Our Guide to Market Rent Review

Both business property owners and tenants are protected when it comes to a market rent review. While tenants need to ensure they aren’t asked to pay for higher rental rates, property owners are given the right to increase their rents. That is where the market rent review comes into the picture.

In this article, we‘ll share what a market rent review entails. Keep on reading to learn what methods of rent increase includes, and what important clauses are involved in the rental review assessment.

How to increase the rent

It’s worth knowing that landlords are given a basis on how to increase their rental rates, whether commercial or retail spaces. Generally, landlords use three common methods to assess and calculate the rental rate, as follows:

By a fixed percentage (such as three or four per cent)

By the consumer price index (CPI) with reference to the inflation rate

According to a market rent review: Typically, the lease will trigger a rent review once it includes a renewal option. The rent will then increase on the specific rent review dates as stipulated on the clause in a lease agreement.

What a market rent review entails

In a nutshell, a market rent review is designed to make sure that the rent the landlords plan to charge or increase remains consistent with rates in the current market.

Tenants usually exercise this option whenever there is a rental renewal, or there are certain increments during a long-term lease. This option then enables the landlord to reassess the applicable rent for the commercial or retail property to keep tabs with the market value.

Once the market rent review applies, the landlord sets out the process by which the rent is calculated. The ultimate purpose is to ensure that the rent that the tenant will pay moving forward is comparable to other similar properties based on the standard market value.

What important clauses to consider

When reviewing how a lease handles market rent, tenants should be on the lookout for the following clauses:

Method: This refers to how the landlord determines the market review. Make sure that the landlords hire an expert third-party market valuer to perform the market rent review.

Review frequency: This pertains to the number of times a market rent reviews occur in a year. If it is done more than once, then the administrative costs can be financially prohibited.

Dispute resolution: This refers to how the tenant is allowed to dispute and how the resolution is arrived at. For instance, it’s best to have an independent expert to break any disagreements.

Rent agreement: This involves both parties—the tenant and the landlord, coming to an agreement on the market rent review.

Ratchet provision: This is a clause that prevents the rent from going down, even if the market valuation lowers.

Conclusion

There’s no denying that market rent review is a viable option to take when on the process of increasing rent, be it a commercial or retail lease. While it allows the landlord to adjust the rent, it also protects the tenants by ensuring that it’s in accordance with the standard market value.

Tenants should review the market rent clauses as outlined above. Ultimately, it’s best to hire an independent valuation service for your market rent review.

We provide valuation services in Sydney for property, plant, and equipment, as well as infrastructure assets. If you’re looking for a rental review assessment, get in touch with us to see how we can help!