Market rent review warnings
Beware of hidden traps that can make your future rent much higher than you anticipated.
Please ensure you fully understand your market rent review clauses and have a specialised leasing lawyer advise you on these terms.
The major items you should look out for include:
• Notice and acceptance
The Landlord may require you to respond to its market rent notice within a short period of time eg 21 days. If you do not respond within this timeframe it could result in your automatic acceptance of the proposed new rental. Ensure that:
1. you have either ample time to respond to the notice;
2. your best contact address is listed in the lease. If you change your address, make sure you have a mail redirection or a subsequent written agreement with the landlord to ensure that any notices are sent to your new/correct address; and
3. the way you process your mail is such that you do not miss any important notices such as this.
• Option period – to renew your lease
Many leases are drafted in a way so that you must exercise your option to extend your lease prior to receiving notification from the landlord of the new market rent.
If you have already exercised your option and subsequently receive the market rent notice you are bound to paying this rent for the increased lease term. This rent may be higher than you anticipated.
If, however, you are a retail shop then you may obtain the protection of the relevant legislation for your state, which your lawyer can advise you on. For example, in NSW section 32 of the NSW Retail Leases Act allows you to:
1. Make a written request for determination of the market rent at any time within the period that begins 3 and 6 months before the last day on which the option may be exercised under the lease.
2. The period within which you must exercise the option is varied so that the last day on which the option may be exercised is 21 days after the determination of the rent is made and notified to you in writing.
If your state does not contain the above protection, then your lawyer can request a new clause in the lease to this effect. That is, the new market rent (or as determined by a valuer) is provided to you before your right to exercise your option to renew the lease is lost.
• Ratchet clause
Because the market rent can decrease, some landlords may put a ratchet clause in the lease. What this means is that the rent cannot be less than it was previously. If you are a retail shop then in most states it is prohibited to stop the rent decreasing. Any clause in the lease stopping this decrease is void.
If the parties cannot agree on the market rent then an independent review is required. Ensure you and the landlord have the opportunity to make written submissions to the valuer. A valuer’s decision is generally binding, and the costs of appointing them are shared equally between the parties. It is always advisable to try and reach an agreement direct with the landlord to avoid these additional costs.
Valuers are to review the rent as specified in the lease.
• Assumptions and limitations
The rent review is essentially the valuation of a hypothetical lease in the open market at the review date, but assuming and disregarding certain things about the lease. The starting position should reflect the rent as reality and should not assume or disregard any matters to create an artificial position. For example, clauses in the lease can provide that the rent on review must be the “best” rent obtainable in the market. This should not be agreed as this would entail a much higher rent.
Additional examples of assumptions that could be imposed in the lease by the landlord to your disadvantage include:
1. To disregard any incentives. It is common practice to grant rent free periods or other concessions. Disregarding incentives is unreasonable as you will be penalised for something that is common in the market.
2. Include any improvements you made to the premises. If you have paid for, and carried out, works to the premise then you should not be penalised on review for works you have completed which increased the rental value.
These assumptions can be avoided by seeking alterations in your lease.
Prevention of any dangers
Prevention is better than a cure. Focus on the details in your lease and clauses surrounding how your rent is to be reviewed and ensure that you understand your rights and obligations.
A leasing specialist can advise you of the terms of your lease and negotiate changes to save you money in the long run.
Market Rent review process
The general review process is as follows:
1. Landlord informs you of the new market rent;
2. You have a timeframe to agree or disagree.
a. If you agree, then no further action is required and the new rent is determined.
b. If you disagree, then you can inform the landlord of what you believe the new market rent should be. If the landlord:
i. agrees then no further action is required and the new rent is determined.
ii. disagrees then a valuer is appointed.
3. Usually you can make submissions to the valuer regarding the market rent. The decision of the valuer is final.