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Market Rent Reviews

Most Leases provide a mechanism for market rent reviews during the term of the Lease or upon exercise of options. The usual Lease provision requires the Lessor to give the Lessee a determination of its assessment of the current market rent and if the Lessee does not dispute that assessment then the Lessor’s determination is deemed to be the current market rent.

If the Lessee disputes the Lessor’s assessment then the parties usually have an opportunity to confer and agree on a market rent and in default of an agreement then the rent is to be determined by a valuer. Most Leases provide that the valuer’s determination is final and binding on the parties.

If the leased premises are retail premises then the market rent review is a “true market rent review” and the rent can actually be less than the rent prior to review. Leases of office, commercial or industrial premises will often provide that a market rent review cannot be less than the rent payable for the year prior to review.

It is usually the case that the Lessor and Lessee reach an agreement on the current market rent but if the Lessor’s determination or assessment seems excessive, it may well be opportune to have the rent determined by a valuer. A recent case in point was one of our clients who had substantial premises near the Harbour who were paying a current annual rent including GST of $425,729.00. The Lessor had determined that it required the rent to increase to $473,000.00 per annum including GST. The Lessee considered the Lessor’s determination unreasonable and referred the dispute to a valuer for determination.

Both the Lessor and Lessee engaged their own experts to make submissions to the appointed valuer. The Lessor was seeking the rent set out above whereas the Lessee submitted that the rental should be $218,768.00 per annum including GST.

The valuer took heed of all party’s submissions and made a determination that the current market rent was $357,984.00 per annum including GST. This was a significant result for the Lessee as it was considerably less than what the Lessee was already paying and considerably less than the amount being sought by the Lessor.

The Lessee found itself in the position that it was able to initiate discussions with the Lessor with a view to varying the Lease terms and having the Lessor make a substantial contribution to a mid term fit out in return for allowing the rental to remain at its pre-valuer determination level.

We suggest and recommend that Lessees should not willingly accept Lessors’ assessments of the current market rent but to make their own enquiries regarding what is current market rent for comparable premises and give consideration to having the rental determined by means of the valuation process if the Lessor’s assessment is excessive.

For further information, please contact Jim Behringer.

This publication is intended only to provide a summary of the subject matter covered. It does not purport to be comprehensive or to render legal advice. The publication reflects the law at the date the publication was written which may differ at the date the publication is being read. No reader should act on the basis of any matter contained in this publication without first obtaining specific professional advice.
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