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Market Reviews in Your Retail Lease

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Market reviews are a common type of rent review method in a retail lease and are most often implemented at the start of an option term. While common, the procedure of a market review may be confusing to tenants. Importantly, if you have a commercial lease, rather than a retail lease, you may not be protected by market review legislation. This article will outline what retail tenants need to know about market reviews. This includes any potential issues which you may find in your lease.

What is a Market Review?

The purpose of a rent review is to adjust the rent, usually using a particular method. During a market review, the landlord will assess the rent payable in line with the rental market. Retail lease legislation in each state or territory governs market rent reviews and any dispute resolution procedures surrounding them.

However, tenants should be aware that while legislation governs procedure and dispute resolution for market rent, in practice, often a landlord and tenant will simply agree on a suitable rent amount at the time of the market review.

Market Review Procedures

State-based legislation will govern how a market rent review takes place. Some legislation may also specify what a market review should consider. 

For example, states including VIC and NSW require the market rent determination to take into account:

  • lease terms;
  • the rent that would reasonably be expected to pay for the premises if it were unoccupied and offered for rent for the same or similar use;
  • the gross rent (less any outgoings); and
  • rent concessions and other benefits.

If the tenant and landlord cannot agree on the market rent, then each state or territory’s legislation will set out a dispute resolution procedure. For most states, the matter will go to an independent or specialist valuer. This is with the exception of the ACT, where the dispute must first go to the Magistrates Court. The valuer will determine the market rent based on the grounds specified in the relevant legislation.

The procedure for market review and any dispute resolution differs widely across the states and territories. You should double-check how it works in your state or territory so that you are aware of your rights and what to do if a dispute arises.

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What to Look Out For

Retail leases commonly include two key issues related to market rent reviews.

Ratchet Clauses

Leases sometimes specify that a market rent review cannot result in a rent amount which is lower than the rent prior to the market review. This is a rent reduction or “ratchet” clause. 

Generally, a common ratchet clause example may state the following: 

Notwithstanding any determination of the current market rent, the rent payable from the market rent review date must not be less than the rent payable for the year prior to the rent review date.’

In practice, if a market review results in a lower rent, even when determined by an independent valuer, then the rent that is payable from that rent review date will still be the same as the year before. In other words, the rent will not decrease, even if the market has fallen.

Most retail lease legislation (with the exception of the Australian Capital Territory) expressly make any ratchet clauses void. The logic behind this is that for a fair market review to occur, the rent must be determined in accordance with what the market situation is like at the time of review. This means that theoretically, the rent could decrease, and any clause prohibiting this decrease is unfair to the tenant. It is worth checking your lease before entering it to ensure that you are adequately protected against ratchet clauses.

Early Determination of Market Review

Market reviews in a lease will typically take place on the date of the rent review. If your market review is for the start of your option, this usually means it will take place on the first day of your option term. Given the undecided nature of market rent, this may be problematic. This is because you will not know what rent you must pay during your option term before you exercise your option. Option terms usually must be exercised at least three months in advance.

Some retail lease legislation, such as in New South Wales, Queensland and South Australia, will protect the tenant in the above scenario. Here, the tenant has the right to early market rent determination. This is usually specific to market rent reviews for an option term only. It typically also implements a new deadline to exercise your option.

For example, in New South Wales, you may request an early determination of market rent between three to six months before the last day on which you must exercise your option. If you choose to do so, the last day on which you must exercise your option is automatically adjusted to be 21 days after the market rent is determined.

Not all retail lease legislation provides the tenant with the right to early market determination. If knowing your market rent before exercising your option is important to you, you should check your relevant legislation to see if you are protected.

Non-Retail Leases

If you have a non-retail lease, you are not protected by any of the rights under retail lease legislation. Market rent procedures for non-retail leases may differ significantly from a retail market rent procedure. 

For a non-retail lease, the market rent procedure will be as negotiated between the parties prior to entering the lease. As you are not protected by legislation, this means any concerns around ratchet clauses and early rent determination must be negotiated and settled prior to signing the lease.

Key Takeaways

Market rent reviews are common rent review procedures in a retail lease and are regulated by the relevant retail lease legislation in your state or territory. However, the procedures are different for each state and territory. As such, your rights may differ depending on where your premises is located. If you have any questions surrounding market rent reviews, contact LegalVision’s leasing lawyers on 1300 544 755 or fill out the form on this page.

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