Market rent reviews: What a valuer must take into account and landlord’s should know?

Market rent reviews are a frequent feature of most retail and commercial leases‭. ‬It is a mechanism that enables a landlord to re‭-‬evaluate the rent appropriate for the premises to ensure it remains in line with market trends‭.‬ 

Depending on the Lease, the use of the“market rent” provision is usually triggered when a tenant wishes to exercise an option to renew, or if the Lease is for a long term, at a specific increment. Usually, the landlord will be required give the tenant a determination of its assessment of the “current market rent”. If the tenant disputes the landlord’s assessment and agreement is unable to be reached, then the rent is to be determined by an independent valuer. 

So what does a valuer actually need to consider? In the recent case of Hanave Pty Ltd v Nomad Sydney Pty Ltd (formerly Wine Nomad Pty Ltd) [2023] NSWSC 265 (Hanave), the Supreme Court was tasked with determining the factors that a valuer must consider when determining “current market rent”.

Section 31(1)(a) of the Retail Leases Act provides that a valuer must consider the following in determining the “current market rent”:

• actual terms and conditions of the lease;
• reasonably expected rent that would be payable if the premises were unoccupied and rented out for a substantially similar use;
• gross rent less the landlord’s outgoings payable by the tenant; and
• any incentives typically offered to prospective tenants of unoccupied rental shops.

The Court noted that the factors above should be the valuer’s sole focus in determining the “current market rent”. An independent valuation that is undertaken will be considered as a “legitimate methodology” on the basis that it considers the above factors. There is no legal test to this and is solely a matter for the valuer to consider. However, the Court confirmed that for a valuation to be legally binding on the landlord and tenant under the Act, the valuer must provide legally adequate reasons for its determination. This must be in writing and address how each of the above factors influenced the valuer’s decision. In cases where a factor is absent from a valuation, Courts will presume that it was not considered during the valuation process. Therefore, Courts are empowered to scrutinise valuations that do not adequately justify the reasons for a valuer’s determination of “current market rent”.

In the case of Hanave, the Supreme Court of NSW upheld a decision of the NSW Civil and Administrative Tribunal to declare a valuation invalid as it did not comply with section 31. For landlords, this means you must ensure you are appropriately instructing valuers to take into account each of the factors set out in section 31(1)(a) as otherwise a tenant may be entitled to dispute the rent through the Courts. For a tenant, in the event a landlord provides you a market valuation that you believe to be unfair or disproportionate, you should always consider whether or not the valuer has taken into account the required factors to ensure compliance.

The contents of this publication are for reference purposes only. This publication does not constitute legal advice and should not be relied upon as legal advice. Specific legal advice should always be sought separately before taking any action based on this publication.