In part three, we bring together the themes of the first two foundational articles in examining the “market rent review”.
Understanding the concept of market rents and rent reviews ensures tenants are not left paying their landlord more rent than they should be. We have explored these in depth in our previous two articles.
This third and final foundational article in the series examines what happens when your lease has a “market rent review”. Providing tenants and advisors with a complete understanding of the concept, this article talks through why it’s important to contest a landlord-proposed market rent review when it arrives, and how to ensure the proper processes are followed.
What is a market rent review?
Market rent reviews are a process where a landlord looks to ‘reset’ (and most often, increase) a rent to the current open-market rental value of the property.
They occur when a lease option is exercised, or in the middle of a long-term lease, such as 5-years into a 10-year lease term.
While the concept is simple, market rent review clauses in a lease that dictate how the market rent should be determined can be filled with nuanced terms that impact the actual rent a tenant could be required to pay at the conclusion of the process.
Therefore, if we were to rework the definition of a market rent, specifically when it comes to the market rent review process, it may be more accurately described as follows:
The rent a landlord could get from a tenant, if the property were leased today – provided neither the landlord nor the tenant were under pressure to agree to the lease – based on current market conditions, comparable properties, and this lease's specific terms.
Why you can – and should – contest a review
Your lease explains in detail the process that must be followed by both you and the landlord. It also includes what’s required when a market rent review has been triggered.
Many tenants are great at running their businesses and they understand the nuances in their day-to-day operations. However, what many tenants fail to realise is that real estate is often their landlord’s business. It results in a structural and informational disadvantage for a tenant when a market rent review is taking place. That disadvantage is only amplified when the firms most qualified to assess a market rent review are often already working for the same landlords whose proposals need challenging
As Sydney’s only valuation firm that exclusively works on behalf of factory and warehouse tenants facing a market rent review, we know that you know your business inside out. We also know that when a market rent review increase arrives, your landlords have people in their corner who do this for a living, representing their interests. This imbalance is exactly what Rasalan was built to correct.
Most leases provide a provision permitting the tenant to contest a landlord’s proposed market rent review increase. In the event of the tenant and landlord being unable to reach agreement on a market rent, most leases then require an independent valuer be appointed, generally by the President of the API, or the President of the Law Society, of the relevant state.
By understanding your lease and its provisions, you’re a step closer to reducing the market rent review increase your landlord has proposed.
Can a market rent review lead to a new rent that doesn’t feel like a market rent for the tenant?
The short answer is yes.
Our reworked definition of market rent makes clear that the lease’s specific terms are critical to determining the market rent of a property.
The specific terms within the market rent review clause define the factors that must be considered or disregarded in the assessment of the market rent by a valuer. This affects the resultant market rent assessment – and whether it feels like a market rent to the tenant.
There are many terms within the market rent review clause that can disastrously affect a tenant’s ability to attract a favourable outcome.
Disadvantageous terms for a tenant within the market rent review clause may include:
A ratchet: A clause that prevents the rent from decreasing under a market rent review scenario - regardless of market conditions and comparable evidence.
Face market rent reviews: A clause that prevents the consideration of incentives when a market rent is determined.
Option exercise: Any clause that allows a landlord to exercise an option on the tenant’s behalf. Whilst rare, we’ve seen it twice in our career.
Building functionality: Some lease terms require assuming the building is in better condition or has better functionality than it actually does. It is not a reflection of the building’s current state.
Determining valuer appointment: A rare clause that permits the landlord to appoint a determining valuer in the event of a proposed market rent disagreement between the tenant and the landlord.
Permitted uses: Clauses that dictate the evidence a valuer must consider when assessing a market rent. It may require the valuer to consider any legally permissible use of the property – not just the tenant's actual use.
Demolition: Clauses that allow a landlord to terminate a lease early if they intend to demolish, redevelop, or substantially renovate the building. Sometimes the lease doesn’t provide for any compensation to the tenant.
These terms, if present, can materially impact the market rent outcome that a tenant’s required to pay.
It’s critical that all tenants – and their trusted advisors – understand the market rent review terms they agree to when they negotiate their initial lease. Decisions made several years ago can impact a business today. Furthermore, it’s critical that tenants know they can contest a landlord-proposed market rent review increase.
Getting the process right
Lauren Smyth at Mills Oakley says that understanding the process is imperative to correctly contesting a landlord-proposed market rent review.
“A market rent review is about more than the number. The process matters just as much, and the clauses above only set the framework. What usually decides the outcome is the detail: the review date, the notice requirements and the windows to negotiate or object before a determination becomes binding,” she says.
“In practice, the avoidable problems almost always trace back to dates. A tenant who diarises the option-exercise date, the review date and any objection or determination deadline – and who takes advice well before those dates – keeps their options open.
“Left too late and the mechanism may have run its course; an unfavourable figure may have crystallised or a right to challenge may have lapsed. The same discipline benefits landlords too because a clean, well-documented process is far less likely to end in a dispute."
Lauren says guaranteeing that the lease is indeed a retail lease, as statutory regimes in each state – such as the Retail Leases Act 1994 (NSW) – can override parts of what a lease says, and prescribe how market rent is determined.
“Understanding what a market rent review is and the appropriate process to correctly contest a landlord-proposed market rent review is critical to making sure you’re not paying more than you need.”
The same discipline applies to the evidence behind your position. Landlords will always look to present comparable transactions that support their proposed rent. The tenants with independent access to recent transactions in their precinct are able to assess whether that evidence holds up before accepting a number they may not have to pay.
Your lease likely already says in the event of an unresolved market rent review contest with your landlord, a determining valuer is required to assess the market rent.
Why not get a valuer that never works for landlords in your corner, sooner rather than later?
As Sydney’s only independent 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.
