In most commercial leases, rent will be increased yearly as part of a ‘Rent Review’. A Market Rent Review is one method of calculating this increase.
For Landlords and Tenants alike, rent reviews are an important consideration in negotiating the initial terms of a lease, with the financial implications potentially significant where the wrong decision is made.
When Reviews Occur
During the term of a lease the mechanisms of rent review are usually quite straightforward, with annual increases generally determined by either a fixed percentage, or tied to the CPI (Consumer Price Index). The less common and considerably more complex option is market rent review.
It is common for a market rent review to occur at the expiry of the initial lease term (or each Option period). The purpose of this mechanism is to ensure rent remains consistent with current market rates, by reference to comparable commercial properties in the area.
For Landlords, market review provides better returns where the market is performing well. For tenants, it can be a useful safeguard against ongoing and restrictive increases where the market is weak. For both parties, the risk is significant, and a proper understanding of the mechanisms of market rent review is therefore essential in protecting their interests.
In the ACT, the process for determining market rent will be set out in the lease, but is also substantially regulated by Sections 52 – 54 of the Leases (Commercial and Retail) Act. Generally, a brief overview of that process as determined by the lease is as follows:-
- The Landlord will give the Tenant written notice of its assessment of the market rent;
- The Tenant can then dispute the proposed market rent within a stated timeframe. If they does not do so, they are taken to have accepted the Landlord’s proposal;
- If the Tenant disputes the rent, the parties must enter into negotiations to resolve the dispute.
If the dispute cannot be resolved within 14 days, the Leases (Commercial and Retail) Act allows either party to refer the dispute to the Magistrates Court. The Court then has powers to either refer the dispute to mediation, or appoint a valuer to determine the rent, as it may see fit.
Schedule 1 of the Act sets out the in detail the factors to be taken into account in determining market rent. One particularly important consideration here is that the market rent is to be determined on the basis rent that could be expected for vacant premises.
If a dispute over market rent review reaches the point of referral to the Court, we strongly recommend that both Landlords and Tenants consult with us to ensure they understand their rights and obligations under their lease, and under the Act.
If you would like to discuss this further with us, please contact Anthony Simpson on (02) 6140 6236, or email [email protected].