At some stage during your lease tenure you will most likely have a market rent review. For most tenants this would be at the beginning of a new lease term if you have exercised an option, or mid term if you have a longer lease (greater than 10 years).
Your lease should include details of when and how the market rent review is to happen and cover off:
- Which party can notify the other of their estimate of market rent. In a lot of leases it will state that the Landlord is to notify the tenant. Some may allow the tenant to notify the Landlord, or at least request it from the Landlord.
- The time frame for when the other party is to be notified. This clause will often state ‘time is of the essence’. For example, the lease may state that the Landlord is to notify the tenant of the estimated market rent within one month of the tenant exercising their option; or it may give the Landlord up to one year after the option has been exercised. In this circumstance it is crucial that a tenant undertakes their own research into what market rent is prior to receiving the estimate from the landlord. The time frames must be adhered to, even if you have a good relationship with the Landlord, they can quickly turn sour when money is involved. Most leases will state that if a response is not provided to the Landlord within a certain time frame, then the Landlord’s estimate of market rent will become the new rent.
- How market rent is determined, including whether market incentives are to be taken into account and if any tenant upgrades are to be included (they shouldn’t be).
- If there is a cap (maximum increase), collar (maximum decrease) or ratchet clause (rent cannot decrease) on the new rent. If the tenant is classified as a retail tenant under the Retail Leases Act 2003 in Victoria, a ratchet clause is not allowed. Some industrial tenants are classified as retail tenants, and you can read more about that here.
- The method for determination should both parties not agree on market rent.
Like any negotiation, knowledge is power, and any tenant approaching a market rent review should be undertaking their own investigations into what market rent is for the property. This should be done well in advance, usually around 6 – 12 months before the rent review date. Whilst market rent can change within this time frame, it will give you a good indication of what you can expect to be paying, will assist with a stay versus go analysis and should provide you with enough time frame to source another property should that be required.
Tenants with medium to large portfolios should be undertaking regular benchmarking studies of market rental rates across the portfolio, allowing for strategic decisions to be made on properties with plenty of lead-time. We’ve done this for clients and it has allowed them make decisions on the future of sites and put plans in place to close, relocate or consolidate sites. It also means that they were well prepared when approaching market rent review dates.
If you would like assistance with your upcoming market rent review, please get in contact – firstname.lastname@example.org