In part three, we bring together the themes of the first two foundational articles in examining the “market rent review”.
Understanding the concept of market rents and rent reviews ensures tenants are not left paying their landlord more rent than they should be. We have explored these in depth in our previous two articles.
This third and final foundational article in the series examines what happens when your lease has a “market rent review”. Providing tenants and advisors with a complete understanding of the concept, this article talks through why it’s important to contest a landlord-proposed market rent review when it arrives, and how to ensure the proper processes are followed.
What is a market rent review?
Market rent reviews are a process where a landlord looks to ‘reset’ (and most often, increase) a rent to the current open-market rental value of the property.
They occur when a lease option is exercised, or in the middle of a long-term lease, such as 5-years into a 10-year lease term.
While the concept is simple, market rent review clauses in a lease that dictate how the market rent should be determined can be filled with nuanced terms that impact the actual rent a tenant could be required to pay at the conclusion of the process.
Therefore, if we were to rework the definition of a market rent, specifically when it comes to the market rent review process, it may be more accurately described as follows:
The rent a landlord could get from a tenant, if the property were leased today – provided neither the landlord nor the tenant were under pressure to agree to the lease – based on current market conditions, comparable properties, and this lease's specific terms.
Why you can – and should – contest a review
Your lease explains in detail the process that must be followed by both you and the landlord. It also includes what’s required when a market rent review has been triggered.
Many tenants are great at running their businesses and they understand the nuances in their day-to-day operations. However, what many tenants fail to realise is that real estate is often their landlord’s business. It results in a structural and informational disadvantage for a tenant when a market rent review is taking place. That disadvantage is only amplified when the firms most qualified to assess a market rent review are often already working for the same landlords whose proposals need challenging
As Sydney’s only valuation firm that exclusively works on behalf of factory and warehouse tenants facing a market rent review, we know that you know your business inside out. We also know that when a market rent review increase arrives, your landlords have people in their corner who do this for a living, representing their interests. This imbalance is exactly what Rasalan was built to correct.
Most leases provide a provision permitting the tenant to contest a landlord’s proposed market rent review increase. In the event of the tenant and landlord being unable to reach agreement on a market rent, most leases then require an independent valuer be appointed, generally by the President of the API, or the President of the Law Society, of the relevant state.
By understanding your lease and its provisions, you’re a step closer to reducing the market rent review increase your landlord has proposed.
Can a market rent review lead to a new rent that doesn’t feel like a market rent for the tenant?
The short answer is yes.
Our reworked definition of market rent makes clear that the lease’s specific terms are critical to determining the market rent of a property.
The specific terms within the market rent review clause define the factors that must be considered or disregarded in the assessment of the market rent by a valuer. This affects the resultant market rent assessment – and whether it feels like a market rent to the tenant.
There are many terms within the market rent review clause that can disastrously affect a tenant’s ability to attract a favourable outcome.
Disadvantageous terms for a tenant within the market rent review clause may include:
A ratchet: A clause that prevents the rent from decreasing under a market rent review scenario - regardless of market conditions and comparable evidence.
Face market rent reviews: A clause that prevents the consideration of incentives when a market rent is determined.
Option exercise: Any clause that allows a landlord to exercise an option on the tenant’s behalf. Whilst rare, we’ve seen it twice in our career.
Building functionality: Some lease terms require assuming the building is in better condition or has better functionality than it actually does. It is not a reflection of the building’s current state.
Determining valuer appointment: A rare clause that permits the landlord to appoint a determining valuer in the event of a proposed market rent disagreement between the tenant and the landlord.
Permitted uses: Clauses that dictate the evidence a valuer must consider when assessing a market rent. It may require the valuer to consider any legally permissible use of the property – not just the tenant's actual use.
Demolition: Clauses that allow a landlord to terminate a lease early if they intend to demolish, redevelop, or substantially renovate the building. Sometimes the lease doesn’t provide for any compensation to the tenant.
These terms, if present, can materially impact the market rent outcome that a tenant’s required to pay.
It’s critical that all tenants – and their trusted advisors – understand the market rent review terms they agree to when they negotiate their initial lease. Decisions made several years ago can impact a business today. Furthermore, it’s critical that tenants know they can contest a landlord-proposed market rent review increase.
Getting the process right
Lauren Smyth at Mills Oakley says that understanding the process is imperative to correctly contesting a landlord-proposed market rent review.
“A market rent review is about more than the number. The process matters just as much, and the clauses above only set the framework. What usually decides the outcome is the detail: the review date, the notice requirements and the windows to negotiate or object before a determination becomes binding,” she says.
“In practice, the avoidable problems almost always trace back to dates. A tenant who diarises the option-exercise date, the review date and any objection or determination deadline – and who takes advice well before those dates – keeps their options open.
“Left too late and the mechanism may have run its course; an unfavourable figure may have crystallised or a right to challenge may have lapsed. The same discipline benefits landlords too because a clean, well-documented process is far less likely to end in a dispute."
Lauren says guaranteeing that the lease is indeed a retail lease, as statutory regimes in each state – such as the Retail Leases Act 1994 (NSW) – can override parts of what a lease says, and prescribe how market rent is determined.
“Understanding what a market rent review is and the appropriate process to correctly contest a landlord-proposed market rent review is critical to making sure you’re not paying more than you need.”
The same discipline applies to the evidence behind your position. Landlords will always look to present comparable transactions that support their proposed rent. The tenants with independent access to recent transactions in their precinct are able to assess whether that evidence holds up before accepting a number they may not have to pay.
Your lease likely already says in the event of an unresolved market rent review contest with your landlord, a determining valuer is required to assess the market rent.
Why not get a valuer that never works for landlords in your corner, sooner rather than later?
As Sydney’s only independent 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.
