Rental determination clauses in commercial leases

Rental determination clauses in commercial leases

It is usual in a commercial lease to prescribe methods of rental review so that the rent reflects the current rates in the market. In relation to the market rent review method, in the absence of agreement between the parties as to the market rent, the lease usually provides a mechanism to appoint a valuer and parameters which the valuer must and/or must not consider. This is known as a rental determination clause.

The recent case of DA Staal Property Pty Ltd v Commonwealth of Australia [2021] QSC 216 demonstrates the importance for both the landlords and tenants to ensure the rental determination clause is drafted correctly.

In this case, a two-storey building situated at Berserker, Rockhampton was leased to Centrelink. The landlord and the tenant were not able to reach an agreement on the market rent on the review date and, as such, proceeded with a rental determination by a valuer in accordance with the Lease. The valuer concluded that the market rent was a value approximately $240,000.00 less than the previous year. The valuer in determining the market rent considered premises in Berserker (Rockhampton), Aitkenvale (Townsville), Maryborough and Hervey Bay. The valuer viewed the premises in Aitkenvale to be the most relevant comparable premises. Despite provision in the lease that the valuer’s determination was final and binding, the landlord disputed the valuer’s determination.

The court had to determine whether the rental determination was made in accordance with the lease, that is, whether the valuer had undertaken the task required of him under the lease.

The lease provided that, in determining the rent, the valuer had to take into account, amongst other factors, the open market rental value of a comparable premises in the suburb or town within which the building was situated, and where there was insufficient evidence of comparable premises in the relevant suburb or town, then of comparable premises within a comparable suburb or town within the immediate vicinity of that in which the building was situated.

By considering Aitkenvale, a suburb in Townsville, which cannot be reasonably regarded as within the immediate vicinity of Berkeley, the court held that the valuer had regard to rents of a different nature to those agreed by the parties and, hence, the valuer had not undertaken the task he was contractually required to do under the Lease. Accordingly, the rental determination by the valuer was not valid.

Valuation is a field of specialised expertise which involves subjective judgements and evaluative choice. The court had noted if the valuer had undertaken what he was contractually required to do under the lease, the rent determination cannot be challenged even if the valuer made error falling within the exercise of his or her discretionary judgement. In this case, the word “immediate” pose a geographical limitation on the discretionary judgement of the valuer as to what was a comparable suburb or town. Hence, the valuer’s error of taking into account premises outside the geographical limitation was one which was not permitted under the Lease and the determination cannot reasonably be considered as being made in accordance with the terms of the Lease.

Ultimately, the question of whether a rental determination is valid and, hence, not subject to challenge is a matter of proper construction of the terms of the Lease. Accordingly, rental determination clause should be carefully drafted and negotiated to ensure a fair and reasonable review of the rent which fits the commercial outcome intended by the parties, one that is tailored to the lease, premises, use and geographical locality.

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