Australia: Rental valuations – Critical in a time of tight credit and increasing banking KPIs

It is my experience in recent times, that due to a tightening of the credit market and in the wake of the recent Banking Royal Commission, there has been increased scrutiny over the performance of assets which form security for finance. This is particularly the case for property, which has fallen out of favour with financiers.

Therefore, an appropriate rental return is vital - more than ever before - and it should be carefully monitored to avoid the value of your property failing your financier's credit criteria. If you are a landlord that has a property portfolio financed, you can expect that your financier will look closely at rental returns.

Consequently, it is critical to carefully consider the basis on which your rent is being determined and the circumstances in which valuations can be challenged.

Methods of Rental Review

There are several methods of determining rent review for retail and commercial leases:

  • Fixed Percentage Increase Review: As the name suggests, this method of rental review is based on a fixed increase in rent on specified dates during the term of your lease. The percentage will generally vary depending on the location and type of premises.
  • Consumer Price Index: A CPI rent review follows changes in the Consumer Price Index, which is calculated quarterly by the ABS. Essentially, the rent will increase by the same percentage as the CPI.
  • Market Rent Review: A market rent review allows for a market valuation of rent. Usually the parties will have an opportunity to negotiate, failing which an independent valuer is appointed.

The Legislative Landscape in NSW

In NSW, the process of rental review for retail leases is governed by the Retail Leases Act (the Act). The objective of the Act is to safeguard a tenant's interest.

The effect of the legislation is as follows:

  • The current market rent is the rent that would reasonably be expected to be paid for the premises, taking into account rent paid for similar premises, rental concessions and gross rent less the landlord's outgoings payable by the tenant.
  • If the parties cannot agree on the actual amount of rent, then a special retail valuer can be appointed to make this determination.

Operation of S32 of the Act

One of my favourites is Section 32 of the Act, which allows the tenant the opportunity to have current market rent determined early. The provision states:

  1. The tenant is entitled to request a determination of market rent at any time that begins six months before and ends three months before the last day on which the option to renew may be exercised under the lease;
  2. The tenant makes the request by giving notice, in writing to the landlord;
  3. The tenant must exercise their option within 21 days after determination of rent is made and notified to the tenant; and,
  4. Parties to the lease share costs of valuation of market rent in equal shares.
    Effectively, the tenant has the right to request a determination of market rent before the date of exercise of option, which then affords them the opportunity to make an informed decision as to whether to exercise their option to renew.

Data Base Corporate Pty Ltd v Strike Australia Pty Ltd [2019] NSWSC 379

A recent decision of the NSW Supreme Court demonstrates the importance of perusing a valuer's review of market rent to ensure it complies with the terms of your lease. The facts of the case were as follows:

  • Data Base Corporate Pty Ltd was the sub-lessor and Strike Australia Pty Ltd was the sub-lessee;
  • The premises was located at the King St Wharf Complex and utilised as a bowling alley;
  • The lease provided that rent for a subsequent term would be market rent, determined by an independent valuer; and,
  • Clause 4.5 of the sublease stated the valuer was to "have regard to...market rents...for comparable premises in the vicinity of the premises." The valuer examined the rent of similar bowling venues in Macquarie Park (17km away) and Bondi Beach (10km away).

The NSW Supreme Court decided that this valuation was inconsistent with the terms of the lease because the comparable premises were not within "the vicinity of the premises."

Key Takeaways from this Decision

In an era of increased scrutiny over the performance of securitised assets, the rental valuation of your lease is of utmost importance. As was the case in the above decision, you may be able to contest the valuation.

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.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
 
Some comments from our readers…
“The articles are extremely timely and highly applicable”
“I often find critical information not available elsewhere”
“As in-house counsel, Mondaq’s service is of great value”

Related Topics
 
Related Articles
 
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Mondaq Free Registration
Gain access to Mondaq global archive of over 375,000 articles covering 200 countries with a personalised News Alert and automatic login on this device.
Mondaq News Alert (some suggested topics and region)
Select Topics
Registration (please scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions