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Tips from a Valuer in Rental Determinations

The following discussion provides the main areas of a rent review process:

As a Commercial Property Valuer of some twenty-five (25) years plus, more particularly, a Specialist Retail Valuer, the Commercial Property Determination process, depending of where the parties involved are in relation to experience, can be very daunting. The role and process may be considered as a snapshot as to the main points to consider:

  1. Market Review Clause
Simply the key to the whole process. Key factors:
  • Who may initiate the review
  • The key time factors of when and how long
  • The requirement of an “expert” valuer
  • Factors that a valuer can have regard to within the determination of value
  • Limitation on the scope of rent review
  1. The Process of Review in Regard to Rental Determinations
Essential features of a market rent review process:
  • Nomination of the review date. The date upon which the rental sum determined is to commence.
  • Which party can initiate the review? In most cases, the Landlord, but a shift to the Lessee is now starting to gain momentum in new lease agreements.
  1. Rent Reviews & Options to Review
  • Market reviews are most common at the expiry of a term, setting the market rental for the next period.
  • A tip is for the Lessee to have some sort of idea as to the market rental level, prior to deciding if the option is to be taken up. Reference being a Commercial Property Valuer and someone having a large knowledge of the Commercial real estate market, more particularly, rental levels of value.
  • A further tip is that the Lessee could seek to negotiate for:
    1. Obtain a market rent before the due date for the exercise of option
    2. Terminate existing lease if market rental is not acceptable
    3. Hold off on option period until market rental has been determined
The above points may be permissible but only if the lease allows same.
  1. Timing of the Rent Review Process
  • The party of whom has not initiated the review usually has the right to object to the proposed rental. If agreement cannot be reached, the lease usually provides for the determination mechanism.
  • A tip – failure to object to the proposed rental usually means the market rent may be deemed to apply.
  1. The serving of notice and responses
A critical factor of which must be adhered to. Landlord needs to check:
  • Date by which the rent review notice must be served
  • Mode of service of notice
  • Address, person
Simply, the notice must comply with the terms of lease.
  1. When the Lessee Receives the Notice of Proposed Rental
Lessee may:
  • Accept the new rental amount
  • Object in accordance with the provisions of the lease
  • Provide an issue that arises due to the notice
  1. Factors to take into account within the expert valuation usually by a Commercial Property Valuer and/or Specialist Retail Valuer
  • Vacant possession
  • Permitted use
  • Valuation date
  • Assumption the parties have complied with the lease
  • Ownership of fitout
  • Incentives (if applicable)
  • Comparable premises
  1. What makes a good submission and/or determination as an “expert” valuer. The valuer must be a Commercial Property Valuer and/or Specialist Retail Valuer, preferably the latter
  • The person preparing the submission/determination must be a qualified expert
  • Degree of specialisation
  • Knowledge of a particular area
  • Quality of comparable rental evidence
  • The ability as a professional in dealing with confidential information
  • Able to have a constant data flow of current market conditions
Conclusions – from a Commercial Property Valuer, moreso Specialist Retail Valuer:
  • Market rent reviews allow both parties to provide for either significant increases and/or decreases in rent
  • Both parties to the lease need to have a clear understanding of the rent review clause within the specific lease
  • Diarise and take notice of deadlines
  • Make sure that you are aware of current market rentals in your area. Time is of the essence, usually within the current market value process
  • Note, that the party’s ability to challenge a determination of rental can be limited

Please contact First Valuation Group (FVG)

• Office 03 9690 1112

• Mark Ruttner • 0411 419 674

• valuations@fvg.com.au