What You Should Know About Retail Market Rent Reviews

In this blog, we’ll explore the ins and outs of market rent reviews, including how the Retail Leases Act may apply, how to appoint a determining valuer, and the process for submitting information to that valuer. Additionally, we will highlight a recent court case that has clarified some of the important requirements for market rent reviews in NSW, as well as certain exclusions from the Act under Schedule 1.

What Is a Market Rent Review?

A market rent review usually occurs either when a lease contains an option to renew or if there is a market rent review clause within the main lease term (often called a mid-term market rent review) and the rent is reviewed to reflect current market conditions. This ensures the rent is adjusted to align with changes in the property and leasing markets. Although mid-term rent reviews are uncommon in retail leases, they can occur for long-term tenants.

Factors typically considered in a market rent review include: frontage, foot and vehicle traffic, sight lines, signage, access, improvements made during the lease, rent escalations, usable site area, permitted use, incentives, and shape.

Your lease should clearly define the method for assessing the market rent If the lease is covered under the Retail Leases Act in any State then it overrides the provisions of the lease where they are in conflict.

Does the Retail Leases Act Apply?

Each Australian State has its own Retail Leases Act, which provides protections for tenants during market rent reviews. These protections include:

• Prohibition of ratchet clauses, which prevents the rent from decreasing.
• Considers as primary comparable evidence the same or substantially similar permissible uses when determining market rent.
• Incentives, such as rent-free periods and contributions to fitout, must be included in the market rent calculation.
• Fitout – If the lessee installed the fitout, then it should be ignored under the market rent review provision. Either party can seek a further review if dissatisfied with the result.
• Market rent is typically assessed on a gross rent basis.

However, not all premises are covered by Retail Leases Acts in each State. Certain types of businesses and premises are excluded. For example in NSW under Schedule 1 of the Act in some of these excluded premises include:

• Premises used for the sale of motor vehicles (e.g., car dealerships).
• Premises used as a place of public entertainment (e.g., cinemas and ice skating rinks).
• Financial institutions, such as banks and insurance agencies.
• Premises with a lettable area greater than 1,000 square metres unless located in a retail shopping centre.

If your lease is excluded under Schedule 1, you cannot rely on the Act’s protections for market rent reviews. If you’re unsure whether the Retail Leases Act governs your lease, seek legal advise.

How Do You Appoint a Determining Valuer?

If the tenant and landlord cannot agree on the market rent, both parties can jointly appoint an independent valuer. It’s essential to ensure the valuer is impartial and free from any conflict of interest.

If the parties cannot agree on a valuer, the appropriate appointing authority will depend on whether the Retail Leases Act applies:

Type of Review	Appointing Authority
Retail Leases Act does not apply.	Presidential appointment of the API or as per the lease
Retail Leases Act applies	NCAT, VCAT, QCAT, or Small Business Commission

Submitting to the Valuer

Both the tenant (Lessee) and landlord (Lessor) typically have the opportunity to submit written and factual information to the valuer. These submissions must be taken into consideration by the Determining Valuer if the lease is subject to the Retail Leases Act.

The submission should be based on solid evidence and reasoning. For example, merely stating that turnover has dropped will not influence the valuer unless you can show how this decline impacts the property’s rental value.

Important elements to include in your submission are:

• Areas – Have you ensured that you only pay rent for the areas you lease? Verify your space based on a Gross Lettable Area (GLA) survey to confirm you aren’t paying for common areas, balconies, or storage spaces that aren’t part of your lease.
• Outgoings – Are you being charged correctly for outgoings? Review what you’re paying against your lease terms.
• Fitout – If the tenant owns the fitout, the valuer must disregard it in rent calculations. Ensure this is clearly stated.
• Incentives – What incentives did you receive under the lease, such as rent-free periods, fitout contributions, or relocation costs? These must be factored into the market rent.
• Comparable Evidence – Provide data on comparable properties, including their currency, location, use, frontage, and depth.

Given that a market rent valuation will determine the base rent for the remainder of the lease, it is crucial to ensure the valuer’s assessment is accurate and considers all key factors.

Recent Court Case: Hanave Pty Ltd v Nomad Sydney Pty Ltd (2023)

A recent court case has clarified the standards a valuer must meet when determining market rent under the Retail Leases Act 1994 (NSW). In Hanave Pty Ltd v Nomad Sydney Pty Ltd, the Supreme Court of NSW highlighted that a market rent valuation must comply with section 31(1)(a) of the Act. Valuers must consider:

• The terms and conditions of the lease,
• The rent that would reasonably be expected for the premises if it were unoccupied,
• Gross rent less the landlord’s outgoings, and
• Rent incentives offered to prospective tenants.

The court ruled that a valuation is not binding unless it provides written, detailed reasons explaining how each factor influenced the final determination. A failure to include all relevant considerations or provide sufficient reasoning can result in the valuation being invalidated, as was the case in Hanave Pty Ltd v Nomad Sydney Pty Ltd.​

Conclusion

A market rent review can significantly impact the rental costs for the remainder of a lease term, making it essential to ensure the process is fair and transparent. With the recent court rulings reinforcing the need for thorough and well-supported valuations, landlords and tenants must pay close attention to the factors influencing market rent assessments. Additionally, understanding whether your lease falls under the Retail Leases Act or if it is excluded is crucial. If you have any concerns, seeking advice from a specialist valuer or legal professional is highly recommended.