Commercial leases will have some mechanism by which the rent is reviewed. This (usually) annual review of rent can occur by one of a few methods, but the most commonly are either a fixed percentage review, a CPI (Consumer Price Index) review or a market rent review. The latter of which can sometimes be cause for uncertainty and confusion, but it need not be. A market review is an opportunity for both the lessor and lessee to set the rent to current market conditions.
Definition of current market rent
This can generally be described as the current rent for the premises, having regard to the terms and conditions of the lease and other relevant matters, which would be reasonably expected for the premises if it were unoccupied and offered for renting for the use to which the premises may be put under the lease. The value of business goodwill created by the lessee’s occupation of the premises and the value of the lessee’s fixtures and fittings in the premises are to be ignored for the purposes of the assessment of current market rent.
So, in essence, what would a willing lessee, with the same permitted use, pay in rent to occupy that premises, assuming it was vacant, with no lessee owned fit out and no business goodwill.
How is market rent determined?
There are two main ways in which a market review can be determined.
In the first instance, and most practically, the lessor and lessee can engage in genuine negotiations about what the new rent should be for the upcoming lease year. Having a good relationship between both parties is desirable for times like this as money and time can be wasted on futile arguments that are not evidence based. Being able to have an open and honest discussion is the most cost effective (and harmonious) way to set a new current market rent. Always having a good idea of what similar places are achieving helps find a resolution.
Despite good intentions, these negotiations will sometimes reach an impasse. This is usually due to the two parties being too far apart on their respective opinion of current market rent. If the lease is covered by the Retail and Commercial Leases Act, the Act has a solution! If the lessor and lessee do not agree, the rent is to be determined via an independent valuation, carried out by a person appointed by the office of the Australian Property Institute in the relevant state of Australia.
As daunting as this may sound, it can be quite simple. Think of it as an independent referee.
Using an independent valuer
Once an independent valuer has been appointed via this method, the valuer will invite both parties to provide ‘submissions’ for the valuer to review and consider as part of their determination. A submission is a report where the individual parties have the opportunity to present to the valuer reasoning and evidence of why they believe the rent should be set to a certain amount. These reports usually contain information about the property and its physical attributes, current lease arrangements, comparable lease evidence and any other relevant information which assists in putting forward each parties’ opinion.
The valuer will consider the submissions provided by both parties and use these in conjunction with their own research to reach a determination on what should be the market rent. A detailed report will be written and provided to both parties about how the valuer has assessed the rent and how the current market rent was determined. This determined amount of current market rent is set by the valuer and is final; both parties accept the determination as what is the current market rent for that premises.
What happens now?
Once the determination is handed down, there will be an adjustment made of the under/overpaid rent to either party as the new level of rent is applicable from the adjustment date (review date). Generally, a new lease document (or extension in some cases) will be drawn up with the updated terms and rent amount included in it to ensure it is noted and clear for future references.
Both landlords and tenants do require help through this process from time to time and Australian Lease Management have over 30 years’ experience in preparing current market rent submissions and representing various clients during a market rent determination process. Our expertise in understanding the market and preparing these submissions gives our clients the best chance of achieving their desired outcomes. If you have a market rent review coming up, it is always wise to be prepared 6 to 12 months in advance so to fully understand what may occur during this process. Our team are a phone call away to help you achieve the best outcome possible or simply help you gain a better understanding of the steps and processes involved.