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Rental Valuations – Critical in a Time of Tight Credit and Increasing Banking KPIs

Andrew Grima

It is my experience in recent times, that due to a tightening of the credit market and in the wake of the recent Banking Royal Commission, there has been increased scrutiny over the performance of assets which form security for finance. This is particularly the case for property, which has fallen out of favour with financiers.

Therefore, an appropriate rental return is vital - more than ever before - and it should be carefully monitored to avoid the value of your property failing your financier’s credit criteria. If you are a landlord that has a property portfolio financed, you can expect that your financier will look closely at rental returns. 

Consequently, it is critical to carefully consider the basis on which your rent is being determined and the circumstances in which valuations can be challenged. 

Methods of Rental Review 

There are several methods of determining rent review for retail and commercial leases: 

The Legislative Landscape in NSW

In NSW, the process of rental review for retail leases is governed by the Retail Leases Act (the Act). The objective of the Act is to safeguard a tenant’s interest.  

The effect of the legislation is as follows:

Operation of S32 of the Act 

One of my favourites is Section 32 of the Act, which allows the tenant the opportunity to have current market rent determined early. The provision states: 

a) The tenant is entitled to request a determination of market rent at any time that begins six months before and ends three months before the last day on which the option to renew may be exercised under the lease; 

b) The tenant makes the request by giving notice, in writing to the landlord;

c) The tenant must exercise their option within 21 days after determination of rent is made and notified to the tenant; and,

d) Parties to the lease share costs of valuation of market rent in equal shares. 
Effectively, the tenant has the right to request a determination of market rent before the date of exercise of option, which then affords them the opportunity to make an informed decision as to whether to exercise their option to renew.

Data Base Corporate Pty Ltd v Strike Australia Pty Ltd [2019] NSWSC 379

A recent decision of the NSW Supreme Court demonstrates the importance of perusing a valuer’s review of market rent to ensure it complies with the terms of your lease. The facts of the case were as follows: 

The NSW Supreme Court decided that this valuation was inconsistent with the terms of the lease because the comparable premises were not within “the vicinity of the premises.”

Key Takeaways from this Decision

In an era of increased scrutiny over the performance of securitised assets, the rental valuation of your lease is of utmost importance. As was the case in the above decision, you may be able to contest the valuation. 

I recommend that you carefully consider the basis on which the rent for your lease is being valued. It is vital that you understand the terms of rental review provisions and I would be happy to guide you in making sense of these complex terms: