Rent Reviews & RPI
A commercial lease rent review allows the landlord to usually increase the rent that’s paid by the tenant.
The review must take place on a certain date (or dates) as prescribed within the lease. The rent review clause will also outline exactly how the review is to be carried out.
How rent review provisions are drafted is important. This is because reviews can be based on either the Retail Price Index (RPI) or the open market. Let’s look at both methods in greater detail.
RPI rent reviews
RPI is a measure of inflation. It changes on a month-to-month basis depending on the price of goods and services.
Using this method, the rent calculation is based on the level of inflation at the time of the review. For example, if prices have risen by 3%, then the rent will also increase by 3%. For an RPI rent review, the current rental value of the property is not considered.
Open market rent reviews
Open market rent reviews reflect the value of the property on the open market at the time of the review. Due to this, an open market rent review will compare the rental value of other properties that are of a similar type and use in that area.
Using this data, an open market rent review will accurately reflect the level of rent that the landlord should reasonably expect to get at the time of the review.
Are RPI or open market rent reviews better?
Due to the fact that RPI rent reviews are based on month-to-month inflation figures, they provide landlords and tenants with more certainty and consistency.
Plus, because they’re based on a calculation, they’re less contentious than open market rent reviews.
However, although both parties can be more agreeable to this form of review, some tenants dislike the fact there’s a lack of connection between inflation and the property market.
As an open market rent review is dependent on the state of the property market, some landlords view them as more of a risk than an RPI review. However, when the property market is thriving, an open market rent review could increase rent significantly.
Open market rent reviews are generally drafted to operate ‘upwards only’. This means the rent cannot decrease below the current rate. On occasion (but this is rarely seen in practice), landlords will agree to an upwards-downwards rent review. It’s also possible for the review to be based on the higher of the two review methods (either RPI or open market).
Similarly, in practice, many rent reviews include ‘caps’ and ‘collars’ that state the minimum and maximum increase of rent during a rent review. These provide both parties with some form of certainty.