Commercial landlords and tenants may face rent determination risks in lease process
SMSFs members that are landlords and tenants of commercial property will need to ensure that rent determination clauses are properly drafted to avoid exposure to risks on valuation during the lease process, according to a law firm.
In a recent update, Cooper Grace Ward partner Laura Gahan said that rent determinations are becoming increasingly contentious for both landlords and tenants. The drafting of determination clauses should be carefully reviewed both in lease negotiations and during market rent reviews.
She noted that an error by a valuer will not always invalidate the market rent determination, especially where the lease provides that the determination is final and binding on the parties.
“To be invalidated, the determination must contain an error of such magnitude to characterise it as not having been made in accordance with the terms of the lease and therefore the contract between the parties,” Ms Gahan said.
In the recent case of DA Staal Property Pty Ltd v Commonwealth of Australia  QSC 216, the Supreme Court held that the market rent determination by a valuer was invalid as it was inconsistent with the process prescribed by the lease.
The applicant landlord owned a property in Berserker (Rockhampton) offering commercial tenancy space, which the respondent leased for use as a Centrelink office. A market rent review was due on 1 May 2019 and the lease provided that, if the parties were not able to reach agreement, a rental determination by an appointed valuer would determine the market rent based on a range of factors including, relevantly, considering comparable premises.
A valuer was nominated by the Australian Property Institute in accordance with the terms of the lease and the valuer issued a rent determination on 19 December 2019.
The valuer concluded that the market rent for the premises, from the date of review, was $565,675 plus GST and outgoings per annum. This figure was 30 per cent less than the rent payable before the rent review.
The valuer considered premises in Aitkenvale (Townsville), Hervey Bay and Maryborough and other premises in Berserker but considered that the property in Aitkenvale was the most comparable premises for the purpose of the rent determination.
Although the lease provided that the valuer’s determination was final and binding, Ms Gahan said the landlord disputed the determination on the basis that it was not done in accordance with the requirements of the lease and it was therefore invalid.
In the Supreme Court’s decision, the court held that the valuer was contractually bound by the lease terms as to how market rent was to be determined.
“One factor the valuer had to consider was the open market rental value of comparable premises in the suburb or town within which the premises was situated, and, where there was insufficient evidence of comparable premises, then comparable premises within a comparable suburb or town within the immediate vicinity of the premises,” Ms Gahan noted.
“The limiting words ‘within the immediate vicinity of the suburb or town within which the premises were situated’ proved critical to the determination.”
The Court also held that Aitkenvale, a suburb in Townsville, did not fit within that limitation and could therefore not reasonably be considered next or nearest to the suburb in which the premises was situated, according to Ms Gahan. Aitkenvale was therefore not ‘within the immediate vicinity’ of the premises, as required by the lease.
“The Court found that the valuer had regard to rents of a different nature to those the parties had agreed in the lease would be considered in determining the market rent for the premises,” she explained.
“Consequently, the Court held that the rent determination contained an error such that the valuer had not carried out the task contractually required by the lease to be undertaken and, as a result, the rent determination was invalid.”
Tony Zhang is a Journalist at SMSF Adviser, which is the leading source of news, strategy and educational content for professionals working in the SMSF sector.
Since joining the team in 2020, Tony has covered various publications across the legal, financial and professional services sectors including Lawyers Weekly, Adviser Innovation, ifa and Accountants Daily.