Leasing and current market rent
Mar 18, 2020Does your retail or commercial lease provide for an increase with reference to a current market rent? We often have clients who approach us before they renew their lease, concerned about the increase of their rent, and unsure as to their rights regarding the valuation of a “current market rent”.
The Lease
Typically, the amount of rent paid by a tenant is reviewed on the anniversary of the commencement date (that is, annually) and/or if the tenant exercises an option to renew the lease for a further term (for example, at the 3 or 5 year mark). The rent can be reviewed according to:
- Consumer Price Index – that is, the rent will be increased in accordance with the rate of CPI for the relevant period;
- A fixed rate – e.g. 3%; or
- Current market rent – that is, the rent will be set at an amount that is considered to be the rent expected to be paid by the market at that point in time.
Typically, the annual rent review will be determined according to CPI or a fixed rate, and then only if the tenant exercises an option to renew at the end of the initial term (for example, at the 3 or 5 year mark), then the rent will be re-set according to market forces. As to what is considered to be a suitable market rent depends on what is negotiated between the parties.
A standard commercial lease usually provides the tenant with a period in which they can negotiate the rent, either enabling them to propose a new rent, or to negotiate based on a proposed rent from the landlord. In the event that they cannot agree, a full valuation is obtained to settle the dispute with a valuer appointed by an impartial arbiter, typically the Australian Property Institute.
Haxglow Pty Ltd v Mirvac Retail Sub SPV Pty Ltd [2020] NSWSC 233
In a judgment dated 17 March 2020, the Supreme Court has handed down a decision which addresses the use and calculation of current market rent in commercial leases. In this case, the tenant and landlord could not reach agreement as to what the current market rent was for the property. In accordance with the lease terms, a rental determination was obtained by a qualified valuer to resolve the dispute, and the parties were bound by the lease to accept that valuation of rent, regardless of the sum determined by the valuer.
A valuation was obtained which concluded that the current market rent for the property was $480,000.00. The tenant was claiming a refund of what it alleged to be an overpayment of rent in the amount of $1,004,318.04, claiming that the rent should have been $480,000.00 as set out in the rental determination, and not an increased rent as charged by the landlord. The landlord did not accept the valuation and criticized the adequacy of the reasons given by the valuer for why he reached the rental sum that he did. They also alleged that he had not complied with his professional practice standards in preparing his valuation and it was therefore invalid.
The Court found in favour of the tenant and made an award of costs plus pre-judgment interest against the landlord.
Key issues to think about:
As noted above, rental amounts are increased annually, and then at the beginning of each option period. This case demonstrates the dangers of having a current market rent review method.
Current market rent is an ambiguous method of reviewing your rent. It can lead to conflict between the parties, and can damage the relationship between landlord and tenant where there is a dispute as to the current market rent value.
Consider whether this is the best option for you, and whether it would be more appropriate for you to have a current market rent review at the beginning of option periods, and a percentage or CPI increase for annual reviews. By minimising the occasions where you will need to value a current market rent, you reduce the chances of having a dispute as to its calculation.
If your lease does contain a current market rent review method:
- Ensure that you diarise any notice periods that you need to comply with to either provide the current market rent value, or to dispute the value;
- Make sure that communication is in writing to avoid there being dispute as to what has been said in negotiations; and
- Be prepared to accept a final determination by a valuer (if that is what your lease provides for).
Contact the Shire Legal team if you have any questions.
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