The reason people own multiple properties, especially commercial properties, is that after that initial cost you can sit back and make money off it without having to do much. This often comes in the form of rental income by the people or business using it. Depending on the lease agreement, and the type of property you own, you might find you have more to do with it than you first thought, and rent reviews are a part of this.
Whether you’re looking to make money from the property or have another goal in mind, the rental income is important – especially if you haven’t paid for the building upfront. When working with lenders or mortgages, you’ll have payments to make, too, and while the rental income may cover it, over time you might find that you’re not maximising the potential of the property you own.
This is where rent reviews come in.
What Is A Rent Review?
A rent review is an opportunity for a property owner to increase the rental price of the building they are letting out. This is normally done at specific times, which depends on the lease agreement and external factors that need to be taken into account.
When leasing a property to a business, the rent price is a part of the agreement. Commercial properties tend to be rented to a business over a substantial period of time, which would make the rent stable over that period.
However, there are often clauses in the contract that allow for increases. This tends be once a year, to ensures costs and prices are in-line with changes to the economy and market. How much the rent can be increased is capped at around 10%, but in some cases this varies.
Notice should be given to the occupier about any increase, as this may make the situation untenable. If rent reviews and increases are a part of the contract, it’s also common to see break clauses included, too.
What should you expect from a review review?
A rent review is about more than just increasing the rental price of a property. Each type of commercial property has a different purpose, and could bring different amounts. A standard percentage increase might seem the easiest way of doing things but there’s a lot to consider beyond the building itself, which is where expert advice and support can become invaluable.
You might find some resistance from the tenant when you inform them of a rent increase. While you are within your rights as the property owner to do this, you should consider the consequences it can have.
If there is an objection, you can push ahead regardless or work with the inhabitants by negotiating rent payments so both sides fee satisfied.
Considering Negotiating Rent?
As mentioned, you can increase the rent of any property you own but this could result in the lease ending as it’s not possible or acceptable for the tenant to continue. This means a period of time where your commercial property is empty while you look for someone else to take over the space.
In this time, if payments need to be made, you will be responsible for making them. That means you should think carefully about what impact any increase will have, and how this is reflected in the property market so you can make the strongest case in any rent negotiation.
How to negotiate rent
With any rent negotiation, you should make sure you have all the relevant information and facts before beginning. This is to make sure you aren’t blindsided with something that changes the outlook for both parties involved in the process. After all, the goal is to ensure the business stays in your property while getting the income you need.
Have a goal in mind, but also work out what the minimum increase would be. Back up your decision with data, such as market rates, nearby prices and other factors to show the current leaseholder that moving to a new location won’t be of any benefit to them, and, if possible, explain why the increase is taking place to ensure a good relationship is maintained.
There might be some back and forth, but in the end, you can find the best option.
How Does Residential And Commercial Rent Differ?
Residential and commercial rent differ in the uses of the property, with residential properties being used for people to live in – even if they are owned by someone else. A commercial property is used by businesses to operate from, even if that doesn’t involve customers entering the premises.
Residential property can be rented out for as little as a month at a time – sometimes even shorter – and up to years, although a year-long agreement with the option to continue is most common. This means there is a very easy and obvious time for a rent review.
Commercial properties are leased for longer periods of time so the business using it can stabilise. This will affect the rent payments, and limits when rent reviews may be undertaken.
What Factors Affect A Commercial Property’s Rent?
There are a number of factors that can affect the rent of a property, and when thinking about how to calculate commercial rent, you’ll need relevant and up-to-date information to come up with the most suitable increase.
Look at the commercial property market and compare rent prices at locations nearby, as well as those further afield that are a similar size, used in the same way, and have identical access routes. This can give you an idea of what to charge. The wider economy and inflation are also factors to consider, as this can drastically change the picture.
Rent reviews are not held at the same time, so this is a constantly changing environment.
Get The Right Support For Your Rent Review
When its time for a rent review, it’s important to make sure you get the right advice and support. This ensures you know what you can do and what to expect from the tenants using the property you own. While you might be tempted to increase the rental price – as you have the power to do – it can result in current inhabitants moving to a new location. This means you have to search for a new business to take over, which means a drop in income or having to pay costs yourself.
This is what can lead to negotiating rent to find a solution that works for both parties. Experienced advisors can help with this, too, and ensure the best price is agreed for both the short and long term.
If you’d like to know more about rent reviews, then speak to our team at Williams Sillitoe today and find out how we can help.