Rent reviews are a fairly frequent occurrence in most leases and often a source of disagreement between landlords and tenants as to what level the reviewed rent should be set at. If you have received a notice from your landlord stating that you have a rent review due and the landlord wishes to increase your rent, then unless you are happy to pay the increased rent the first thing to do is to obtain a copy of your lease and check the rent review provisions.
The items you should be looking for are:
- that you do in fact have a rent review due on the date stated by the landlord;
- how your rent is supposed to increase. It may be in accordance with market increases, or a fixed review based on a consumer price index increase formula, or there may be other mechanisms for determine the increased rent; and
- whether your landlord has correctly served the notice.
Leases may contain restrictions preventing a notice being served either more than a certain period before the rent review date and in a few circumstances the lease may also prevent a landlord serving notice a certain period past the relevant rent review date. The lease will usually stipulate that the notice be served in a particular manner and if the landlord has not followed that process then the notice will not be validly served.
The most important point to remember is that if you disagree with the proposed rent, you must act promptly. Many leases, including the Auckland District Law Society Incorporated 5th edition deed of lease (“ADLS Lease”) contain strict time periods within which a party must respond if it wishes to dispute the proposed rent. Failure to respond within the strict time period, without following the correct method for service of the notice, or failing to include all the required information could result in the tenant being required to pay the rent proposed by the landlord until the next rent review. This would occur regardless of whether the tenant agrees that this is a fair assessment of the reviewed rent or not. This result can be compounded if the lease contains a ratchet clause preventing the rent from decreasing, as it could mean an artificially high rent might still continue to be payable even after a further rent review.
If you wish to dispute the increased rent proposed by the landlord, you may wish to consider what evidence you will provide to back up your alternative proposed rent increase. It may be helpful to provide information on recently undertaken rent reviews in the same area for comparable premises, if this information is available to you, or obtain an assessment of current market rent from a registered valuer.
The lease should also provide a formula or mechanism by which the landlord and tenant will resolve any dispute as to the new rent. The ADLS Lease provides the parties will endeavour to agree upon the current market rent, but if agreement cannot be reached within 10 working days then the parties can either choose to have the reviewed rent determined by arbitration or by registered valuers acting as experts, with a third expert appointed as an umpire.
If the landlord is undertaking a rent review after the rent review date has passed, it is also worthwhile for a tenant to carefully check the provisions of their lease relating to backdating. The ADLS Lease contains a provision that if the landlord’s notice is served later than three months after the rent review date, the new rent (once determined) can only be backdated to the date of service of the landlord’s notice. Other forms of lease may also contain similar restrictions on backdating.
The most important point to remember is that upon receiving a notice from the landlord with regards to a rent review a tenant needs to act promptly and not ignore such notice. Failure to do so within a specified timeframe or in a specified manner may mean a tenant loses its rights to challenge the proposed new rent. This could have significant ongoing financial consequences.
In deciding how to respond to the landlord, we recommend that a tenant always obtains a copy of their lease and carefully reads the rent review provisions to make sure that they are aware of, and comply with the mechanism set out for both responding to any landlord’s notice and for determining any disagreement as to the new rent. If a tenant is in any doubt, we would recommend they consult with their lawyer at the earliest opportunity.
Want to know more?
Please contact the Commercial Property team at Hesketh Henry on 09 375 8700