RENT REVIEWS AND RENTAL DETERMINATIONS
Market rent reviews are an important, and relatively common provision in most commercial property leases. In our experience, the mechanics of these provisions is often misunderstood (or not understood at all!) by tenants and landlords alike.
A typical commercial lease agreement will allow for the rent to be adjusted, usually on the anniversary of the commencement date (but not always) and will be set to either a fixed increase, pegged against the movement of the Consumer Price Index (CPI) or provide a market review.
Some leases will also include what is commonly known as a ‘Ratchet clause’, whereby the rent may only increase, rather than move freely up or down. Any lease which is subject to the Commercial Tenancy (Retail Shops) Agreements Act 1985, commonly referred to as the retail shops act, is not able to have a ratchet clause.
It is important to understand that if the lease does include a market rent review, the process which is to be followed is usually stepped out quite specifically within the lease document itself. This will include important items such as the timing for which a market rent must be proposed and agreed/ refused, the definition of market rent and the process for resolution if it can’t be agreed upon.
If there is a dispute with the rent, as mentioned, the lease will ordinarily detail the process which is to be followed and will normally culminate in a determination process if the parties are unable to agree. This is where an independent valuer (or valuers) is appointed to act as an impartial expert and provide a final and binding determination of the rent, in accordance with the lease. A common scenario is for the determining valuer to be appointed by the President (now known as State Chair) of the Australian Property Institute (API) if the two parties can’t agree on the valuer to appoint.
Should a rental dispute make it to determination, both the tenant and landlord will generally have the ability to provide a submission to the determining valuer, which can include their own independent valuation in support of their position.
Upon conclusion of the determination, the decision is final and binding on all parties with any discrepancy between what was being paid versus the new rent to be reconciled.
A rental dispute can be a costly exercise for all parties concerned; however, not pushing for a fair market rent can prove to be even more expensive in the long run!
Please note that this information is general in nature only. Each lease is different and you should read your full lease, along with any supporting documentation and obtain specific expert advice before making any decisions in connection with the lease.
Hemsley Paterson have an experienced valuation team that regularly assist clients with rent reviews and Director Rowan Hemsley is also called upon by the API to act as a determining valuer.