Rent reviews – Lease terms save Landlord

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It is common for the rent of commercial or retail premises to be subject to a market review, to bring the rent in line with any potential changes in the market that have occurred since the commencement date.

Rent determination clauses in the lease set out how any adjustments are to be made, including how market rent is determined. If the Landlord and Tenant cannot agree on a market rent amount, the terms often allow for the appointment of a valuer to determine the market rent.

A decision recently handed down in the Queensland Supreme Court provides some insight on terms to be conscious of when it comes to market reviews, for both Landlords and Tenants. In this case, the Landlord stood to lose over $240,000 in rent per annum.

The case is DA Staal Property Pty Ltd v Commonwealth of Australia [2021] QSC 216 and can be accessed here.

The case facts

  • The Landlord owned a two-storey building offering commercial tenancy space, situated at Berserker, Rockhampton.
  • The Tenant was Centrelink.
  • The terms of the lease provided that there was to be a market review on 29 May 2019.
  • The parties were not able to reach agreement on the rental amount under the market review, so a valuer was nominated by the Australian Property Institute in accordance with the terms of the lease.
  • The valuer concluded that the net rent for the property, from the date of review, was $565,675 plus GST and outgoings per annum. This was a significant reduction from the rent payable just prior to the review of $806,213 plus GST and outgoings per annum.
  • The Landlord disputed this new lesser rent, arguing that the market review was not undertaken in accordance with the requirements of the lease.

What did the lease say about market rent determination?

The rent determination clause in the lease stipulated that:

  • The valuer’s determination is final and binding.
  • The valuer must take into account the open market rental value of comparable premises in the suburb or town within which the building is situated. Where there is insufficient evidence of comparable premises in the relevant suburb or town, then the valuer may take into account comparable premises within a comparable suburb or town within the immediate vicinity of that in which the building is situated.

What comparable premises did the valuer regard?

  • The Property was situated at Berserker, Rockhampton.
  • The valuer considered properties in Aitkenvale (Townsville), Hervey Bay and Maryborough, as well as other premises in Berserker.
  • The valuer considered that the property in Aitkenvale was the most comparable premises for the purpose of the rent determination.

The Landlord’s dispute

The Landlord disputed that the rent determination was made in accordance with the process prescribed by the lease, claiming that Aitkenvale, Townsville, was not in the immediate vicinity of Berserker, Rockhampton.

The decision

The Court held in favour of the Landlord and the valuer’s rent determination was deemed invalid.

Neither Aitkenvale nor Townsville could reasonably be considered next to Berserker or Rockhampton, so were not in a comparable suburb. Consequently, the rent determination contained an error and the market review was not conducted strictly in accordance with the terms of the lease.

What does this mean for you?

Even if the lease provides that the determination of the valuer is final and binding, the decision of the valuer may still be invalid if it is not conducted in accordance with the terms of the lease.

Both Landlords and Tenants should be aware when entering into a lease that rent determination clauses, particularly for market rent, should clearly set out the matters to be taken into consideration when determining the rent. These clauses should be reviewed carefully when you are negotiating a lease, and during rent reviews, to ensure the market review process is commercial and tailored to the lease and premises.

If you would like to discuss anything leasing related, please contact our experienced Property Team on 07 3223 6100 or email redchip@redchip.com.au for an obligation-free discussion.

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