Understanding Rent Reviews and Market Rent Reviews in Commercial and Retail Leases
Lease agreements have the option of containing a rent review clause; a clause that allows for the rent price to be adjusted at specified intervals to reflect changing conditions such as market conditions or inflation. They are designed to keep the price of rent in accordance with the current market value of the property.
If you are a landlord or a tenant, it is vital that you understand how these rent review clauses work because they often bring significant financial implications.
Market Rent Reviews
A Market Rent Review (MRR) is a process whereby the rent is compared to the market value of similar properties to ensure it reflects current market rise.
The market rent review process is typically initiated when a landlord proposes a new rental rate based on their assessment of market conditions. If the tenant disputes the proposed rate, the matter must be resolved through the specific dispute resolution process outlined in the lease agreement, which may include independent determination and negotiation. Often, a professional property valuer is hired. This is extremely encouraged, as a valuer can use their expertise to determine a fair price on the property and create a binding valuation report. The valuer’s determination will be legally binding if specified as such in the lease agreement. It is very difficult to argue with their expert opinion, unless a party can prove a ‘manifest error’ on the valuer’s part.
Practical Considerations
A tenant should always prepare and assess the market in anticipation of a rent review. If the prices for similar properties are going up, it is advisable to prepare for a potential rent review in accordance with the terms of the lease agreement.
Tenants may dispute a proposed rent increase if they believe it does not reflect market conditions or violates the terms of the lease agreement. Such disputes must be pursued through the appropriate legal channels as specified in the lease. But it is important to note that landlords often consult leasing agents and/or independent valuers before proposing their rent figure to assure that it is justified and legal.
If you are going through a rent review matter, seeking legal counsel can help protect your legal rights and interests. A lawyer can help you understand the legal framework behind a claim, and guide you on the best path forward.
If you have any questions about rent reviews, please do not hesitate to contact me. I am here to help.
DISCLAIMER: This explanation is for informational purposes only and does not constitute legal advice.