Market rent reviews under the Retail Leases Act 2003

The Retail Leases Act 2003 (Vic) (the “Act”) sets out certain rights and obligations in relation to rent reviews under a retail premises lease.

This two part series will explore rent reviews based on the current market rent of retail premises, and what to do when a dispute arises.

In Part 1, we will explore methods of rent review and market rent reviews generally.

In Part 2, we will explore the role of a Specialist Retail Valuer under the Act.

1.         Methods of rent review

Retail leases are required to set out when a rent review is to take place and the basis or formula on which the reviews are to be made.

Under the Act, there are five possible rent review methods:

(a)        fixed percentage rent increases;

(b)        reviews of rent having regard to an independently published index of prices or wages (usually the Consumer Price Index);

(c)        a fixed annual amount;

(d)          the current market rent of the retail premises; or

(e)        the basis or formula prescribed by the Retail Leases Act Regulations 2013 (the “Regulations”) (no basis or formula has yet been prescribed as at the date of this blog).

The Act also sets out how rent is to be determined when the rent review provision in the lease is void or non-compliant. For example, if the basis or formula on which a rent review is to be made is not one of the bases or methods set out above, or if the provision is otherwise void because it fails to set out how the rent review is to be made.

This blog will focus on rent reviews based on the current market rent of the retail premises.

2.         Threshold issues

2.1       Is the lease governed by the Act?

A preliminary threshold issue is whether the premises are “retail premises”. Effectively, premises will be considered “retail premises” if under the terms of the lease, they are used or are to be used wholly or predominantly for the sale or hire of goods by retail or the retail provision of services (see section 4(1)(a) of the Act).

The question as to whether premises are “retail premises” is a complex one at law which goes beyond the scope of this blog, and we encourage you to reach out for tailored advice if this question arises for you as a landlord, tenant or agent.

2.2       Has the option for renewal been validly exercised?

Given market rent reviews are often (but not always) triggered on renewal of lease, an initial question for practitioners, agents and landlords alike is whether the option for a further term has been validly exercised by the tenant. This is a threshold issue which landlords and agents alike would be prudent to consider.

It is also worthwhile noting that a retail tenant now has the right under section 28A of the Act to request an early rent review, where a lease provides for market rent review.

3.         Market rent reviews

If the lease is a retail premises lease under the Act, the lease is taken to provide as set out in subsections (2) to (6) of section 37 of the Act.

The current market rent is taken to be the rent obtainable at the time of the review in a free and open market between a willing landlord and willing tenant in an arm’s length transaction, having regard to:

(a)          the provisions of the lease;

(b)        the rent that would reasonably be expected to be paid for the premises if they were unoccupied and offered for lease for the same, or a substantially similar, use to which the premises may be put under the lease;

(c)        the landlord’s outgoings to the extent to which the tenant is liable to contribute to those outgoings (for example, land tax is not recoverable under a retail lease so would not be a relevant consideration);

(d)       rent concessions and other benefits offered to prospective tenants of unoccupied retail premises.

4.         What if the parties are in dispute as to the market rent payable?

4.1       The parties can appoint a specialist retail valuer by agreement

If parties are in dispute as to the assessment of market rent, then they can refer the matter to a specialist retail valuer (“Specialist Retail Valuer”) to determine the current market rent by a valuation.

A Specialist Retail Valuer is defined in the Act as a valuer that has not less than 5 years’ experience in valuing retail premises (and in the case of retail premises in a retail shopping centre, the valuer must have not less than 5 years’ experience in valuing retail premises located in regional or sub-regional shopping centres).

If the parties are able to come to an agreement on the appointment of a Specialist Retail Valuer, the costs of the valuation will be shared equally between the landlord and the tenant.

4.2       The parties can apply to the VSBC

If the parties fail to agree on a Specialist Retail Valuer, then either party may apply to the Victorian Small Business Commission (“VSBC”) for the appointment of a Specialist Retail Valuer under the Act. This can be done even where the lease in question specifies that a certain rent will apply where the tenant has not objected to a notice of a rent increase within the specified time (i.e. the Act prevails).
The VSBC will then select an independent Specialist Retail Valuer who has the requisite experience and who does not have a conflict of interest with either party.

Some key commercial questions to ask before going down the path of a VSBC valuation are:
1.         whether there has been a substantial effort to reach an agreement on a rental amount; and
2.         whether there has been a substantial effort to reach an agreement on a valuer.

Tomorrow, in part 2 of this 2 part series, we will examine the Specialist Retail Valuer’s role in greater detail.

If you have any questions in relation to market rent reviews, if you require legal advice in relation to specialist retail valuations, or if you otherwise are a landlord or tenant that would like more information or advice on rent reviews or leasing generally, please contact Angela Kordos or a member of our Property Law Team.