One of the benefits of having been in the industry for many years is that you get an historical perspective on various matters. When I first started preparing Lease documents nearly 40 years ago it was common to specify that the rent would be reviewed to the higher of market, a fixed percentage, or CPI. There was also commonly a provision that the rent would never decrease. This was probably why it became common for a market review to be undertaken at the time of renewal.
Since those days of course the Act has come in and we can no longer put a floor under the rent and a market review has become a true market review in that it can take the rent down as well as up. Knowing that and assuming that post Covid, the commercial property market will take quite a while to recover which will in turn put a fair amount of pressure on rents to go down due to there being a greater supply than demand, I wonder whether it would be wise to get rid of market reviews for the foreseeable future.
Certainly, I have never understood the logic behind continuing the practice of automatically including a market review at the point of renewal. Which is why at The Lease Bureau we have always ensured that we specify the exact method of review for each of the potential years of the term and any renewal period. This ensures that the parties have actually given the rent review methods some thought.
A lot of Leases that we see from other firms, have an automatic market review included in the fine print at the time of renewal. Personally, I think that is potentially dangerous in that you might find that the rent goes backwards.
If you really believe that a market review will increase your rent, then it would make much more sense to me to include a market review during the term when the tenant doesn’t have the option of saying that because they don’t like that amount of rent, they are not going to renew the Lease.
Something to consider in the post COVID-19 world.
As always if you have any questions, please let me know.
Steve Evans