What You Should Know About Market Rent Reviews

In this weeks blog post we will be looking at Market Rent Reviews and whether the Retail Leases Act applies, how to appoint a determining valuer and the submission to valuer process.

What is a market rent review?

If your lease contains an option, it will most likely have a market rent review. This facilitates alignment of the rent amount with any market adjustments by requiring a re-assessment of the requisite base rent. In retail leases, mid-term lease reviews are relatively rare, however, they do occur for long-term tenants.

A typical market rent review will consider factors including but not limited to foot and vehicular traffic, sight lines, signage, access, improvements throughout the duration of the lease, escalations, usable site area, permitted use, incentives and other charges or negotiables under the lease such as outgoings.

Your lease should stipulate the criteria by which the market rent will be calculated, setting out whether the assessment will be through independent valuation or other means such as both parties nominating their own valuers.

Does the Retail Leases Act apply?

Each state has their own Retail Leases Act which provides considerable protections to a tenant at the time of a market review. This includes that:

• Ratchet clauses (provisions which prevent the rent from falling) are not lawfully enforceable
• The same or similar permissible use of the property is relevant
• Incentives must be included in any assessments of market rent
• The market rent review process is open to further review if either party is not satisfied
• The gross rent is to be assessed

It is important to note that not all market rent reviews will fall under the Retail Leases Act and to remember that each state has different legislation it is governed by. In New South Wales, the Retail Leases Act will only apply if the lease term including option terms is less than 25 years in duration, the area of the premises is under 1,000 square metres and the permitted use is a prescribed use in Schedule 1 of the Act, outside a shopping centre.

If unsure whether the Act applies to your lease, seek further advice.

How do you appoint a determining valuer?

If both parties are unable to to negotiate a market rent outcome, both parties can appoint by agreement on an independent valuer.  You must be careful the valuer nominated by either party is not conflicted.

If you are not able to agree on a jointly appointed valuer, the following appointing authority is:

Submission to the valuer

There will usually be a provision allowing both the Lessee and Lessor to provide a written and factual submission to the determining valuer. If your Lease comes under the Retail Leases Act, then submissions are mandatory.

This submission must be supported by fact and reason. For instance, making a statement asserting that yearly turnover has decreased is unlikely to carry any weight with the determining valuer unless supported by fact, and there is a reason why the turnover would affect the rental value.

If in doubt, always seek advice from a qualified specialist valuer.

Important factors to consider in a written submission include:

• Areas – Do you have a survey based on Gross Lettable Area Retail? Make sure you are not paying for areas that are not part of your lease, including common areas, balconies, storage areas, and so forth.
• Outgoings – What outgoings are you paying under your lease and are they correctly charged?
• Fitout – Who owns the Fitout? If the lessee owns the Fitout, the Valuer must then ignore Lessee’s Fitout when calculating rent?
• Incentives – What incentive did you receive under your lease? Examples include a rent-free or rent-reduction period, contribution to fitout, interest-free loans, or relocation costs.
• Comparable evidence – currency of comparables, location use, frontage and depth.

A market rent valuation will dictate your property’s base rent for the remainder of the lease term, making it imperative to ensure an accurate determination which takes all crucial considerations into account is reached.

Author

This post was authored by Simon Fonteyn. Simon is one of Australia’s leading experts in retail, childcare and medical leasing and rental valuations. He holds a Degree in Accounting & Finance, a Diploma of Valuation, a Masters of Management and is an Associate of the Australian Property Institute. With over 25 years experience in the commercial property industry, Simon founded LeaseInfo® as a way to provide more transparency to the industry.