When it comes to renting out shops, offices, or warehouses in Australia, both landlords and tenants need to know how rent is reviewed over time. These rent changes are usually built into a commercial lease and help keep things fair as market conditions and costs change.
Whether you’re a business owner trying to keep costs under control or a property owner aiming for fair returns, understanding how rent is reviewed is key. That’s where a good Commercial Lease Solicitor comes in handy. They can help make sure the lease is fair and everything is clear from the start.
Below, we’ll break down the four most common rent review methods used in commercial leases across Australia. Each one works differently, so it’s important to know the pros and cons before signing anything.
How Do Rent Reviews Work in Australian Commercial Leases?
1. Fixed Percentage Increase
How it works: This is the simplest method. The rent goes up by a set percentage every year (or whatever period is agreed on). For example, if rent starts at $50,000 a year and the lease says it goes up 3% each year, then next year it becomes $51,500, the year after $53,045, and so on.
Why people use it:
- Easy to understand
- Makes budgeting predictable for both tenant and landlord
But keep in mind:
- If the market drops, the tenant might pay more than they should
- If the market rises fast, the landlord might lose out on higher rent
Tip: A commercial solicitor can help you pick a realistic percentage based on the market and future forecasts.
2. CPI (Consumer Price Index) Adjustment
How it works: The rent goes up based on inflation, measured by the CPI. This is a number published by the Australian Bureau of Statistics that tracks how much the cost of living is changing.
Let’s say CPI rises by 2.5% this year. The rent would then go up by that same 2.5%.
Why people use it:
- Keeps rent increases in line with economic changes
- Fair for both parties during stable inflation periods
Watch out for:
- If inflation spikes, tenants could face a big jump in rent
- If inflation is really low, landlords might not get much of a rise
What to do: Ask a commercial lease solicitor to check if the lease includes a cap or floor (like a max 4% increase or minimum 1% increase), so both parties are protected.
3. Market Rent Review
How it works: The rent is compared to what similar properties in the same area are renting for. This usually happens every few years (like every 3 or 5 years).
A property valuer might come in and assess what your property would be worth to rent on the open market. Most commonly, a letting agent may come up with the market value of the rent.
Why it’s popular:
- Keeps rent in line with the real market
- Can benefit both the landlord and tenant, depending on market conditions
Possible issues:
- The process can be slow and sometimes lead to disputes
- Both parties might not agree on what the “market rate” really is
Who helps: If things get tricky, Commercial Litigation Lawyers can step in to settle disputes or represent you in a valuation disagreement.
Extra tip: Many leases have a “ratchet clause,” meaning the rent can go up during market review but not go down. So even if the market rate drops, the rent might stay the same or still go up. These clauses are not permitted in retail leases.
4. Turnover Rent (Also Called Gross Sales Rent)
How it works: This method ties rent to the tenant’s sales. It usually has two parts:
- A base rent (set amount paid no matter what)
- A percentage of the tenant’s turnover (sales) if it passes a certain amount
For example: You pay $40,000 a year base rent + 5% of sales over $1 million. If you make $1.5 million in sales, you pay $25,000 extra. Total rent = $65,000.
Where it’s used:
- Common in shopping centres and retail shops
- Helps landlords share in tenants’ success
Good things about it:
- Fair for tenants in slow periods
- Great for landlords when business is booming
Things to watch:
- Must be clear on what counts as “turnover”.
- Records need to be kept properly to avoid disputes
Tip: A Commercial Solicitor can help make sure the lease clearly spells out how turnover is calculated and how often it’s reviewed.
How to Choose the Right Method with the Help of a Commercial Lease Solicitor?
The best method depends on:
- The type of business
- How stable or volatile the market is
- How long does the lease last
- How much risk each party is happy to take on
Some leases use a mix. For example:
- CPI increases every year: To keep up with inflation
- Market review every 5 years: To check you’re still in line with the going rate
Always talk to a commercial lease solicitor before signing. They can:
- Check if the method chosen is fair
- Make sure the lease protects your rights
- Explain any confusing legal terms
When Do Disputes Happen?
Unfortunately, rent reviews can sometimes lead to disagreements. This is where commercial litigation lawyers become important. They can:
- Help mediate between the landlord and the tenant
- Represent you in legal proceedings if needed
- Ensure the lease terms are properly followed
In Summary
Whether you’re leasing a small retail space or a large commercial warehouse, rent reviews are a big deal. They can affect your profit margins or your return on investment.
A commercial solicitor helps you understand what you’re agreeing to before signing. A commercial lease solicitor ensures the lease works for your type of business. And commercial litigation lawyers have your back if anything goes wrong later on.
FAQs
1. What’s the most common rent review method in Australia?
CPI adjustments and fixed percentage increases are very common.
2. Can rent go down in a market review?
It can, but some leases include a clause to stop that. That’s called a “ratchet clause”.
3. Do I need a solicitor for a lease agreement?
Yes. Always speak with a commercial solicitor to make sure your lease is clear and fair.
4. What if we can’t agree on the market rent?
Most leases have a clause that allows an independent valuer to decide.