Commercial leases – can a market rental determination be set aside?

Commercial leases ordinarily provide for rent to be reviewed at particular intervals throughout a lease term, such as when an option to renew the lease for a further term is exercised.

There are various ways that rent can be reviewed. A common way for rent to be reviewed in the context of commercial leases is the market review method.

So, what happens if you are not happy with the outcome of the market rent review?

This article makes some comments on the position relating to market rent reviews in general commercial leases, not retail leases (which are regulated by the Retail Shop Leases Act 1994).

The typical scenario

Generally, when a rent review period approaches, the landlord and tenant will have an opportunity to agree on the amount of the rent to be paid for the particular term.

The landlord and tenant may each obtain their own expert valuation, which may be used as the basis for their negotiations with the other party.

If no agreement can be reached, a valuer will be appointed to determine the market rent.

The expert conducting the valuation may be agreed on jointly by the landlord and tenant. However, if the landlord and tenant are unable to agree on a valuer, the valuer will be appointed independently by a third-party body (for example, through the Australian Property Institute).

Once the valuer is appointed, the landlord and tenant will usually have the opportunity to provide written submissions to the valuer setting out their position on the appropriate market rental value.

The valuer is required to determine the appropriate market rent based on the process set out in the lease.

Can I challenge a determination if I am not happy with the result?

Any increase or decrease of the rent payable based on a market rent review can significantly impact the landlord or the tenant.

Often the lease will say that the valuer’s determination is final and binding on the parties. So, if you are a landlord or tenant affected by a market rent valuation, it may appear that you are stuck with a determination that has had a significant adverse impact on you.

However, just because the lease says a valuer’s determination is final and binding, this does not necessarily mean that a valuer’s determination cannot be challenged.

A valuer’s determination can be set aside if it is not done in accordance with the lease.

Things to consider

Courts have made it very clear that, in determining whether to set aside an expert valuation, the key question is whether the valuation has been performed in accordance with the process set out in the lease.

Whether a valuation is done in accordance with the lease will be determined by asking questions such as:

• What did the lease require the valuer to do? The court will look at the lease provisions using a commonsense approach to answer this question and taking into account what reasonable persons in the positions of the parties would have understood the lease to require the valuer to do.
• What process was actually undertaken by the valuer?
• Does the process undertaken by the valuer comply with what the lease required the valuer to do?

In the case of Legal & General Life of Aust Ltd v A Hudson Pty Ltd (1985) 1 NSWLR 314, the Court considered that, while a valuer is required to perform the valuation in accordance with the process set out in the lease, a mistake in a valuation (that is otherwise in accordance with the process set out in the lease) will not be set aside.

However, a mistake in the process of valuation may give rise to an action in negligence.

Conclusion

The key question for a party dissatisfied with a rental valuation is whether the valuation was undertaken in accordance with the lease.

If it was not, you may be able to apply to the court to have the valuation set aside and for an order requiring a new valuation to be undertaken in accordance with the lease.

The terms of every lease will differ and it is important to ensure that you seek legal advice regarding your particular circumstances.

Cooper Grace Ward has experience in acting for landlords and tenants in litigation involving rental determinations under commercial leases. If you have any questions regarding your commercial lease or are involved in a dispute, please contact a member of our dispute resolution team on 07 3231 2998.