The end of the ratchet clause ambush

The ratchet clause has long been a dirty word to businesses with commercial tenancies.

More than 95 percent of leases have a ratchet clause. Traditionally they never advantage the tenant.

A soft ratchet clause ensures the rental figure will never drop to less than the original sum agreed between owner and tenant, and a hard ratchet clause ensures the figure never drops lower than the last agreed rent review.

So in recent times, as the market rose, so too did rentals and the ratchet clause ensured they didn’t drop.

Property owners have always needed this clause so they can guarantee a certain level of income in financial agreements with banks and finance institutions.

But today’s fluctuating markets are turning the traditional wisdom of ratchet clauses on its head.

Commercial tenants need no longer expect that a rent review will automatically lead to a rent increase.

Obviously, most property owners will have to stick with a ratchet clause at some level. But with high vacancy levels, there are a growing number of areas to negotiate a deal on that can dramatically lessen the impacts and the threat of the ratchet clause. And with values having fallen, the potential for the rental to go down becomes a distinct possibility.

However, a note of caution. Although the current climate opens up a range of new opportunities to negotiate better deals, negotiations in this area can get complex. I would advise anyone with a rent review coming up to give me a call and check whether they could lessen the impacts of their ratchet clause via another mechanism.

But it is clear: Today’s commercial tenants need no longer consider themselves under ambush from the ratchet clause!