As touched on within our first article, understanding the concept of a market rent is important for all tenants. However, the rent review is just as important to understand, as this dictates the potential increases (or more rarely, decreases) of the rent a tenant pays to their landlord. It’s what we’re unpacking in the next instalment of our ‘Understanding market rent reviews’ series.
What is a market rent?
A rent review is a process built into a lease that changes the passing rent paid by the tenant, typically occurring once a year until the lease expires (and on exercise of each option).
Rent reviews are in effect from the moment a lease is signed until it expires. It means that understanding the practical implications of what’s being agreed to when a lease is signed matters from day one.
For industrial tenants, annual rent reviews typically come in one of these forms:
A fixed percentage increase;
A fixed dollar increase;
A CPI increase;
A CPI + x.xx% increase; or
A market rent review.
This is where the information gaps between tenant and landlord tend to open up. Landlords and their team work with these mechanisms constantly across all their properties, while tenants may only consider them at the time of initial agreement and not again until the notice for their next rental increase arrives.
Caps and collars may be included to provide either the landlord or tenant some income certainty. A cap is an upper limit on which a rental increase may occur, while a collar is a lower limit on which the rental increase may occur.
A ratchet clause may also be present (and is legally permissible) for industrial tenants.
In the event of a market rent review, this clause prevents rent from decreasing below the amount currently being paid, regardless of whether the market rent should actually be lower at that point in time.
While Rasalan typically works on behalf of factory and warehouse tenants only, it’s important for retail tenants in NSW (if their lease is subject to the Retail Leases Act 1994) to understand that a ratchet clause in their lease is actually unenforceable. If you’re a retail tenant and your landlord asserts that your rent can’t be reduced, despite the market rent likely having deteriorated, keep this in mind.
There are some common traps tenants unintentionally fall for in the lead up to, and during, rent reviews, which we’ll discuss in future articles.
That said, two common rent review types that are generally uncontested by tenants – CPI increases and market rent reviews – often lead to a tenant paying more than what they should be.
It’s important to understand that different review types provide different opportunities for landlords to wrongly pass on increases that can be contested by tenants, which is what Rasalan was specifically set up to provide.
Read on to learn more about the practical implications of rent reviews and how tenants can ensure they aren’t paying more than they need to.
Looking ‘beyond the label’
Property Law Academy founder and accredited property law specialist, Sangeeta Thaker, says the name given to a rent review is only the starting point.
“Two leases may both provide for a CPI review or a market rent review, but produce quite different outcomes because of the way the clauses are written,” she says.
“The starting rent tells you what the premises cost today. The rent review provisions tell you how that cost may change over time and who carries the risk if inflation or market conditions move differently from what the parties expected.”
Sangeeta says tenants should understand both the commercial effect of the review, and the process set out in the lease.
“A fixed increase provides certainty, but it compounds over the term. A CPI review depends on the index and formula used, as well as whether there is a cap, a minimum increase or another limit built into the clause.
When asked about the role of a valuer when determining the scope of a market review, Sangeeta says it can differ based on the terms of the lease itself.
“With a market review, the lease may tell the valuer what assumptions to make, what matters to ignore, and whether incentives offered in comparable leases should be taken into account,” she says.
“Market rent is therefore not simply the asking rent for the property next door, it is the rent reached by applying the rules that the landlord and tenant agreed when they entered into the lease.”
Many prominent valuation firms have longstanding relationships with the institutional landlords who own the buildings the tenants are leasing from. The potential for the perception of a conflict of interest may exist more often than most tenants realise.
It’s this structural arrangement that ensures an assessment is built to provide independent advice for the tenant, free of any potential perception of conflict of interest coloured by the existence of any prior commercial relationship with the landlord.
“The lease may also set deadlines for starting the review, responding to proposals and appointing a valuer if the parties cannot agree. Those steps should not be treated as paperwork. Missing them can affect the tenant’s position.”
Sangeeta says the review mechanism should ultimately be assessed as part of the entire commercial deal.
“A generous incentive or attractive starting rent can lose some of its shine if the rent rises more quickly than the business can absorb. Tenants should model the likely rent across the initial term and any option periods, but they should also have the clause reviewed carefully. A few lines in a rent review clause can have financial consequences for years.”
What those consequences look like in practice depends significantly on the quality of the comparables used to assess them. Rasalan maintains a proprietary database of every registered industrial lease above 1,500 square metres across metro Sydney, tracking recent transactions, precinct changes, and lease expiries.
It's what allows Rasalan to assess whether a proposed rental increase reflects what the market actually supports, contrasted with just what the landlord wants.
Understanding what a rent review is and how it’s determined is a critical step toward making sure you’re not paying more than you need.
As Sydney’s only independent valuation firm working exclusively for industrial tenants, Rasalan provides market rent review advice, backed by our proprietary industrial lease database. If you or your clients have an industrial lease in metro Sydney, we’ll make sure you’re not paying more than you have to.
Look out for Article 3 where we examine the most common mistakes tenants make during rent reviews and how to avoid them.
