As a tenant, understanding the terms of your lease and what you’re entitled to are paramount. While seeking out a rental review may seem unnecessary, it plays a critical role in a landlord/tenant relationship. So, what are rental reviews and a rental determination? And why would you need one? Here’s everything that you need to know –
Whether you’re running a business or occupying a residential property, rent will be one of your most significant expenses. Therefore, the rent payable must reflect the true rental market value. Having a rental review completed regularly to re-evaluate the market conditions is essential in maintaining a fair price as well as a steady relationship between landlord and tenant.
While the landlord usually initiates a rent review and rental determination, they are common in most commercial Leases. In a residential property, tenants are also entitled to seek out a review.
Understanding your rights as a lessee can have a substantial impact on your expenses while ensuring peace of mind that the rent payable is correct and fair. While most Leases will contain a clause for a rental review, it’s important to be aware that the option to seek out rental review is within the rights of every lessee.
What is a rental review?
In the simplest terms, a rental review is a report completed to re-evaluate the current rental value. Depending on the Lease, a rental review can either be requested or scheduled at any time. Regarding commercial Leases for your business, a rental review is usually scheduled in the middle of the lease (called a Mid Term Lease Market Review). This, however, is more common in long-term Leases that are longer than five years. Tenants also have the option to request an Option Market Rent Review if the lease contains an options clause. Between budgeting, staff wages, supplies and utilities – they are all contingent on the rent being paid, so you must be paying the correct amount.
Although it’s less common, a market rental review can also be exercised in residential Leases. Because residential Leases are usually between 6 – 12 months long, a rental review does not have to be completed annually. However, it is recommended every few years to account for any changes in the market conditions. A residential Lease will usually occur during the renewal stages of a Lease agreement.
During a rental review, both parties can submit evidence based on the property conditions and market research independently or have a rental review completed by a property valuer. The evidence submitted in a rental review will determine whether or not the rental value remains or should be increased.
When a valuer completes a rental review, they will look into the following:
- The property size (both land size and floor layout)
- Comparable rental prices
- The location of the property
- The proximity of the property to local transport, recreational facilities and public buildings
- The condition of the building including amenities and facilities
The purpose of a rental review is to provide evidence that the rental price reflects the current market value, so even minor condition changes should be included.
What is a rental determination?
While a rental determination has a lot of similarities to a rental review, it has an entirely different purpose. A rental determination occurs when the tenant and the landlord cannot come to an agreement on the rental value of a property. When this is the case, an independent property valuer can help assist with the negotiations by performing an independent rental determination.
In commercial Leases, while there are multiple reasons why a rental determination is completed, the most common cause is because of conflict rising within what’s known as the ratchet clause. A ratchet clause is common in Australian commercial leases, and it stipulates that the rent payable cannot be less than the rental payable prior to a rental review. The Rental Leases Act (RLA) can disregard this, however, in order to protect tenant rights in the case of a market downturn.
Each party must seek out their own independent valuer to maintain transparency. This way, each party can be confident that the final outcome will be based on an unbiased evaluation. It’s also a useful starting tool to begin negotiations in litigation proceedings if the situation progresses to this stage.
During a rental determination, the property valuer will complete a comprehensive report based on the following:
- The property located in proximity to the nearest city as well as street placement and road access
- Internal property factors and layout
- A review of the current rental market
- Comparable rental prices
- Historic sales and prices
- Current market conditions – including supply/demand etc.
A rental determination must be completed by a property valuer with at least five-years-experience in the industry and be accredited by the Australian Property Institute (API). The benefit of having an independent property valuer is to ensure that the lessee and lessor can reach a mutual agreement on a fair, unbiased rental market value.
Do you need a rental review/rental determination?
Yes. Every tenant should exercise the option to request a rental review to ensure that the rent payable is consistent with the current rental market value. It can be easy to dismiss the need for a rental review because of convenience or price, but the rental market is never stagnant. Especially during times of economic downturn or upcoming developments in the local area, the rental market will fluctuate frequently, so a lessee must take advantage of the option to request a rental review.
In the case of requesting a rental determination, having an accredited property valuer complete a comprehensive report to determine the true rental value can save time, money and maintain a stable landlord/tenant relationship.
Requesting a rental review or a rental determination is an option that every tenant should look into to ensure that the rent payable is correct and fair. Seeking out a property valuation for your rent review/rent determination requirements will guarantee that the rent payable reflects the current rental value.