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The purpose of a rent review is to adjust the rent, usually using a particular method. The method might be a fixed percentage increase, or use the consumer price index or market rent review. The adjustment of rent usually occurs upon the yearly anniversary of the commencement date of the lease. It also occurs at the time of an option to renew the lease for a further term, if any. It is important to understand how to determine market rent in order to safeguard the tenant’s interest. This article will unpack how to determine market rent for retail lessees in NSW.

Rent Review for Retail Lessees

Rent review procedures under a lease can occur in a few different ways. For retail tenants in NSW, the Retail Leases Act 1994 NSW (“the Act”) governs this procedure. The aim is to standardise lease provisions and safeguard a tenant’s interest.

If any provisions of a lease is contrary to the Act, the Act will take priority over the lease.  

When Do You Determine Market Rent?

The market rent review procedure usually occurs when the tenant exercises an option to renew the lease. This means that the “market rent review date” is the same day as when the further term begins.

However, the lessee may ask the lessor to determine the current market rent early. This may occur as long as the lessee and lessor have not already agreed on the market rent amount.

The lessee must make a written request to the lessor to determine the new rent three to six months before the last day on which the option may be exercised under the lease.

Example: Exercising An Option

Mark enters into a lease on 1 January 2018 for an initial term of three years, which makes the expiry date 1 January 2021.
Mark has the option to renew the lease for an additional three years from 2 January 2021 to 1 January 2024.
If Mark wants to exercise this option, he must notify the lessor in writing between 1 August 2020 and 1 November 2020.
Ordinarily, the “market rent review date” will be 2 January 2021, which is the date on which the further term begins.
However, Mark may have the rent determined three to six months before 1 November 2020. This is the latest date on which he may exercise the option under the lease.
The last day on which the option can be exercised is 21 days after the determination of rent is made. This means Mark has 21 days after finding out the rent for the upcoming term to decide whether to exercise his option.

How Do You Determine Market Rent?

The retail lease may include a provision to use the market rent procedure. In this situation, you must determine market rent according to the Act regardless of what the lease says. Therefore, the lessor and lessee must consider:

  1. the terms of the lease;
  2. the amount of rent that could reasonably be expected to be paid if the retail shop was unoccupied;
  3. the amount of rent that could reasonably be expected to be paid if the retail shop was up for rent for the same or very similar use;
  4. the gross rent minus the outgoings to be paid by the lessee; and
  5. any rent concessions and other benefits that may be offered to potential lessees of unoccupied retail shops. Concessions might include a rent-free period or any contribution made by the lessor to the fit-out of the premises.

The Act provides that market rent determination does not consider the value of any goodwill created by the occupation of the lessee or any fixtures or fittings, such as air-conditioning units or equipment, owned by the lessee in the premises.

Can a Market Rent Review Decrease the Rent Payable?

The rent may decrease after a market rent review. Any clause which operates to prevent a decrease will be void under the Act.

What if the Parties Disagree on Market Rent Amount?

If the parties disagree on the market rent payable, a specialist retail valuer will determine the market rent. Both parties should agree on the valuer, but sometimes the parties cannot reach an agreement on the valuer. In this case, either party may make a request to the Registrar who will make the appointment.

How Does a Valuer Determine the Market Rent?

The valuer will consider the five points above when determining the amount of rent to be paid, as well as any written submissions which the lessee or lessor may make to assist the valuer.

The valuer may also request that the lessor provides further information (where available) about leases for comparable retail shops in the same building or retail shopping centre to assist with making their determination. This information may include:

  1. current rent for each lease;
  2. rent-free periods or any other incentives made;
  3. recent or proposed variations of any lease;
  4. outgoings for each lease; or
  5. any other information prescribed by the regulations.

If the lessor receives a request for the above information, it must be provided within 14 days or the valuer may apply to the NSW Civil and Administrative Tribunal (NCAT) for an order that the lessor comply with the request. The valuers will make their valuation within one month of receiving the requested information.

What Will the Valuation Include?

The valuation must be in writing and include the following:

  1. detailed reasons for the determination of the valuer; and
  2. specific matters the valuer considered in making their determination.

The valuation must not disclose any information which will:

  • identify other leases;
  • identify parties to other leases; or
  • identify parties relating to the business (unless those parties provide their consent).

Who Pays the Costs of the Valuer?

The parties share the costs of the valuer equally. The parties can avoid the valuation procedure set out above, as well as the costs payable by agreeing on the market rent payable.

What Happens if Either Party is Unhappy With the Valuation?

Either party may apply for the review of the valuation within 21 days of receiving a copy of the valuation. This review process involves the appointment of two specialist retail valuers. The valuers will follow the same procedure as the original valuer and decide to either affirm or vary the rental amount.

These valuers must reach their decision within one month. If the valuers do not reach a decision, the parties must assume that the valuers have affirmed the original determination.

The joint decision of the valuers is final and binding. However, the exception is if either party can satisfy NCAT that the valuers made a fundamental error.

Key Takeaways

When entering into a lease, it is worth considering whether adjusting the rent according to market is the ideal procedure. The process can be complicated and costly if the parties disagree on the rental amount. However, it can provide a fair outcome for lessees who are paying higher than market rent for their premises – noting that the Act declares any clause in a lease which prevents a decrease void.

If you require assistance with entering into a Retail Lease in NSW or have a question about market rent review procedure, get in touch with LegalVision’s leasing lawyers on 1300 544 755 or fill out the form on this page.

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