Rent reviews are a mechanism for adjusting a tenant's rent to the current market level. Similarly, the revaluation of rating assessments adjusts the rates an occupier pays, bringing it into line with rental values.
You negotiate rent reviews (if your lease provides for them) with your landlord. You discuss rates with your local valuation office. The key questions are whether an increase is reasonable and if you should challenge it. This briefing covers:
- The rent review terms in your lease.
- How to negotiate a low open market rent valuation.
- How to appeal against a rent review.
- Rating assessments, and how to query your valuation.
1 Your initial position
The landlord's right to increase the rent, and your right to challenge an increase, are detailed in your lease agreement. Read it, and discuss it with your professional adviser, who should specialise in property.
1.1 The frequency of rent reviews is typically once every three to five years.
- As a tenant, you want rent reviews to be as far apart as possible. Your rent then lags behind any general increase in rents.
1.2 The new rent is usually the open market rental value at the date of the rent review.
- This is the rent the landlord could expect to receive if the premises were leased to a third party, on similar terms.
- You may have agreed a low rent for the original lease, but this is irrelevant. It does not entitle you to continue with a low rent.
Some leases have fixed increases or link the new rent to increases in the retail price index or some other inflationary indices.
1.3 If the rent review is 'upward only', the rent cannot go down at the rent review even if the open market value of the rent is lower than your existing rent.
1.4 The lease will include a range of 'assumptions', aimed at making comparisons with other premises easier when deciding the open market rental value. The 'use of the premises' assumption can increase or decrease the rental value.
- If a building can be used either as high-value office space or low-value storage space, the rent will be valued on the assumption that the tenant will use it as an office. It is irrelevant that the tenant may really only be using it for storage.
1.5 The landlord must usually give you notice, in writing, if the rent is to be reviewed. Three months is a typical notice period.
2 Negotiating a market rent
At a rent review your landlord will want to increase the rent. Strengthen your position by gathering evidence to show that the proposed rent is too high.
2.1 Collect information on the rents charged for similar premises in the area.
- Ask fellow tenants what they are paying.
- Commercial estate agents can provide details of properties to let.
- Obtaining details of the rents that have actually been agreed is more difficult. You may be able to reach an agreement to swap information with the tenants.
2.2 Form your own estimate of the open market value of your premises.
- When analysing the rent of other premises, make any necessary adjustments for incentives (or premiums).
2.3 Try to reach a settlement with your landlord at this stage.
- If local rent levels are collapsing, consider proceeding more slowly. But observe any time limits set out in the lease.
- If you are in shared premises, consider negotiating jointly with other tenants.
Until agreement is reached, you can continue paying rent at the old rate. On settlement, you will have to pay the difference between the passing and revised rents.
2.4 If appropriate, negotiate better terms in your lease as part of your rent review.
Your surveyor can compile the necessary evidence and negotiate on your behalf.
If the negotiations become acrimonious or legalistic, involve your solicitor.
3 Using a third party
If you cannot agree the new rent, the lease usually specifies that a third party should resolve the dispute and sets out the procedure to be followed.
3.1 First try to agree on an independent third party, such as a local chartered surveyor.
- You can veto the landlord's suggestion, if you think this person favours the landlord.
- If you cannot agree the appointment, an independent appointment must usually be made by the president of the Royal Institution of Chartered Surveyors (RICS).
3.2 An arbitrator's decision will be based on evidence presented by you and the landlord.
3.3 An independent expert's decision will be based on his or her own knowledge and investigations.
- The independent expert need not consult you or the landlord.
- Usually you split the fees equally with the landlord and pay your own costs, even if you win the appeal.
3.4 The major drawbacks of going to a third party is the cost, as well as the time.
- The fees are usually agreed by you and the landlord with the third party when he or she is appointed.
- You can expect to pay at least £1,000, plus the cost of your own professional advisers.
- The third party's decision is usually announced once the fees have been paid.
Going to a third party may not pay off, especially if your rent is low. But it may be the only way to reach an agreement.
3.5 Once the third party's decision is made, any rent owed is payable immediately.
- The new rent is backdated to the rent review date. Interest is likely to be payable.
3.6 The alternative way to settle a rent dispute if your lease allows it, is to use a mediator. You and your landlord need to agree who the mediator will be.
- Using a mediator may be a quick and cheap solution. The mediator has no authority to impose a rent on either party.
4 Understanding rates
4.1 All non-domestic property is subject to business rates.
- Living accommodation - including most accommodation within business premises - is subject to council tax.
