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17.11.2021

News

Is your rental determination clause right?

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 and Siobhan Luck from our Real Estate team review 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.


Facts

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—

  • comparable premises in the suburb or town where the property is situated, and
  • where there is insufficient evidence of comparable premises in the area, then of comparable premises within a comparable suburb or town within the immediate vicinity of the property.

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.


Findings

The Court said—

  • ‘immediate vicinity’ meant ‘next or nearest’ to the town or suburb where the property was located
  • these words provided a limitation to the market of rents the valuer considered, being the market located in central Queensland.

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.


What does this mean for landlords and tenants?

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.


Authors

Kristy Dorney

Kristy Dorney

Partner

Siobhan Luck

Siobhan Luck

Lawyer

Contact McMahon Clarke

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