How can landlord and tenant successfully negotiate renewals of their lease at market rent? What happens when the landlord and tenant disagree about the appropriate rental rate for the renewal term? Many commercial leases provide that, on renewal, rent will be charged at “market rent”, being the rental rate prevailing in the local market at the time for similar properties in similar locations. But a market rent renewal provision can leave many questions unanswered and as “market rent” can mean different things to different people, this can lead to disagreements between landlord and tenant.
To avoid disagreement on market rent, the parties should bring up the topic of rent early on; and if it looks like there will be any disagreement, the parties should seek an independent opinion as to the value of market rent. Typically, parties will seek such an opinion from a commercial broker or certified appraiser. If at least one party shows up to the negotiations with a reasonable opinion of the value of market rent, as well as a solid understanding of the legal aspects of the lease, it can facilitate agreement between the parties, avoid any deterioration of the landlord-tenant relationship and avoid additional expenses for both parties.
If the negotiations fail, and the lease does not provide for a specific dispute resolution method, there are generally four non-exclusive options to resolve the dispute. The first option is mediation, where the parties hire a mediator who tries to help the parties reach an agreement. Mediators can be an effective and affordable means of helping the parties reach an agreement while maintaining the landlord-tenant relationship. If mediation fails, the parties can choose between hiring an expert appraiser to make a final decision, going to arbitration, or fighting it out in the courts through litigation.
The pros and cons to the different approaches are set out in the following table:
Expert appraisal Arbitration Litigation
- Expert decision-maker
- Private outcome
- Parties agree re. costs
- Cost-effective option
- No chance to present arguments; no procedural fairness
- No right of appeal
- Depends totally on opinion of appraiser
- (Optional) expert decision-maker
- Can be quick & cost-effective
- Option to present arguments and have procedural fairness
- Very limited grounds for appeal (unless parties agree)
- Private outcome
- Parties can agree re. costs
- Can be slow
- Can be as expensive as litigation
- Maximum chance to present arguments; maximum procedural fairness
- No expert decision-maker
- Appeal on question of law
- Public outcome
- Losing party may pay costs
In a future blog post, we will discuss the factors used to determine the value of market rent.