A Valuation Perspective on Market Rent Review Clauses
Graham Kennedy Director
Jones Lang LaSalle
~galwise SEMINARS wwwiegalwiseseminarscomau
JONES LANG LASALLE
Page 11
A VALUATION PERSPECTIVE ON MARKET RENT REVIEW CLAUSES
GRAHAM KENNEDY
JONES LANG LASALLE
I venture to say that the common commercial lease agreement is one of the most complex
documents involved in property transactions and rent reviews The implications for property
performance funding and general function cannot be under estimated The wording in review
clauses can lead to very different results
Property market conditions change pursuant to the cycles of economic performance and
supplydemand fundamentals It follows that a lease document can be drafted to the
circumstances of a particular market or client requirements only to be exposed to the
vagaries of a completely different market
Examples include
bull The development of a 2 tiered market
bull The boom of the late 1980s
bull The subsequent recession
bull Incentives
While those matters provide an extreme range of discussion topics Im here today to discuss
or deal with the one issue of market rent review provisions I preface my comments by
saying I dont for a moment pretend to have the legal wisdom of our gathered colleagues so I
ask for their forgiveness in advance of my talk for any perceived indiscretions that might
arise
JONES LANG LASALLE
Pel 2
I CONTENTS OF PRESENTATION
The content of my presentation includes the following
What does rent mean
What valuation principles apply
Market rent review criteria
Avoiding traps in market rent review
Dealing with special characteristics and unusual premises
Summary
JONES LANG LASALLE
Page 13
IWHAT DOES RENT MEAN
Rent in its simplest form means a sum of money that is paid by a tenant to a landlord for the
use of premises
_ sle lH ckt$e ~~(~ 64~ ~ Gross rent Net rent plus all outgoings i~ ~cvlctv b I~~s yeuroltft
ot~IV~ ~ +qxpeWfcJ~ lMiJ~ Semi-Gross rent Net rent plus limited outgoings-usually ITmit~ to statutory costs and
insurance ~ lit t~ ~ (~I~~ caltA r- C~ cf MQIYIkJACUct)~
Net rent Base rent exclusive of all outgoings J
Face rent A quoted rental before adjustment for incentives It can be net or gross
Effective rent A quoted rental after adjustment for incentives The accepted calculation of an
effective rent is one which is calculated over the full lease term Its not simply a matter of
taking a rent of say $500-20 equals $400 ltt- usi- ~ cbsc~ bclct St ~ltfcf~ ~ IN ~ ~s
Base rent plus increases in outgoings Usually a gross rental inclusive of outgoings as at a
certain date but with the tenant to pay increases in outgoings over initial outgoings
(Woolworths is a good example) It is predominantly found in retail leases
Reasonable rent-Can mean something totally different from market rent Cases include
Ponsford v HMS Aerosols and Email Limited v Robert Bray (Langwarrin) PtyLimited This
case dealt with premises that were built for the tenants particular requirements ~~ IWlpnrved pngtp-
Best rent The court said the best rent should be established on the presumption of a
reasonable lease irrespective of the reasonableness or unreasonableness of the actual lease
involved
Open market rental v open market rental value The distinction being that the addition of the
word value requires an obligation to consider incentives and other matters which may
impact the value of the lease
JONES LANG LASALLE
Page 14
PRINCIPLES
Adherence to lease terms
Quite simply the valuer is required to comply with what the lease dictates to be done Ill
show a couple of examples of a rental brief at the end of this slide
Basis of rent
Is it gross semi-gross net face rent effective rent base rent plus outgoings reasonable
rent best rent or the distinction between OMR and OMRV J Impartiality
LAND VALUERS LICENSING ACT 1978
LICENSED VALUERS CODE OF CONDUCT
2 A licensed valuer shall notshy
28 adopt the role of advocate in a matter whereshy
(a) their duty is to exercise independence and impartiality
Comparability of Premises
Usually the valuers domain to determine this aspect but occasionally there is specific
direction Ideally one should have regard to similar quality accommodation in similar office
precincts
Spencer Concept (l~o7 )
Market rent is the estimated amount for which a property or space within a property should
lease on the date of valuation between a willing lessor and a willing lessee on appropriate
terms in an arms length transaction after proper marketing wherein the parties had each
acted knowledgeably prudently and without compulsion
JONES LANG LASALLE
Page IS
Analysis of rental evidence
V~~~ bull Evidence in accordance with lease direction
bull Comparable premises
