Rent reviews are a crucial component of a business lease from the standpoint of a landlord. Rent is reviewed at regular intervals to ensure that it is in line with current market prices.
Rent reviews can be self-executing and provide for a fixed rise, Consumer Price Index (CPI) review, or a fixed percentage increase – or they can include rent review methods, such as market rent reviews. This post looks at market real estate reviews and elements to think about while finalising rent review terms in your Commercial or Retail lease.
What is a market rent review?
Market rent evaluations are intended to ensure that the rent you charge is commensurate with market prices. As a result, they are based on the rent paid by renters in comparable houses in the local region, which is highly impacted by the supply and demand for comparable properties. A lessor, a property valuer, or an estate agency can conduct market rent reviews.
Why should you do a market rent review?
Market rent evaluations give a higher rate of return in high-performing markets. However, in weaker markets, they may result in a rent fall. That is why, when including a market assessment in your business lease, it is critical to evaluate the market during the whole lease period, not only at the time of signing.
If the market appears to be trending upwards over the lease period, a market rent review is a viable option. If things aren’t as predictable, a CPI rise or a 3 to 5% fixed yearly review will protect you from rent cuts.
Process of reviewing market rents
In most cases, the review procedure begins when the landlord delivers a written notice to the tenant suggesting a new rental sum. If the tenant agrees, the lessor’s decision is regarded to represent the current market rent.
If the tenant objects to the increased rental price, the landlord and tenant collaborate to reach an agreement on fair market rent. If an agreement cannot be reached, and to guarantee that the review process is fair to both parties, most commercial leases include a clause permitting the tenant to hire a valuer to independently establish the market rate.
If your lease is a retail lease, your state’s retail leasing legislation imposes specific limitations on how the market rent review is conducted.
While considering Rental Review keep the following points in mind:
1. Timing
Outside of a fixed-term lease of less than two years, NSW statute allows for as many increases as you like. It is advised that a ‘Rent Review’ be performed yearly at the same time as a standard inspection. This will keep you in sync with the rental market’s fluctuations, and your renters will become accustomed to tiny increases over time.
If your renters are on a fixed term, 70 days before the end of the term is a suitable time. Offering a new lease term may be a smart option if your renter is worth maintaining.
2. Size
Smaller gains are better than larger ones. A large, unexpected increase will come as a surprise to the tenant, prompting him or her to contemplate relocating or requesting a review from the tribunal.
3. Comparable Rentals in the Rental Market
To do the evaluation, we simply look at how many similar homes are now available, what the asking rental is, and how recently similar houses have been rented for. Knowing what’s going on in the neighbourhood is crucial; you don’t want to lose a renter for a few bucks only to discover the property is unoccupied for weeks.
Keep in mind that while looking for a rental home, tenants often search for value. Rent increases should not be dependent entirely on the amount of your spending.
4. The Premises’ Condition
It’s also vital to look at how the property has changed when doing a rent review. Is it still in the same condition it was in when the renter moved in or is it beginning to show signs of wear? When comparing homes, check sure the degree of finish and condition is equivalent.
5. Correct Observation
According to NSW legislation, we must provide the renter with 60 days’ notice, plus four days for distribution by post, unless the tenant has given you permission to issue notifications by email.
The notification must specify the new rent amount, the date the new rent will take effect, and be signed by either the landlord or an agent.
If you do not have enough time as an owner to conduct a market review evaluation, you may go to a rental estate website reviews where you can find renters and real estate rental reviews that will help you understand if you are being paid fairly in relation to the current market rent value. It is also not always required to obtain a market rental evaluation since it is entirely dependent on your circumstances and preferences.