Are You Being Screwed Over By A Ratchet Clause?

Ratchet Clause

Most commercial tenants have at least one rent review over the term of their lease. Often the rent review will be the first time that a commercial tenant will experience a nasty shock when their rental increases at a rate that they feel is completely unfair. Bewildered tenants complain to their landlord, to be told that their rent review has a ratchet clause, so the rental can only be increased, never reduced. Worse still, if their lease has several rent reviews in it, the ratchet clause ensures the rental will always will always increase, in other words, the ratchet clause is a One Direction only movement.

When will the ratchet clause affect you?

Ratchet clauses are often found where the landlord uses an ‘old style’ in-house lease form. Smart tenants will try to get the landlord to agree to use ADLS lease which contains terms that are fair to tenants as well as landlords. Other options include getting the landlord to agree to modifying the rent review clause

Recently we advised a commercial tenant who was frustrated with its landlord.  Our client had wanted to have a longer-term lease over large office premises.  The landlord required frequent rent reviews, with a ratchet clause impacting the rental at each review. With our advice, our client persuaded the landlord to agree the rentals would reduce if the current market had dropped, provided the rental did not go below the commencement rent. This change has provided our client with confidence that it will be paying a fair market rental and potentially saved them considerable cost. As the old saying goes: “the devil is in the detail”.

Don’t be hurried into signing a premises lease agreement.

For over thirty years Parallel Directions Ltd has advised commercial tenants on leasing matters. The ratchet clause is only one of the terms and conditions that need to be carefully considered before committing to a lease. After all, we all want to avoid being screwed over by the ratchet clause or other traps and pitfalls in commercial leasing.

If you’d like to discuss your ‘Ratchet Clause’ query, please contact us.

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