- Business rates are normally payable by the occupier of the premises.
- If your lease or licence agreement states that the rent is inclusive of rates, it is your landlord who is responsible for paying the rates. If the landlord defaults, the local council can pursue the occupier.
4.2 The amount you pay in rates is based on the rateable value of your premises.
The Valuation Office Agency (VOA) in England and Wales, and the Assessor in Scotland, provides summary valuations showing how your rateable value has been calculated.
- The basic level of rateable value usually remains fixed for a five-year period. The rateable values which became effective on 1 April 2010 were based on open market rental values on 1 April 2008.
- Any new premises or any changes to existing premises are valued at the rent they would have commanded in April 2008.
- The next revaluation comes into force on 1 April 2015. Any national increase in rateable values should be offset by a comparable reduction in the multiplier (see 4.3).
- The rateable value is the same, whether the premises are owner-occupied, leased or licensed.
4.3 The normal rates payable are calculated by multiplying the rateable value by the multiplier. The multiplier (sometimes called the Uniform Business Rate or UBR) usually changes each year in line with inflation.
- For the year starting in 1 April 2013, the standard multiplier in England is 47.1p (including the Small Business Rate Relief premium of 0.9p) (see 4.4). So for a building with a rateable value of £50,000, the annual rates would normally be £23,550, but this could be subject to transitional arrangements (see 4.6).
- A lower small business multiplier, 46.2p, is used for businesses eligible for Small Business Rate Relief (SBRR) (see 4.4).
- Special rules apply in the City of London, which usually charges a small supplement over the standard multiplier.
4.4 Businesses in England which occupy only one main property with a low rateable value can get SBRR.
- Eligible rate payers qualify for 100% SBRR on buildngs with a rateable value up to £6,000 and a tapering relief from 100% to 0% for properties worth up to £12,000.
- For rateable values between £12,000 and £17,999 (or up to £25,499 in London), there is no percentage reduction but the small business multiplier is used.
- Businesses that occupy additional properties may still be able to claim the relief on the main property, provided that the rateable value of each of the other properties is less than £2,600.
- The process for obtaining SBRR has been simplified and you no longer have to apply for the relief.
You must inform your local authority if your circumstances change in any way that is likely to affect your entitlement to SBRR, for example, moving to new premises.
4.5 You may qualify for other reliefs.
- If the property (or part of the property) is empty, you may qualify for rates relief.
- Empty commercial premises are exempt from business rates for the first three months. Industrial and warehouse buildings qualify for a further three months' exemption. After that, full business rates are payable.
- Listed properties and those with a rateable value of under £2,200 are exempt from empty property rate. Assessments of land are also exempted.
- There are a number of specific reliefs for properties in rural areas and for charities and qualifying amateur sports clubs.
If you believe you might qualify, contact your local authority.
4.6 You receive the rate demand from your local authority each year around 1 April. You have a choice of when to pay.
- Most businesses choose to pay in ten equal monthly instalments.
5 Challenging your rates
5.1 If you disagree with the rateable value set for your premises, you can contact your local VOA office to discuss the valuation and why you think it is incorrect.
5.2 If you still do not agree with the rateable value, you can make a formal proposalThere are two main grounds of appeal:
- The rateable value of the premises is significantly different to the open market rental value of the premises at the last valuation.
- The premises are adversely affected by a change in circumstances. For example, structural alteration of the premises or the loss of nearby parking facilities.
- You may not make more than one proposal on the same grounds during the life of a rating list (the current list runs from 1 April 2010 to 31 March 2015).
5.3 The VOA will consider your proposal and discuss it with you.
- You can complete the proposal form yourself, or make a proposal on the VOA website.
- A property adviser, such as a chartered surveyor, can advise you and make a proposal on your behalf.
- Avoid advisers who may provide you with poor advice for a large fee. Try and use an adviser based on a personal recommendation.
- The person at the VOA dealing with your proposal will advise you when he or she is ready to discuss it.
- If you cannot agree a revised assessment, you can appeal to a valuation tribunal.
5.4 If your rates challenge is successful, you receive a rate refund.
- This might be a cheque, a reduction in the amount of your monthly payments, or a credit for the next year.
- You usually receive interest on the amount owed to you.
6 Where to get help
6.1 The Royal Institution of Chartered Surveyors (RICS) runs several helplines.
- The RICS helpline provides information for non-members (0870 333 1600; www.rics.org/uk).
6.3 Staff at the VOA are available to discuss your property's rateable value. Call the VOA helpline to get connected to your local office (03000 501501).