Commercial leases generally contain an initial rent and then a
mechanism for regularly reviewing the rent. The rent reviews are
generally annual and if the lease contains an option for a further
term then there is generally a mechanism for reviewing the rent at
the commencement of the second and subsequent terms.
The most common types of commercial rent reviews are set out
Percentage increase – It is common for a lease to contain
a mechanism for increasing the rent by an agreed percentage each
year. It is in the landlord's interest for that percentage to
be high (perhaps 4% or 5%) whereas a tenant will usually seek a
lesser percentage (such as 3%). Percentage rent increases can be
useful for a tenant seeking to budget their lease for the term
Consumer Price Increase (CPI) reviews or increases – in
an effort to keep the true cost of a lease the same often leases
will contain a mechanism to review the rent in accordance with the
annual change in CPI. Landlord's will often seek to make that
review only occur if it will result in an increase, although
specifying a review will only occur if it is an increase is not
possible in most retail leases as it is generally prohibited by the
relevant retail legislation
Market rent reviews – market reviews are most common at
the commencement of a lease for a subsequent term but they can also
be used mid-term particularly with longer term leases. Market
reviews can be expensive to conduct as they usually contain a
dispute mechanism that involves appointing a valuer to determine
the rent. The terms of a market review clause in a lease can be
extremely important, as depending on the terms a tenant could end
up with a hugely increased rent merely because of the terminology
in the clause
A combination of the above
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.
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