Commercial leases can allow the rent to be reviewed in a number of ways, whether that be to market, CPI, a fixed percentage or even relative to the tenant's turnover. We set out below the pros and cons of each rent review method.
Historically the most common method for reviewing a property's rent was to have its market value assessed by a valuer. The lease will often dictate what factors can be taken into account when the market rent is assessed. For example, a valuer would usually ignore any goodwill associated with the tenant's business and any items of fit out which have been paid for by the tenant.
Some leases measure rent increases against the movement in the Consumer Price Index (CPI).
To add even more certainty the parties could agree that the rent will increase by a set figure or percentage on each rent review date.
Turnover rentals are when the tenant pays a set percentage of their business' turnover as rental. These types of rentals are less common in NZ, but they are sometimes utilised if the lease relates to a motel or retail premises.
Lease's will often include a ratchet clause which dictates the amount (if any) by which rents can decrease following a rent review.
For market rent reviews there are 3 possible types of 'ratchets':
Under a standard ADLS lease form all CPI rent reviews are subject to a hard ratchet in that they can only consider increases (but not decreases) in CPI.
As you can see there are many advantages and downsides to each particular method of rent review. When working with our landlord or tenant clients, Cavell Leitch will help you tailor a bespoke rent review clause (including rent review ratchets) which suits your circumstances. We can also help resolve rent disputes or help find resolutions if payments are overdue. Please contact us for further assistance.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
Please don’t hesitate to contact one of Cavell Leitch’s lease specialists for advice on the rent review process or to help you resolve any disputes.