As touched on within our first article, understanding the concept of a market rent is important for all tenants. However, the rent review is just as important to understand, as this dictates the potential increases (or more rarely, decreases) of the rent a tenant pays to their landlord. It’s what we’re unpacking in the next instalment of our ‘Understanding market rent reviews’ series.
What is a market rent?
A rent review is a process built into a lease that changes the passing rent paid by the tenant, typically occurring once a year until the lease expires (and on exercise of each option).
Rent reviews are in effect from the moment a lease is signed until it expires. It means that understanding the practical implications of what’s being agreed to when a lease is signed matters from day one.
For industrial tenants, annual rent reviews typically come in one of these forms:
A fixed percentage increase;
A fixed dollar increase;
A CPI increase;
A CPI + x.xx% increase; or
A market rent review.
This is where the information gaps between tenant and landlord tend to open up. Landlords and their team work with these mechanisms constantly across all their properties, while tenants may only consider them at the time of initial agreement and not again until the notice for their next rental increase arrives.
Caps and collars may be included to provide either the landlord or tenant some income certainty. A cap is an upper limit on which a rental increase may occur, while a collar is a lower limit on which the rental increase may occur.
A ratchet clause may also be present (and is legally permissible) for industrial tenants.
In the event of a market rent review, this clause prevents rent from decreasing below the amount currently being paid, regardless of whether the market rent should actually be lower at that point in time.
While Rasalan typically works on behalf of factory and warehouse tenants only, it’s important for retail tenants in NSW (if their lease is subject to the Retail Leases Act 1994) to understand that a ratchet clause in their lease is actually unenforceable. If you’re a retail tenant and your landlord asserts that your rent can’t be reduced, despite the market rent likely having deteriorated, keep this in mind.
There are some common traps tenants unintentionally fall for in the lead up to, and during, rent reviews, which we’ll discuss in future articles.
That said, two common rent review types that are generally uncontested by tenants – CPI increases and market rent reviews – often lead to a tenant paying more than what they should be.
It’s important to understand that different review types provide different opportunities for landlords to wrongly pass on increases that can be contested by tenants, which is what Rasalan was specifically set up to provide.
Read on to learn more about the practical implications of rent reviews and how tenants can ensure they aren’t paying more than they need to.
Looking ‘beyond the label’
Property Law Academy founder and accredited property law specialist, Sangeeta Thaker, says the name given to a rent review is only the starting point.
“Two leases may both provide for a CPI review or a market rent review, but produce quite different outcomes because of the way the clauses are written,” she says.
“The starting rent tells you what the premises cost today. The rent review provisions tell you how that cost may change over time and who carries the risk if inflation or market conditions move differently from what the parties expected.”
Sangeeta says tenants should understand both the commercial effect of the review, and the process set out in the lease.
“A fixed increase provides certainty, but it compounds over the term. A CPI review depends on the index and formula used, as well as whether there is a cap, a minimum increase or another limit built into the clause.
When asked about the role of a valuer when determining the scope of a market review, Sangeeta says it can differ based on the terms of the lease itself.
“With a market review, the lease may tell the valuer what assumptions to make, what matters to ignore, and whether incentives offered in comparable leases should be taken into account,” she says.
“Market rent is therefore not simply the asking rent for the property next door, it is the rent reached by applying the rules that the landlord and tenant agreed when they entered into the lease.”
Many prominent valuation firms have longstanding relationships with the institutional landlords who own the buildings the tenants are leasing from. The potential for the perception of a conflict of interest may exist more often than most tenants realise.
It’s this structural arrangement that ensures an assessment is built to provide independent advice for the tenant, free of any potential perception of conflict of interest coloured by the existence of any prior commercial relationship with the landlord.
“The lease may also set deadlines for starting the review, responding to proposals and appointing a valuer if the parties cannot agree. Those steps should not be treated as paperwork. Missing them can affect the tenant’s position.”
Sangeeta says the review mechanism should ultimately be assessed as part of the entire commercial deal.
“A generous incentive or attractive starting rent can lose some of its shine if the rent rises more quickly than the business can absorb. Tenants should model the likely rent across the initial term and any option periods, but they should also have the clause reviewed carefully. A few lines in a rent review clause can have financial consequences for years.”
What those consequences look like in practice depends significantly on the quality of the comparables used to assess them. Rasalan maintains a proprietary database of every registered industrial lease above 1,500 square metres across metro Sydney, tracking recent transactions, precinct changes, and lease expiries.
It's what allows Rasalan to assess whether a proposed rental increase reflects what the market actually supports, contrasted with just what the landlord wants.
Understanding what a rent review is and how it’s determined is a critical step toward making sure you’re not paying more than you need.
As Sydney’s only independent valuation firm working exclusively for industrial tenants, Rasalan provides market rent review advice, backed by our proprietary industrial lease database. If you or your clients have an industrial lease in metro Sydney, we’ll make sure you’re not paying more than you have to.
Look out for Article 3 where we examine the most common mistakes tenants make during rent reviews and how to avoid them.
