Rent review could steal Christmas

2:31 PM Friday December 8, 2017 True Commercial

Like the Grinch, a business rent review could steal Christmas. Photo / Supplied

Businesses could be in for a nasty surprise if they let rent review notices fall through the cracks in the lead-up to Christmas, an occupier expert warns.

Chris Farhi, Strategic Consulting Director for Colliers International, says there is usually a surge in landlords issuing market rent review notices during December.

“The tactic is used because tenants are more likely to be distracted in December and fail to respond to a rent review notice in time,” he says.

“Without a response, the tenant is deemed to have accepted the landlord’s proposed rent — often resulting in substantial rental gains for the landlord, and a nasty surprise for the unwary tenant.”

Farhi says the ability for landlords to hike rents over Christmas is a reality in most commercial property leases.

“The process for the market rent reviews is contained within the lease documentation.

“Typically, leases without fixed or inflation based rental increases have market rent reviews during the lease term — for example, every two or three years.

“This means that the rent is reset to the current market rent, potentially with a lower or upper limit.

“Typically, the lease states that a rent review notice can be given no earlier than, say, three months before the review date.

“However, there is flexibility over when the first notice is issued — it does not have to be issued on a single specified date.”

Farhi says the review process begins when the initiator, usually the landlord, issues a notice proposing the current market rent.

The respondent, usually the tenant, must respond to the initial notice, proposing their view of the current market rent.

“The response must be issued within a set period of time — usually 20 working days,” Farhi says.

“The two parties then attempt to agree the rent by negotiation or, failing that, a valuation or arbitration process applies.

But there’s a catch

“The catch is that the initial rent review notice usually does not need any registered valuers’ advice — it could be the parties’ own view of the rent.

“This creates a tendency for the parties to take extreme views — usually a higher rent when the landlord issues the notice.”

Farhi says “deemed acceptance” is what catches tenants out.

“If the tenant does not respond to the initial notice within the specified timeframe, then they are deemed to have automatically accepted the landlord’s proposed rent.

“The chance of this happening is much higher in the lead-up to Christmas because December is a busy period with a large number of distractions, such as excessive lunches.

“Offices close down over the Christmas holidays and into January, and decision makers are often away, creating delays in responding.”

Farhi says this works for landlords because rent reviews don’t go on holiday.

“In simple terms, the Property Law Act 2007 defines the Christmas period as December 25 to January 2, plus any observed holidays.

“While you might be holidaying until January 23, your rent review was back at work on January 3.

“Issuing a rent review notice during December means there is a greater chance the tenant will fail to respond and therefore automatically accept the initially proposed rent.

“If the initially proposed rent is high-balled, all the sudden your rent review is stealing Christmas.”

Farhi has some advice for tenants to make sure they don’t have a nasty surprise waiting for them in the New Year.

“Understand your lease, its processes and its key dates.

“If a market rent review date is near, carefully monitor your registered contact details for any notices.

“Take urgent action on any lease notices, and get help from experts who understand the process.

“We recommend advisors who have registered valuers in-house.

“This will streamline the process during a very busy time of the year.”