A recent case confirms the importance of having a correctly drafted rent determination clause in a commercial lease to set clear and appropriate criteria for valuers.
Kristy Dorney from our Real Estate team reviews a Queensland Supreme Court decision which examined the importance of valuers following specific criteria when undertaking a market rent review under a commercial property lease and the consequences for failing to do so.
The case involved the owner of a commercial property in Rockhampton which was leased to the tenant for use as a Centrelink office.
The parties could not agree on market rent and requested a valuer be appointed to determine the new market rent under the rental determination clause in the lease.
This clause required the valuer to consider—
Any determination was final and binding on the parties.
The valuer’s determination considered premises located in Townsville, Hervey Bay and Maryborough. However, the most weight was placed on the Townsville property.
The valuer determined the market rent was 30 percent less than the rent payable before the review.
The landlord challenged the determination on the grounds the towns used were not within the immediate vicinity of the property.
The Court said—
The Court said the valuer had regard to rent of a different nature than those previously agreed between the parties. This meant the determination contained an error which resulted in the determination not being carried out as contractually required by the lease.
The rental determination was deemed invalid as a result.
Market rent determinations have been difficult to set aside in the past, and generally a common mistake is not sufficient grounds. However, if the error means it fundamentally does not comply with the contractual requirements set out in the lease, the determination may be invalid.
This case offers some important lessons for landlords and tenants around correctly drafting rental determinations. Get in touch with our Real Estate team to review your commercial lease.