In a previous blog post, we discussed the methods for settling
a dispute over "market rent" when renewing a commercial
lease. In this blog post, we will address substantive issues that
can arise in determining the value of "market rent".
To recap, many commercial leases provide that, on renewal, rent
will be charged at "market rent" – the problem
being that "market rent" is not specific at all! The term
can also show up in an agreement that includes a right of first
offer to lease at market rent. Unsurprisingly, this can lead, and
has led, to disputes between landlords and tenants.
The law regarding market rent is unsettled. Issues that can
arise in determining the value of market rent include:
Do market trends (e.g. rising real estate prices) affect the
value of market rent?
Does market rent include factors that are subjective
to the leaseholder, such as the terms of the current lease, or is
the valuation a purely objective reflection of what the
general market would pay?
Does market rent include tenant inducements that are typically
paid in the marketplace?
Should improvements paid for by the leaseholder be included in
the market rent valuation? What about improvements paid for by the
Does an offer from a third party to lease the property affect
the value of market rent?
These are issues that should be considered when drafting the
renewal provision for a commercial lease. The renewal provision
must strike a balance between being too specific and too
general. If the renewal provision is too specific, it will
not be sufficiently flexible to adapt to changing market conditions
(keeping in mind that commercial leases often last for
decades). On the other hand, a renewal provision that is too
broad will be too flexible without providing sufficient
certainty and clarity for the parties, which can lead to
disagreement about the interpretation and meaning of the lease.
Further, incorporating these issues into the renewal provision can
help structure, and give parameters to, the applicable dispute
resolution mechanism in the lease.
Russell v. Township of Georgian Bay provides a useful reminder of the fact that while municipal officials sometimes appear to hold all of the cards in disputes with home owners, that is not always the case.
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