What rent review means
A rent review clause decides how and when the rent changes during the term.
On a short tenancy it hardly matters, because the arrangement ends and is renegotiated. On a lease of five or ten years it matters enormously, because the mechanism rather than the negotiation determines what you pay for most of the term.
There are three common mechanisms.
Open market review: the rent is reset at intervals to what the premises would command on the open market, assessed by valuers and, where they disagree, by an independent expert or arbitrator.
Index linked review: the rent moves by reference to a published index, most often inflation, which is predictable and requires no valuation.
Fixed uplift: the rent increases by a stated percentage or amount at stated intervals, which is the simplest and gives both sides certainty.
The critical qualifier is whether the review is upward only. Where it is, rent can rise at review but never fall, however the market moves.
How it is used
The clause should answer five questions.
When. The review dates, commonly every two or three years on a longer lease.
How. The mechanism, described precisely. An open market review needs assumptions and disregards: what the hypothetical letting assumes about the premises, the term and the use, and what is disregarded, such as improvements the tenant paid for.
Who decides. The valuation process, and the mechanism for resolving disagreement, naming who appoints the expert or arbitrator.
Whether it is upward only.
And what happens if the review is late. Reviews are frequently overlooked, and the clause should state whether time is of the essence and what interest applies to any back rent.
That last point matters. A landlord who misses a review date and raises it two years later may claim the increase retrospectively, and a tenant who never budgeted for it faces a substantial arrears demand.
The disregard for tenant improvements is the clause tenants most often lose money on. Without it, a tenant who spent heavily fitting out the premises has their own investment used to justify a higher rent.
Key features
- Determines how rent changes during the term of a lease
- Common mechanisms are open market, index linked and fixed uplift
- Upward only reviews prevent rent falling regardless of the market
- Open market reviews need stated assumptions and disregards
- Tenant improvements should be disregarded in the valuation
- The clause should state what happens if a review date is missed
How this works in Nigeria
Nigerian commercial leasing practice differs from residential tenancy practice, and the review question really only arises in the first.
Most residential arrangements are yearly tenancies with rent paid in advance and renegotiated at renewal, so there is no review mechanism at all. The landlord proposes a new figure, the tenant accepts or leaves, and in Lagos the tenant can apply to court where a proposed increase is unreasonable.
Commercial leases of several years are where review clauses live, and two Nigerian features make them harder than elsewhere.
The first is currency. Some commercial rents are agreed in dollars and paid in naira at the prevailing rate, which functions as a review mechanism of its own and transfers exchange rate risk to the tenant. A tenant agreeing that structure should understand that a rate movement can increase the naira cost dramatically without any review taking place.
The second is comparable evidence. Open market reviews depend on evidence of what similar premises are letting for, and Nigerian transaction data is thin, so valuations diverge and disputes are harder to resolve.
For those reasons, index linked or fixed uplift reviews are often the more practical choice in a Nigerian lease. Both sides can model the cost, and neither is arguing about comparables.
Open market vs index linked vs fixed uplift review
Three mechanisms, trading certainty against accuracy.
Open market review resets the rent to what the premises would actually command. It is the most accurate reflection of value and the most contentious, because it depends on comparable evidence and valuer judgment, and it requires a dispute mechanism.
Index linked review moves the rent by reference to a published index. It requires no valuation, it is transparent, and it may diverge from what the property is actually worth. In a high inflation environment it can rise faster than the market.
Fixed uplift increases the rent by a stated amount or percentage at stated intervals. It gives both sides complete certainty and complete indifference to what actually happens in the market.
For a Nigerian commercial lease, fixed uplift or index linked reviews avoid the comparable evidence problem, and a tenant should model the total cost across the term before agreeing any of them.
Limits and risks
Upward only reviews mean a tenant cannot benefit from a falling market, which in a downturn leaves them paying above market rent with no remedy.
Open market reviews depend on comparable evidence that may not exist, making outcomes unpredictable and disputes expensive.
Index linked reviews can outrun the market in either direction, and in a high inflation environment they can produce increases the business cannot absorb.
And a review clause does not help a tenant whose business has changed. Rent set by mechanism takes no account of whether the premises still suit the occupier.
Worth knowing
Make sure the review clause disregards improvements you paid for. A Nigerian tenant who fits out premises at their own cost and then has the rent reviewed on the improved property is paying rent on their own investment, every review, for the rest of the term.
Questions people ask
What is a rent review clause?
A term setting out how and when rent changes during a lease. Common mechanisms are open market review, index linked increases and fixed uplifts at stated intervals.
What does upward only mean?
That the rent can rise at review but never fall, whatever happens in the market. A tenant in a downturn continues paying above market rent with no mechanism to reduce it.
Which mechanism is best in Nigeria?
Index linked or fixed uplift reviews avoid the comparable evidence problem that makes open market reviews contentious here, and both allow the parties to model the total cost across the term.
Why should tenant improvements be disregarded?
Because otherwise you pay rent on your own investment. A tenant who fitted out the premises at their own cost has that work reflected in the reviewed rent unless the clause expressly disregards it.
What if the landlord misses a review date?
It depends on whether the clause makes time of the essence. Where it does not, a landlord may raise the review late and claim the increase retrospectively, which can produce a substantial arrears demand.
Do residential tenancies have rent reviews?
Generally not. Most Nigerian residential arrangements are yearly tenancies renegotiated at renewal, and in Lagos a tenant can apply to court where a proposed increase is unreasonable.