Rent Reviews: Increasing The Rent For Your Commercial Property
16 March, 2016 | Kristal Rogers
Completing well documented and timely rent reviews of your commercial property is imperative to achieving profitable commercial property management. Letting rent review dates lapse is common among commercial landlords, but what is the process for rent reviews and how do you ensure your rent reviews happen in a timely manner?
Keeping track of when reviews are due
Online commercial property management systems can help you keep on top of your rent reviews. Smith and Partners’ offers its commercial property clients free access to their commercial property management software, Nomos One. Nomos One stores all your lease documentation online and automatically reminds all parties when important events such as rent reviews, lease renewals etc. are due.
The main purpose of a rent review is to adjust the tenant’s rent to the current market level in order to protect the landlord against inflation.
What happens if you miss a rent review?
The most common form of commercial lease provides that the date of a rent review will lapse if more than three months passes after the date stipulated in the lease. The landlord is then limited to claiming any increase in the rent from the date of the landlord’s notice and not from the date of the proposed rent review as stipulated in the lease. Therefore, it is prudent to exercise the rent review at the earliest opportunity. In most leases, this is 3 months prior to the date of the rent review date outlined in the Deed of Lease.
Our commercial property software will give you a timely reminder three months prior to each rent review to ensure that these important rent review dates are not missed and that you as a landlord maximise the best possible profits available to you as a commercial property owner.
Alternatively, you can set up reminders in your calendar or use spreadsheets if you have multiple properties, but these systems can be cumbersome and hard to keep on top of. The latest version of the Auckland District Law Society’s (ADLS) Deed of Lease (which is commonly used in the current market for commercial leases), allows either the landlord or the tenant to give written notice to the other party specifying the annual rent proposed as the current market rent at the relevant review date.
The party receiving the the written notice (usually the tenant) has 20 working days to give written notice of their objection to the party given the notice (usually the landlord). If the tenant does not dispute the change in rent within 20 working days, the rent is set at the new amount as at the date specified in the notice.
The Process – Giving Notice
You should plan to give written notice to your tenant prior to the date of the rent review. Any written notice to the other party proposing a new rent, can be done up to 3 months prior to the rent review date specified in the lease. Being proactive with your rent reviews can help you maximise your profits!
If the party receiving the notice then gives written notice to the party giving the notice within 20 working days after service, disputing the annual rent proposed, then the new rent shall be determined between the landlord and the tenant by either:
- reaching an agreement upon the current market rent; or
- if agreement is not reached within 10 working days, then the new rent may be determined by arbitration; or
- if the parties agree, to appoint registered valuers (acting as experts). Each party shall then appoint a valuer and if one party decides not to appoint a valuer within 20 working days, then the valuer appointed by the first party shall then determine the new rent and such determination shall be binding on both parties.
CPI Rent Reviews
An alternative rent review is a CPI (Consumer Price Index) rent review. Some landlords prefer a CPI rent review over a market rent review as it reduces the cost of the process involved in determining a current market rent as a valuation is not required. A CPI rent review involves a calculation using figures that are given by the Department of Statistics. The calculation is included in the Deed of Lease and therefore can provide the parties with more certainty over the expected rent increases.
Which process is right for you?
Exactly how rent reviews are determined will be laid out in the Deed of Lease. You should always ensure that you are following the correct process as laid out in your particular lease, as there may be variations. It is always a good idea to have your lawyer review your lease and provide advice on the best way to proceed with giving notice and negotiation the new rent.
Documenting the rent review
Too often landlords fail to document what was agreed at the time of the rent review, or they subsequently misplace the documentation. The rent review should be documented by way of a Deed of Rent Review which is executed by both the landlord and the tenant and any guarantor (if any). An online property management system such as Nomos One, allows you to store any documentation related to a commercial property online. Therefore, your lease documentation is easily accessible and kept in one place telling the entire progression of the life of the lease.
When renewing leases or signing a lease with a new tenant, you may wish to look at having a more landlord-friendly lease drafted. Smith and Partners, together with Nomos One also offers landlords and tenants an option of a modern, flexible lease to be used as an alternative to the Auckland District Law Society Lease. This lease was created by Nomos One, in collaboration with a panel of commercial property experts around New Zealand, including our very own Peter Smith. This lease allows landlords to tailor the rent review clause to suit the parties.