When it comes to rent reviews, there are a number of options which could give tenants greater certainty regarding the rent payable over the term of the lease. Examples are:
- CPI-linked review
- Cap and collar
- Stepped rent
In most commercial lease agreements in Ireland, there are rent reviews every five years based on the open market rent level. Upwards-only rent reviews are prohibited by section 132 of the Land and Conveyancing Law Reform Act 2009 (the Act) for all commercial lease agreements entered into after 28 February 2010.
Landlords and tenants are free to negotiate the reviewed rent upwards or downwards. Unfortunately, however, the reviewed rent level will typically be influenced by the current market rents for comparable properties at the time of the review dates.
Alternative arrangements to an open market rent review
1. CPI-linked review: The rent is reviewed by reference to the increase or decrease in the consumer price index during a specified period. This period is typically five years. This is a recognised measure of inflation and the rates of inflation are published monthly by the Central Statistics Office.
2. Cap and Collar: Once the open market rent is determined, the landlord and the tenant look to pre-agreed “cap and collar” provisions in order to fix the rent. The “cap” will set the maximum limit to which the rent can be increased, while the “collar” will set the minimum level to which the rent can be decreased thereby preventing the rent from falling below or increasing above a certain amount.
3. Stepped Rent: This is where the lease provides for fixed increases in rent throughout the term of the lease. For example, it could be agreed that the yearly rent during the first five years of the lease will be €500,000 and the yearly rent during the second five years will be €600,000. Alternatively, an incremental fixed increase every year could be agreed.
A word of warning
These mechanisms have not yet been tested by the Irish courts since the introduction of the statutory prohibition on upwards-only rent reviews. There is a risk that these alternatives may be interpreted by a court as preventing any meaningful reduction or increase in the rent. As a result, it may be deemed to be outside of the spirit of section 132 of the Act. Section 132 assumes that the lease in question contains a rent review based on specified criteria. Landlords should take care to avoid any language which could be struck out on the basis that it effectively amounts to an upwards-only rent review.
At the outset of negotiations, tenants have an opportunity to explore alternative arrangements to the market standard open market rent review at five-year intervals which could be beneficial to the tenant’s business. This would bring more certainty to a significant business cost and allow for more accurate budgeting.
We recommend that tenants engage their lawyers prior to signing heads of terms so that the lawyers may discuss rent review mechanisms with the tenant’s real estate agents prior to signing agreed terms.
Greater certainty around rent reviews in the heads of terms may reduce the potential for heavy negotiation of certain lease provisions thereby making the process smoother and more cost-efficient.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.