It is common for a commercial or retail lease to provide for a market rent review to occur, particularly on exercise of an option to renew. Usually the parties will attempt to negotiate an agreed rent however, failing agreement the lease will generally then provide for an independent valuer to be appointed to determine market rent on behalf of the parties.
A recent decision of the NSW Court of Appeal delivered on 21 August 2019, highlights the importance of understanding the market rent valuation clause contained in a lease and ensuring the valuer has complied with the terms of the lease in determining market rent.
In Strike Australia Pty Ltd v Data Base Corporate Pty Ltd (2019), the subtenant of a bowling alley exercised an option to renew its sublease and a valuer was appointed to determine market rent. The sublease required the valuer to “have regard to … market rents … for comparable premises in the vicinity of the premises.”
The valuer examined the rents of other bowling alleys in Macquarie Park (17km away) and Bondi Beach (10km away). The landlord argued that such premises were outside the vicinity of the bowling alley and therefore resulted in the valuer determining a lower rent than other tenants in the Darling Harbour precinct were paying.
The landlord was successful in having the valuation struck out by the Supreme Court. This decision was upheld by the Court of Appeal which held the terms of the lease required the valuer to have regard ‘only’ to premises in the vicinity of the bowling alley and therefore the valuer did not comply with the instructions contained in the sublease and the valuation was invalid.