The Most Expensive Clause in a Commercial Lease Is Often the Least Understood
Most rent review disputes are not caused by bad faith negotiation. They are caused by a clause that neither party fully understood at signing.
There is a section of every commercial lease that gets less attention than it deserves at signing, and significantly more attention in years three, five, and seven.
The rent review clause.
By the time the first review triggers, the economics of the original negotiation are history. The market has moved. The relationship has developed. And the clause sitting in the lease determines whether the rent follows the market, tracks an index, increases by a fixed amount, or does something more complicated involving the tenant’s trading performance.
The landlords who approach that review from a position of confidence are the ones who understood exactly what they agreed to at signing.
The ones who approach it with surprise are the ones who signed a clause they read as straightforward and discovered, when the review date arrived, that it was not.
The Clause Most People Gloss Over
A rent review clause does four things.
It specifies when reviews occur. It defines the method used to calculate the new rent. It determines whether the rent can move downward as well as upward. And it sets out what happens if the parties cannot agree.
Each of these elements has financial consequences that extend for the full lease term.
The method matters most.
A market rent review produces a rent reflecting what the premises would achieve in the open market at the review date.
A CPI-linked review calculates the new rent by applying the change in a price index to the passing rent. No valuer. No market evidence. Mechanical and predictable.
A fixed percentage review is even simpler. The lease specifies the increase. The market is irrelevant.
A turnover review calculates some or all of the rent as a percentage of the tenant’s gross trading revenue.
Four methods. Four completely different financial trajectories for the same asset over the same lease term. The method is chosen at negotiation and cannot be changed without the other party’s agreement.
This is not a technical detail.
This is the fundamental income economics of the asset.
The Ratchet That Nobody Explained
Here is a lease provision that appears in many market rent review clauses and is not always understood by the parties who signed the lease.
The ratchet.
A ratchet clause, also called an upward-only provision, means the rent at a market review can increase or stay the same, but cannot fall below the passing rent regardless of what the market evidence shows.
In a rising market, this is largely invisible. The market review produces a higher rent. The ratchet does not come into play.
In a softening market, it becomes very visible.
A tenant whose lease contains a market rent review with a ratchet clause, in a building where market rents have declined fifteen percent since the last review, is not entitled to a reduction at the next review. They pay the same rent regardless of what comparable transactions show.
The landlord’s income floor is protected. The tenant is locked in above market.
This affects the tenant’s occupancy cost relative to competitors. It affects willingness to renew at lease end. And it is a provision that should be understood clearly by both parties at negotiation, not discovered as a surprise when the market softens and the review date arrives.
We see this consistently. The lease terms that generate the most friction during the tenancy are almost always the ones that were negotiated in the abstract at signing and became concrete only when they had financial consequences.
When CPI Diverges From Reality
The appeal of a CPI-linked rent review is obvious.
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No valuer. No market evidence. No dispute. The index moves and the rent moves by the same amount.
The limitation becomes apparent in retrospect.
CPI does not track commercial rental market movements.
Consider a simple example. A tenant paying $100 per square foot with a three percent fixed annual CPI-linked review reaches approximately $116 by year five regardless of market conditions. If comparable market rents in the same submarket have risen to $135 during that period, the landlord is systematically underperforming. If market rents have fallen to $88, the same structure protects income in a way a market review would not.
Over a ten-year lease with five review events, the divergence between CPI and market conditions compounds into a material gap between the income the asset generates and what it could have generated.
Neither outcome is inherently right or wrong.
Both are the direct consequence of a method chosen at negotiation that locked in a specific relationship between passing rent and an external index for the full lease term.
The Turnover Clause That Reveals Its Complexity Later
Turnover rent is the review structure that most consistently reveals its complexity after signing.
The concept is simple. The tenant pays a base rent plus a percentage of gross turnover above a specified threshold. The landlord participates in the upside of the tenant’s trading performance.
The complexity lives in the drafting.
What counts as gross turnover? Does online revenue from orders placed but fulfilled from the premises count? What about click-and-collect? Returns? Ancillary services sold from the premises but not the core product?
What audit rights does the landlord have over the tenant’s trading accounts? What format does the tenant use to report turnover? What is the reconciliation frequency and deadline?
A turnover rent clause not drafted precisely is a clause that will generate a dispute the first time it is applied to an actual trading period with actual numbers.
The dispute is not caused by bad faith.
It is caused by a clause agreed in general terms at signing that produces specific financial consequences neither party had fully worked through.
What the Review Type Means Beyond the Individual Lease
The rent review structure in each lease is not just relevant to that tenancy.
It shapes income modelling, asset valuation, and the sale or refinancing position for the full portfolio.
A portfolio with predominantly market rent reviews has income exposed to market movements in both directions. A portfolio with fixed or CPI-linked leases has more predictable income growth but may underperform in rising markets.
A valuer assessing the portfolio for a refinancing draws directly from the review structure of each lease to model the future income trajectory. An investor buying the portfolio is buying the income profile embedded in the review clauses across every active tenancy.
Understanding the review type in each lease, when the next review is due, and whether the clause is upward-only or upward and downward is as fundamental to portfolio management as knowing the lease expiry dates.
The data is only useful if it is current, accurate, and visible at the moment a review approaches rather than discovered in the lease document under deadline pressure.
For a full breakdown of all four review types, including how each is calculated, the key provisions to negotiate, and how disputes are resolved when parties cannot agree, the complete guide is here: what is a rent review and what are the different types used in commercial leases.
The Honest Close
The rent review clause gets negotiated at the beginning of the lease when both parties are optimistic and the review date feels comfortably distant.
By the time the review triggers, the market has moved. The financial consequences of the clause are real rather than theoretical.
The asset managers who approach that moment from a position of preparation, who understood the review mechanism when they signed it, who have been tracking the review date and relevant market data in the months approaching it, have a fundamentally different conversation from the ones reading the clause for the first time.
The review structure was always there.
Whether it was understood was a choice made much earlier.
What is the most surprising rent review consequence your team has encountered in practice? An upward-only ratchet in a falling market? A CPI gap that compounded over years? Something else entirely? Drop it in the comments.
