Risk management

Read that rent review clause

From time to time the Solicitors Indemnity Fund becomes aware of leases which contain potentially misleading rent review provisions.In a recent case - and there may be more such cases - the rent review clause might have the effect of increasing the basic reversionary rent after 10 years to between 0.25% and 0.35% of the value of the whole development site, not just of the individual residential unit on the site.

Rents could increase dramatically, because the development is large.The clause provides for a rent review at the landlord's request after 10 years.It then reads:'e) The New Basic Rent is the higher of: either the Basic Rent payable immediately before the review date or the Ground Rentf) In this clause 'the Ground Rent' means 0.25% of the price likely to be paid for the Property in the open market...'So far so good? Not quite.

In the definitions section, the lease says: '..."The Property" shall mean the Building', - in other words, the whole block.A nominal basic rent of around 250 per annum could conceivably rise to as much as 20,000 as a result.

Whether you are acting in relation to a commercial or a residential lease, the precise wording of the rent review clause in every lease must be carefully checked.The more complicated, unusual or verbose the clause, the more likely that it has been inserted for the landlord's benefit.To avoid claims, there are a number of steps solicitors can take:X Make no assumptions.

Check every word, including definitions;X Get the calculator out.

Work out likely increases according to the formula given;X Check existing simple precedents for rent review clauses.

Ask why different or unusual phrases have been used;X Check the effect of any clauses linking rent to the retail price index; check what the rent would be if the lease had been granted 10 years ago;X Take advice from an expert surveyor or valuer if necessary;X Explain the effect of the clause to the client, record your advice and obtain your client's written instructions.X For information on claims prevention, contact your claims handler at the Solicitors Indemnity Fund or the Risk Improvement Unit; tel: 0171 566 6000.