Mechanisms for rent review are important components of all commercial leases. Typically leases provide for rent review at regular intervals during a lease often in relation to a set percentage or the consumer price index.
It is common to see rent reviewed in line with movements in CPI which is a compilation of indices by the Australian Bureau of Statistics representing the change in cost of living. A CPI increase clause should specify the base date from which the index applies or a range of possible dates i.e. the date of the lease, the date when it was signed, or the date when it was delivered by the lessor to the lessee. Such a clause should consider the possibility that CPI will be discontinued. Where there is uncertainty a court will generally look to interpret such a clause fairly and broadly without being too astute or subtle in finding defects.
There are a range of other mechanisms that may be used as a means of varying rent. These include:
Current market rent: In determining current market rent, it would be expected that rents of comparable premises be reviewed.
Rent as a fraction of turnover: The parties will need to consider the process by which turnover is determined and the processes to be followed should there be a dispute.
When considering rent review clauses, it is important to examine applicable statutory obligations. In New South Wales and South Australia base rent in relation to a retail shop lease is defined as rent or a component of rent that comprises a specific amount of money whether or not that amount is subject to change. In those states a retail shop lease must not provide for a change to base rent less than 12 months after the lease is entered into and must restrict successive changes to that rent in the 12 months after any previous change except where there is a change to the base rent specified by a specific percentage.
In New South Wales, Queensland and South Australia any term of a retail shop lease is void to the extent that it provides for the rent of a shop to change on the basis of whichever results in the highest rent out of two or more methods. In New South Wales, Queensland, South Australia and Victoria, ratchet clauses, which provide that rent review must not result in rent that is less than the amount payable before the review, are void.