Market rent review warnings

Marianna Idas, the Principle Solicitor of eLease Lawyers, discusses the cautions and processes you should be aware of with rent review clauses.

Rent review clauses in the lease are not standard. Generally, there are three major types of rent review methods: percentage increase, CPI and market rent view. Hidden traps with market rent reviews can make your future rent much higher than you anticipated. So make sure you understand your rent review clauses, have a specialised leasing lawyer and look out for these major items.

NOTICE AND ACCEPTANCE

The Landlord may require you to respond to its market rent notice within a short period of time, e.g. 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 1994 allows you to make a written request for determination of the market rent at any time within the period that begins three and six months before the last day on which the option may be exercised under the lease.

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.

DISPUTES

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 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.

Marianna Idas Principle Solicitor of eLease Lawyers