The review takes place on a certain date or dates, prescribed within the lease. The rent review clause will also outline how the review is to be carried out.
How rent review provisions are drafted is important as reviews are often based on either the Retail Price Index (RPI) or the Open Market.
RPI is a measure of inflation that changes month-to-month depending on the current price of goods and services - a form of indexation. For example, if there is a 2% rise in prices, then the rent should increase by 2% regardless of the property’s current rental value. It is essentially a calculation subject to the inflation at the time of the review.
An Open Market rent review aims to reflect the value of the property on the Open Market at the date of the review. The review will compare the rent of other properties of a similar type, use and location to accurately reflect the level of rent the Landlord should, hypothetically, expect to reasonably get at the time of the review. It is dependent on the state of the property market at the date of the review.
Both types of reviews have advantages and disadvantages whether you are a landlord or a tenant. Landlords will want to maximise their investment and will therefore want the rent to increase, whereas a tenant will want to ensure they are paying fair and reasonable rent for the property.
As RPI is based on month-to-month inflation figures, this can provide the landlord and tenant with more certainty as it is generally more consistent. RPI-based reviews are less contentious as they are based on a calculation. As a result both parties may be more agreeable to this kind of review. However, tenants may dislike the fact that there is lack of connection between inflation and the property market.
An Open Market review is dependent on the state of the property market at the date of the review. This contrasts with an RPI review because the property market is a lot less consistent and landlords may view this as a risk. However, when the property market is thriving, an Open Market rent review could increase rent significantly. Open Market reviews should set out assumptions and matters to be disregarded, for example if the tenant has carried out works to the property at their own expense the tenant will probably want this to be disregarded from the review.
Open Market rent reviews are generally drafted to operate 'upwards only.' This means the reviewed rent will either increase in line with the Open Market or, if this is less than the current rent, remain the same. This protects the landlord and allows them to retain the same level of rent. However, the tenant will not benefit from any decrease of rent.
Sometimes, but rarely seen in practice, landlords will agree to an upward-downwards rent review which will allow the rent to increase or decrease. This is usually so the landlord can retain its tenants. More commonly seen, however, the review can be based on the higher of the two (either RPI or Open Market).
The inclusion of 'caps' and 'collars' in rent reviews allows the parties to agree the minimum and maximum increase of rent on a rent review. Collars will assure the landlord that the rent will increase even if RPI reduces, whereas caps will assure the tenant that the rent will not increase beyond a certain amount. This provides both parties with some form of certainty.