Commercial leases commonly provide for a rent review at intervals throughout the lease and on the exercise of any option to renew.
Any increase or decrease of the rent payable at these reviews can significantly impact both the landlord and tenant.
One standard way to review the rent payable for a commercial lease is by a market review. The market review determines the rent by comparison with similar properties in the area.
This bulletin outlines the procedures for applying for a market review, as well as the steps that can be taken to challenge a market rent determination.
1. Rent review under the lease agreement
Commercial leases often provide for rent to be determined by the current market rent.
At first instance, the landlord and tenant will have the opportunity to agree on the appropriate market rent. Where parties can agree, this agreed rent will be payable until the end of the applicable term.
Under the Retail Shop Leases Act 1994 (Qld), where the parties cannot agree on the market rent within one month after the review date set by the lease, the rent must be determined by a specialist retail valuer.
If the parties cannot agree on the appointment of a valuer, one will be nominated for them.
2. Determination by a valuer
Once a valuer is appointed, the landlord and tenant can make written submissions to the valuer about the current market rent and respond to the other party’s submissions. The valuer may also request information from the landlord about other leases in the retail shopping centre.
After receiving the submissions and information from both parties, the valuer has one month to make a determination.
The Act sets out strict criteria that the valuer must take into account when determining the rent, which are as follows:
- The valuer must determine the rent on the basis of the rent that would be reasonably expected to be paid for the shop if it were unoccupied and offered for lease for the same or a substantially similar use as that under the actual lease between the parties.
- The valuer must determine the rent on the basis of gross rent less the landlord’s outgoings payable by the tenant under the lease.
- The valuer must determine the rent on an effective rent basis, which means taking into account all associated advantages and disadvantages under arrangements made between the landlord and tenant.
- The valuer must not have regard to the value of the goodwill of the tenant’s business or the tenant’s fixtures and fittings in the shop.
- The valuer must have regard to the terms and conditions of the lease as well as the submissions from the landlord and tenant about the market rent of the shop.
The Act also sets out the procedural requirements of the valuer’s determination, which include that the determination must be in writing, identify the location of the leased shop, state the matters taken into account by the valuer in making the determination, and include the detailed reasons for the determination. The determination is also required to state whether the current market rent includes GST and, if so, what the GST amount is.
3. Dispute resolution
If the valuer’s determination does not comply with the requirements of the Act, either party can rely on the dispute resolution process set out in the Act.
The Act provides for the following two-step process for resolving retail tenancy disputes:
- first, mediation of the dispute; and
- second, the hearing of the dispute by the Queensland Civil and Administrative Tribunal (QCAT).
To kick off this process, either party must lodge a Form 4 – Notice of dispute – Retail Shop Leases Act 1994 with the QCAT registry.
The mediation is a private negotiation of the dispute between the parties with the help of an independent mediator. The mediator will not determine the dispute but will assist the parties in attempting to reach a resolution.
If the mediation is unsuccessful, and if QCAT has jurisdiction, the mediator can refer the dispute to QCAT.
5. QCAT hearing
It is important to note that QCAT cannot determine the rent that should be payable for the retail shop. QCAT can only determine whether the valuer has complied with the relevant provisions of the Act (summarised above).
If QCAT finds that the valuer’s determination is compliant with the Act, then, subject to any rights of appeal, the valuer’s determination will stand and the parties will be bound by it for the term of the lease.
If QCAT finds that the valuer did not comply with their statutory obligations in making the valuation, QCAT may order that the valuer’s determination be set aside and a new determination be made by another valuer.
The process of making a rental determination will then be repeated with the new valuer.
If the new valuer fails to comply with the provisions of the Act, another application to QCAT can be made by either party and the dispute resolution process will begin again.
The impact of an unfavourable valuation can have significant consequences for both the landlord and tenant.
If you are unhappy with the market rent determination for your retail shop lease, or if the other party to the lease challenges the market rent determination, you should consider whether the determination complies with the criteria set out in the Act.
Assessing the valuer’s compliance with the criteria set out in the Act is vital to any QCAT application.