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In New Zealand, nearly all commercial leases will contain a process through which the landlord can change your rent. This process is known as rent review. There are various ways you and your landlord can go about reviewing your rent. Likewise, each has different ramifications on you as a tenant. This article will detail three of the most common methods of commercial rent review in New Zealand and outline the advantages and disadvantages of each process.

What Is Rent Review?

A rent review clause provides the parties to a lease agreement the ability to either increase or decrease their premises’ rent to reflect that property’s current market value. The objective of rent review clauses is to balance the rent with changes in the value of money and the property market throughout a lease. 

Rent review clauses are not compulsory for commercial leases in New Zealand. If included in your lease, the review may be compulsory or optional. If the rent review is optional, your landlord will discharge it at their discretion. When and who can initiate a review will vary between each lease. Therefore, you should be familiar with the contents of your rent review clause. 

A rent review clause should set out the method or formula for assessing the rent. The most common methods of review are:

  • market rent review;
  • Consumer Price Index (CPI) rent review; and
  • fixed percentage increase rent review.

Market Rent Review

A market rent review compares the price of rent for your premises with the current market rates for properties of a similar standard, size, location and usage at the time of the rent review. This process of rent review usually requires a professional and independent valuation of the property.

Advantages 

This rent review process ensures that the price of your rent is what the property is genuinely worth. If the market value does not move, or decreases, your rent price could decrease as a result. 

Disadvantages

Your landlord may include a ratchet clause in your lease to avoid losing money in circumstances of a decrease in market value. A ratchet clause can come in two forms – hard or soft. 

A hard ratchet clause dictates that the rent can only increase and may never decrease despite the property market’s movements. A soft, or limited, ratchet provision allows for some reduction in rent, but only to a certain level. Such clauses will not allow the rent to go below the rent value at the lease’s commencement. If a ratchet provision is within your lease, you may miss out on the benefits that accompany a market rent review method. 

As a professional valuer typically undertakes a market rent review, this can be quite expensive. If you call for a review of your rent, you may have to pay for this cost. Furthermore, valuations can vary quite significantly between the valuer used. Disagreement as to the premises’ valuation may lead to a time consuming and costly dispute with your landlord. To avoid this, whilst negotiating your lease, you and your landlord could agree to nominate a particular valuer or company to carry out the rental evaluation.

Consumer Price Index Rent Review

A Consumer Price Index (CPI) rent review provides a variation to your rent in proportion to changes in the Consumer Price Index. The CPI is the recognised measure of inflation in New Zealand and is published quarterly by Statistics New Zealand. This method means that, when reviewed, your rent will increase or decrease per the rate of inflation. Your landlord will usually include the formula for these changes in your lease. 

Advantages

As your rent varies in proportion to the CPI, you as a tenant have a greater degree of certainty regarding any anticipated changes to your rent. This method provides you with an opportunity to plan ahead and roughly budget for any changes in rent. It also reduces the chances of a dispute as to the changes in your rent.

As CPI rent review does not involve any third party valuer, it is a less time consuming and less costly method than market rent review.

Disadvantages

However, as your rent value will depend on the rate of inflation, there is still an element of uncertainty regarding the price of your rent. Furthermore, in periods of high inflation, you may end up paying more than if you undertook a market rent review. 

Fixed Percentage Increase Rent Review

Under fixed percentage increase rent review, your rent will increase at specific percentages specified in your lease on specified rent review dates. For example, your rent may increase by 5% every six months of your lease. 

Advantages

As a term in your lease, you have the opportunity to negotiate the fixed percentage your rent is to increase by, and how often this is to occur. This method also provides you with complete certainty as to what the revised will be at each rent review date. 

Disadvantages

If you have a long-term lease, you could be potentially stuck with predetermined rent increases that are vastly different from the premises’ actual market value. As a term of your lease, you would have to get your landlord’s consent to vary a now disproportionate rent review clause. 

Key Takeaways

Rent review clauses can come in a variety of different forms. The most common methods for commercial leases in New Zealand are:

  • market rent review;
  • Consumer Price Index (CPI) rent review; and
  • fixed percentage increase rent review.

When negotiating your commercial lease, you should discuss what method of rent review will be included with your landlord. It is essential to consider how the chosen process will affect both you and your landlord.  If you would like assistance with your lease negotiations, contact LegalVision’s property and leasing lawyers on 0800 005 570 or complete the form on this page.

Frequently Asked Questions

What is rent review?

A rent review clause provides the parties to a lease agreement the ability to either increase or decrease their premises’ rent to reflect that property’s current market value.

What are the most common methods of commercial rent review?

The most common methods of commercial rent review in New Zealand are market rent review, Consumer Price Index (CPI) rent review and fixed percentage increase rent review.

What is market rent review?

A market rent review compares the price of rent for a commercial premise with the current market rates for properties of a similar standard, size, location and usage at the time of the rent review.

What is fixed percentage increase rent review?

A fixed percentage increase rent review  increases the rent of a premise at specific percentages specified in your lease on specified rent review dates.

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