Market rent reviews are often a source of disagreement between landlords and tenants as to the level of the reviewed rent. If you are a tenant and have received a notice from your landlord stating that the landlord wishes to increase your rent, then unless you agree with the proposed increase, the first thing to do is to obtain a copy of your lease and check the rent review provisions.
The items you should be looking for are:
- that you do in fact have a rent review due on the date stated by the landlord;
- the mechanism by which your rent is supposed to increase (it may be a market increase, based on a consumer price index formula, a fixed percentage increase, or there may be another formula for determining the increased rent) and whether the landlord has reviewed the rent using the correct method;
- whether your landlord has correctly served the notice.
Leases may contain restrictions preventing a notice being served either more than a certain period before the rent review date or a certain period past the rent review date. The lease will usually state that the notice must be served in a particular manner and if the landlord has not followed that process, then the notice may not be validly served.
The most important point to remember is that if you disagree with a proposed market rent, you must act promptly. Many leases, including the Auckland District Law Society Incorporated 6th edition deed of lease ("ADLS Lease") contain strict time periods within which a party must respond if it wishes to dispute the proposed market rent increase.
- respond within stated time periods;
- follow the correct method for service of the notice; or
- include all the required information;could result in the tenant being required to pay the market rent proposed by the landlord until the next rent review. This is regardless of whether the tenant agrees that the proposed rent is a fair assessment of the market rent. This result can be compounded if the lease contains a ratchet clause preventing the rent from decreasing, as it could mean an artificially high rent might still continue to be payable even after a further rent review.
If you wish to dispute the market rent proposed by the landlord, you may wish to consider what evidence you need to substantiate your alternative proposed market rent. The ADLS Lease provides that if you give notice disputing the rent proposed by the landlord, you must also specify in that notice the rent you propose as the current market rent. The ADLS Lease also contains interim rent provisions which mean that increased rent might still be payable while the disagreement around current market rent is resolved. Various scenarios apply depending on whether each party provides a registered valuer's certificate substantiating their proposed market rent.
A lease should also provide a formula or mechanism by which the landlord and tenant will resolve any dispute as to the new rent. The ADLS Lease provides that the parties will endeavour to agree upon the current market rent, but if agreement cannot be reached within 10 working days then the parties can either choose to have the reviewed rent determined by arbitration or by registered valuers acting as experts, with a third expert appointed to determine the market rent if the two valuers cannot agree.
If the landlord is undertaking a rent review after the rent review date has passed, it is also worthwhile for a tenant to carefully check the provisions of their lease relating to backdating. The ADLS Lease contains a provision that if the notice is served more than three months after the rent review date, the new rent (once determined) can only be backdated to the date of service of the notice. Other forms of lease may also contain restrictions on backdating.
The most important point to remember is that upon receiving a notice from the landlord with regards to a rent review, a tenant needs to act promptly and not ignore such notice. Failure to do so within a specified timeframe or in a specified manner may mean a tenant loses its right to challenge the proposed new rent. This could have significant ongoing financial consequences.
In deciding how to respond to the landlord, we recommend that a tenant always carefully reads the rent review provisions in their lease to make sure that they are aware of, and comply with any mechanism set out for both responding to the landlord's notice and for determining any disagreement as to the new rent. If a tenant is in any doubt, we would recommend they consult with their lawyer at the earliest opportunity.