The leasing of commercial properties has increased in recent times and Landlord and Tenants are both again focusing on the rent review clauses in Commercial Leases. Tenants are seeking rent review options which provide certainty in respect of rent payable over the term of a Lease.
There are a number of currently favoured options which seek to provide that certainty: CPI linked review, Cap and Collar review and Stepped Rent.
Most Commercial Leases are reviewed on a 5 year basis at open market levels. Landlords and Tenants are of course free to negotiate the reviewed Lease at each review time with the typical rent review clause providing a mechanism for review by a third party in the event in the event agreement cannot be reached between the landlord and tenant.
By choosing a CPI linked review, the rent would be reviewed by reference to an increase or decrease on the consumer price index during specified periods. The rates of inflation are published on a monthly basis by the Central Statistics Office.
By choosing a Cap and Collar method, the Cap sets the maximum limit to which the rent can be increased and the Collar sets the minimum level to which the rent can be decreased which prevents the rent falling below or increasing above a specified level.
Stepped Rent would provide for fixed increases throughout the term of the Lease either on an annual basis or on a five yearly basis.
None of these mechanisms have been tested in the Irish Courts since the prohibition of upward only rent reviews. It is possible that the Court may view the mechanisms as preventing any meaningful change in the rent agreed under the original Lease. However, the alternatives suggested provide both Landlords and Tenants with an opportunity to bring some certainty to the terms on which they are prepared to contract in respect of the property being leased which would allow for more accurate budgeting.
Both Tenants and Landlords are recommended to obtain advice prior to committing to a Heads of Terms so that each of the rent review mechanisms can be discussed to establish the one which most suits the Landlord’s or Tenant’s needs.
Caroline Meaney, Solicitor at Keating Connolly Sellors, can be contacted at [email protected] or by telephone on +353 (0)61 414 355.
The material contained in this article is for general information purposes only and does not constitute legal or other professional advice. We advise people to always seek specific expert advice for their individual circumstances.