A market rent review is a rental review mechanism when an Owner determines the current market rent for a tenants office space.
Reviews are common in commercial real estate and can occur at regular intervals in line with the lease agreement. This could be each year, every three or five years, at the end of the lease term or when an option term is exercised.
So, how does a market rent review work? It can work both ways, depending on the way the market has increased or decreased.
How is market rent calculated?
A market rent evaluation may be calculated by an independent third-party assessor. This valuation draws on other leases in place at different commercial offices to determine a fair rent for the property.
How is rent calculated? The market review of rent will be determined on the comparable lease transactions and the rent other tenants paid for similar office space, and the demand for that type of property at the time. Due to this, the rent may go up and down depending on that demand. Conversely, if there is an oversupply of office space and the market is deemed soft, then the rent could very easily go down.
The commercial rent will be assessed on the property’s square meterage, and whether the agreement is a gross or net lease.
It is important for potential tenants to understand the effective rent of the property - the amount that they have to pay after the inclusions of any incentives in the way of rent-free or rental discounts.
Rent review frequency and timing
Rent reviews will occur on a schedule that is set down in the original lease agreement.
This could be each year, or every few years, or even at the end of the term. They should not come out of the blue.
The owner, through their agent, will notify the tenant of the upcoming market rent review. In the lead up, the assessor will determine pricing and the condition of the local rental market. Using that information the landlord will determine the fair market value of the property.
There may be a negotiation between the parties to determine the final rental price, or any additional incentives.
Preparing for a rent review
When preparing for a rent review, it is important to review the current rental agreement to determine the legal framework for your lease. It may be worth doing your own research on the current rental conditions. This will give you an indication of the fair price and incentives and the included services.
In a soft market, it may be worth negotiating for some capital works or tenancy refurbishment. But if the market is bullish, it is important for the tenant to set their limit on how much they are willing to pay for an ongoing lease at the property.
Understanding tenant rights during a rent review
Tenants have rights throughout the occupancy of a commercial property lease. When it comes time to review the rental agreement, there are also some general legal requirements that the owner must follow.
The market rent review should be in line with the current market conditions, and the tenant has the right to argue that review.
If an agreement cannot be reached, there are legal proceedings that could occur. It is worth bearing in mind that legal actions are commonly expensive and take considerable time.
The tenant can stay in the property until the end of the lease agreement, and then should provide a notice period if the lease is not going to be renewed.
Negotiating a rent review: strategies for renters
When going into a rent review, tenants and owners should be willing to negotiate terms and conditions that are fair and reasonable.
Renters should come prepared with information about current office rentals in the area for similar properties. This could involve researching online or speaking with local commercial property agents who are experts in the sector.
It may be worth considering the condition of the property now that the initial lease agreement period has expired. Would a minor renovation or other service from the landlord be of greater value to you than maintaining the rental amount? Or would a longer or shorter lease period be beneficial to the organisation?
Make sure you know your boundaries, your rights and your responsibilities when going into a negotiation.