Rent review clause explained
A rent review clause sets out when and how the rent changes during a commercial lease. Most leases review the rent once a year by a fixed percentage or by CPI, and at the start of any option term by a market review. The clause decides how much your rent can rise over the lease, so it is worth reading closely before you sign.
The main types of rent review
| Type | How it works | What to watch |
|---|---|---|
| Fixed percentage | Rent rises by a set percentage, such as 3% or 4%, each year | Compounds over the term, even if the market falls |
| CPI | Rent rises by the change in the consumer price index | Which CPI figure and which period are used |
| Market | A valuer, or the parties, set the rent at current market rent | Timing, process and any ratchet |
| Fixed amount | Rent rises to a set dollar figure on a set date | Usually clear, but check it against the market |
| Turnover | Part of the rent is a percentage of your sales | Common in shopping centres, and needs sales reporting |
Many leases combine these. A common pattern is a fixed or CPI review each year and a market review when you exercise an option.
Fixed percentage reviews
A fixed review is easy to budget for. The risk is that it compounds. A 5% annual increase over a 5-year lease adds more than 20% to the rent by the final year, whatever happens in the market.
CPI reviews
A CPI review links your rent to inflation. Check which CPI figure the lease uses (usually the all groups figure for a capital city), which quarters are compared, and what happens if CPI falls.
Market reviews
A market review resets the rent to what the premises would lease for on the open market. It is usually started by notice from the landlord, with a proposed new rent. If you don’t agree, the clause should set out how the rent is decided, usually by an independent valuer.
Check:
- who can start the review, and by when
- how long you have to dispute the landlord’s figure
- how the valuer is chosen and who pays
- what the valuer must consider, such as incentives in the market and your fitout
- whether you pay the old rent or the new rent while the review is in dispute
Missing a deadline in a market review clause can mean the landlord’s proposed rent applies.
Signing a lease with a market or fixed rent review? We check the clause as part of our lease review and tell you what to ask for. Have your lease reviewed.
Ratchet clauses
A ratchet clause says the rent can’t go down at a review. At a market review, that means the new rent is the higher of the market rent and the current rent. If the market has fallen, you keep paying above market.
In a general commercial lease, ratchets are allowed, and you would need to negotiate them out. In a retail lease, most states make them void.
Watch also for clauses that apply whichever is higher of two methods, such as CPI or 4%. That gives the landlord the higher increase each year.
Retail leases and rent reviews
If your lease is a retail lease, your state’s retail leases Act limits what the rent review clause can do. Depending on the state, the Act may:
- make ratchet clauses void
- require the lease to state the method for each review
- stop the lease using more than one method at the same review
- set out who appoints the valuer at a market review, often through the state’s small business commissioner
- set out what the valuer must consider
The rules differ between states. If you are not sure whether your lease is retail, see commercial lease vs retail lease.
What to ask for
- An annual increase you can afford over the full term, including any option.
- No ratchet at a market review.
- A market review only at the start of an option, not during the term.
- A clear process and timetable for a market review, with a fair way to appoint the valuer.
- A cap and collar on market reviews, such as no more than 10% up or down, if the landlord will agree.
The rent review clause is easy to overlook. Read it with the rent schedule, as the dates and percentages are often in a schedule, not the clause itself.
Questions
Something else? Enquire online or email us.
Can the rent go down at a rent review?
Usually only at a market review, and only if the lease doesn't have a ratchet clause. Fixed reviews only go up. A CPI review may go down if CPI falls, depending on the clause.
What if the landlord misses the date for a market review?
It depends on the clause. Some leases let the landlord start the review late and backdate it. Others say the review is lost if notice isn't given on time.
Can I dispute a market review?
Usually, yes. Most leases let you dispute the landlord's figure within a set time, after which a valuer decides. Check the deadline, as missing it can mean the landlord's figure applies.
Check the rent review before you sign
Our fixed fee commercial lease review covers rent reviews, outgoings, make good, guarantees and options. You get written advice on what to change.
Sources
General information only, not legal advice. Every lease is different, so get advice on yours before you sign.