and tenant.

For Landlords

An open market review ensures that rental income keeps pace with the property market. In high-demand locations, this can mean significant rental growth over time, providing a strong return on investment. Landlords also benefit from the relative certainty of established valuation practices.

For Tenants

For tenants, the system can be challenging when market rents rise sharply. However, if legislation shifts toward upward-downward reviews, it could create greater fairness and help businesses manage costs more effectively. Importantly, open market rent reviews can also help prevent vacancies in high streets and shopping centres, as rents are more closely aligned with what tenants are realistically willing to pay.

Advantages of Open Market Rent Reviews

• Aligns rent with current commercial market conditions.
• Offers a transparent, professional method for reviewing rent.
• Can prevent disputes by relying on independent valuations.
• Protects landlords' rental income and property value.

Disadvantages and Risks of Open Market Rent Reviews

• Potential for high rent increases if the market has risen significantly.
• Historically, upward-only clauses can disadvantage tenants when market rents fall.
• Lease wording heavily influences the outcome, requiring careful legal review.

Can Disputes Arise in Open Market Rent Reviews?

Yes, disputes can occur if the landlord and tenant cannot agree on the market rent or the interpretation of the lease terms. Most commercial leases allow for an independent surveyor or arbitrator to determine the new rent.

Having a clearly drafted rent review clause and seeking professional legal advice helps minimise conflicts and ensures the review process is fair and transparent.

How Can I Prepare for an Open Market Rent Review?

To prepare for a review, tenants and landlords should:

• Understand the terms of the rent review clause in their lease.
• Gather information on comparable properties and current market rents.
• Consider engaging a commercial lease solicitor to review assumptions and disregards.
• Negotiate any necessary caps, collars, or adjustments to protect against unexpected increases.

Conclusion

An open market rent review in a commercial lease is a fundamental mechanism that ensures rents reflect real-time market conditions. It works by creating a hypothetical lease, applying market valuations, and using carefully drafted assumptions and disregards. While the process benefits landlords by protecting rental income, tenants must be cautious, especially with upward-only reviews, which can drive rents higher even during downturns.

The specifics of the rent review clause are crucial, and expert guidance from commercial lease solicitors is essential to negotiate fair terms and avoid disputes. By understanding the process and potential implications, both landlords and tenants can make informed decisions that balance fairness, transparency, and financial security.

At Moeen & Co. Solicitors, our team of expert commercial lease solicitors specialise in advising both landlords and tenants on rent review clauses, lease negotiations, and dispute resolution.

Whether you're facing an open market rent review, a CPI or RPI rent review, or a complex lease renewal, we'll guide you through every step with clarity and confidence.

Need advice on your open market rent review? Contact our commercial lease solicitors today at 0203 959 7755 to discuss your commercial lease rent review.