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Nearly all commercial leases in New Zealand contain a process through which the landlord can change your rent. This process is known as a rent review. There are various ways you and your landlord can go about reviewing your rent. Moreover, each method has different ramifications for 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.
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What is a Rent Review?
A rent review clause provides the parties to a lease agreement the ability to either increase or decrease the rent of premises 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 outline 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 rent review process usually requires a professional and independent property valuation.
Advantages
This review process ensures that your rent price is what the property is worth. If the market value does not move or decreases, your rent price could decrease.
Disadvantages
In your lease, your landlord may include a clause that prevents rent from decreasing in circumstances where a market review shows a decrease in market value. These are called ratchet clauses. Further, they 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 (also known as a limited ratchet provision) allows for some reduction in rent, but only to a certain level. Such clauses do not allow the rent to go below the rent value applicable at the lease’s commencement. You may miss out on the benefits of a market rent review method if a ratchet provision is in your lease.
Another disadvantage is that a professional valuer typically undertakes a market rent review. This can make the process quite expensive. You may have to pay for this cost if you call for a review of your rent. Further, valuations can vary quite significantly between the valuer used. Disagreements about the premises’ valuation may lead to a time-consuming and costly dispute with your landlord.
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Consumer Price Index Rent Review
A Consumer Price Index (CPI) rent review provides a variation to your rent in proportion to changes in the CPI. The CPI is the recognised measure of inflation in New Zealand and is published quarterly by Statistics New Zealand. This method means that your rent will increase or decrease per the inflation rate when reviewed. Your landlord will usually include the formula for these changes in your lease.
Advantages
The CPI rent review method means you, as a tenant, have greater certainty regarding any anticipated changes to your rent. Further, this method allows you to plan ahead and roughly budget for any changes in rent. It also reduces the chances of a dispute regarding the changes in your rent.
CPI rent review does not involve any third-party valuer. This means it is less time-consuming and costly than a market rent review.
Disadvantages
As your rent value will depend on the rate of inflation, there is still an element of uncertainty regarding the price of your rent. Further, in periods of high inflation, you may pay more than if you undertook a market rent review. This has been a common experience recently with high inflation rates in New Zealand.
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.
Advantages
As a term in your lease, you can negotiate the fixed percentage your rent is to increase by. You can also negotiate how often this is to occur. This method also gives you complete certainty about the revised rent at each rent review date.
Disadvantages
Fixed rent increases mean you will be stuck with predetermined rent increases, regardless of the inflation rate, which may differ vastly from the premises’ actual market value. This is particularly the case if you have a long-term lease. If you want to change this, you must negotiate with your landlord and vary the lease terms. Unfortunately, this process is costly, and often, most landlords will not agree to it.
What Happens If I Miss a Rent Review?
Most commercial leases specify the date of a rent review and the period when notice to you needs to be provided. Where the landlord misses the date stipulated in the lease, they will usually be able to apply the increase in rent from when they give notice to you of the rent increase, as opposed to the proposed date in the lease. This may apply from the date of the notice or within a period from the date of the notice.
What Happens If I Disagree With My Landlord?
There are usually dispute resolution procedures outlined in your lease, which will apply when you and your landlord cannot agree on a new rate. For example, some leases will contain alternative dispute resolution procedures. This often appoints a third party to make independent decisions about the new rate. Market Rent increase clauses may also include dispute resolution provisions where there is a disagreement on the valuation made by a valuer.
Where there is a dispute about the lease, your landlord should receive rent payments at the old rate until you can agree upon a new figure. Often, the new rent payment can be backdated to the review date. However, as a tenant, interest may also be charged on this amount.
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.
- fixed percentage increase rent review.
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Frequently Asked Questions
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 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.
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