How does a market rent review work? Does it involve parties guessing the premises’ ‘market value? Do they pick a ballpark figure and hope that the other party agrees? The process of conducting a market rent review in a lease document is not always straightforward, and many variations depend on how parties draft it into the lease. Below we will discuss the market rent review process in both retail and commercial leasing.
State-based retail legislation governs retail leases and prescribes the procedure for how market rent review should be carried out. Generally, ‘current market rent’ is taken to be the rent that a landlord would reasonably expect a tenant to pay in an arm’s length transaction were the shop unoccupied and offered for renting. If a landlord and tenant cannot agree on the current market rent, a valuer is to be appointed with both parties making submissions and bearing the valuer’s cost equally. The landlord must typically determine the market rent within a stated timeframe and in some states, a tenant’s option notice is extended until a certain time after the landlord determines the current market rent. Consequently, the tenant can exercise its option after being notified of the new market rent.
For commercial leases and other non-retail leases (not regulated by retail legislation), the process is similar, but the landlord has greater discretion when determining market rent review, and what they take into account. The landlord can determine the current market rent any time up to six months after the commencement of the new term and request the tenant to back date the payment to the lease commencement date. This raises potential problems for tenants who want to know the market rent before making the decision to renew their lease. Unlike retail leases which retail legislation protects, commercial and non-retail leases may contain a ratchet provision which prevents the rent from going down. Consequently, if the current market rent is subject to a ratchet provision and can only increase in value, it does not necessarily reflect the true ‘market’ value of the property.
The process of market rent review largely depends on how it is drafted in the lease. As such, it is prudent that you understand this process before committing to a lease – particularly how it is calculated, what is taken into account and the dispute resolution procedure. If you would like assistance in reviewing your lease document or require advice before entering into your lease, get in touch with our experienced commercial leasing team on 1300 544 755.