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Written by Peter Carter

March 14, 2009

At lease review time, what should come first – the review of market rent or the exercise of the option?

Tenants would obviously prefer to know the rent they will be obliged to pay before they commit to a further term of the lease. On the other hand a landlord might find it beneficial to have the tenant committed before the market review occurs.

The only restrictions that apply to the timing of a market review of rent at option time are those that relate to retail shop leases in the Retail Shop Leases Act.

A retail tenant can by written request to the landlord, require an “early determination” of market rent in the period (in leases more than one year) starting six months before the option expiry date and ending three months before the option expiry date.

Unless agreement is reached, market rent will be determined by a specialist retail valuer. There is also a requirement for each party making a submission to the valuer to give a copy of their submission to the other party within a reasonable time.

Of major consequence to landlords, notwithstanding any provision contained in a retail lease, the date for the exercise of an option is automatically extended to 21 days following the date the lessee receives written notice of the determination of the market rent (or the day the lease ends, if that occurs earlier).

This has obvious and major implications for retail landlords and the management of their investment.

As a result retail tenants will in most cases be aware of the market rent payable for the forthcoming period, before they exercise an option.

The “early determination” of market rent does not apply in the case of a retail lease to a “major lessee” (ie the lessee of five or more retail shops anywhere in Australia), if the lessee, before the lease was entered into, provides the lessor with notice stating that it had received legal and financial advice and the lease is properly drafted in relation to the timing and basis for each review.

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