bull Similar locations
bull As at similar date (Pre and post GFC relevant examples of date specific)
bull Circumstances behind a negotiation
bull Undertake a procesfgt of weighting the evidence (Look for the most probative evidence) I II 11 I
- 11 ~
Ii ~~j ~lt
II rO K - r Lt lt
t smiddot1gtshy
JONES LANG((C LASALLE
Page 16
I RETAIL LEASE EXAMPLE
Example 1
Section 11(a) - Rent Review of the Commercial Tenancy (Retail Shops) Agreements act
1985 states the following definition for Market Rent
That market rent shall for that purpose be taken to be the rent obtainable at the time of that
review in a free and open market as if all the relevant factors matters or variables used in
proper land valuation practice having been taken into account that retail shop were vacant
and to let on similar terms as are contained in the current retail shop lease
J
JONES LANG LASALLE
Page 17
ITYPICAL OFFICE REVIEW CLAUSE ~~ l
In determining the market Rent the Valuer must act as an expert and not as an arbitrator ~
and his determination shall be final and binding on the parties (except for manifest error) shy9
The assessment must be made on a GST -exclusive basis S~
tfl-~The annual market rent of the Premises as at the subject review date must be determined on
the basis of the following
(1) Rents as at the review date of any comparable premises
(2) The Permitted use I-p~ A_
(3) The period of time until the next Review Date ~-
(4) The Valuer must disregard as evidence for determining the market rent of the Premises
leases ofcomparable premises of less than a whole floor
(5) The length of the Term
(6) That any deleterious condition of the Premises is deemed not to have occurred if it has
been caused by the Tenant or the Tenants predecessors
(7) That if the Premises or any other part of the Building have been destroyed damaged
rendered inaccessible or are being refurbished they are deemed to have been fully
repaired and restored
(8) That no account must be taken of
(A) The value of any goodwill attached to the Premises due to the Tenants business
(B) The value of the Tenants Property
(C) Rents in respect of any sub-letting or licensing of the Premises or any
comparable premises
(9) That the Valuer should disregard any reduction in the Rent of any comparable
premises or in the annual market rent of the Premises to take account of any
abatement concession inducement or reduction paid payable granted or allowed to a
new tenant or any other person or to retain a potentially outgoing tenant in respect of
the Premises or this lease or any comparable premises or any lease of any comparable
premises that this lease is between a willing but not anxious Landlord and a willing but
not anxious Tenant and the Premises are ready for immediate use and occupation
(10) Any other criteria that may in the opinion of the person making the determination be
relevant to his determination of the annual market rent of the Premises as at the
JONES LANG((( LASAlLE
Page 18
subject review date (except for criteria that are not consistent with the criteria listed in
paragraphs (1) to (9)
Or
Example 2 (Cap and Collar)
On the commencement of Year 4 of the Lease the face rent (disregarding any incentives)
will be reviewed to the then open market and can be reduced up to a maximum of 10 or
increased up to a maximum of 10 of the previous years Annual Rent
Example 3 (Effective) bvl-- ea ( 0MA( ~ ~ t~ ~
The Valuer will be required to determine the effectie market rental value of the pre~t_(~~ being the rental that has not been inflated or distorted by the provision of any leasing bull V~
llt--t ~incentive to the Tenant c
Example 4 (Selective options)
The rent review clause provides for the reviewed rental to be the higher of
1 CPI increase
2 25 of sub-lease rents
3 Fair Market Rental
JONES LANG( LASA1LE p g e 19
[MARKET RENT REVIEW CRITERIAAVOIDING TRAPS
The market rent review criteria is that drawn from the lease
Quite simply the valuer is required to comply with what the lease dictates to be done We
saw a few examples earlier where the valuer was directed to consider or disregard certain
matters in the determination process There are countless examples of such matters Clarity
in such examples is highly desirable although Im sure that the difficulty associated with the
construction of rent review clauses is not lost on the legal profession
The review criteria is often referred to as assumptions and disregards Such directions
can be in direct conflict with normal industry convention and for this reason there is a
compelling case to simplify the wording for the benefit of clarity
It becomes frustrating when there is ambiguity or perceived contradictions
It can be extremely beneficial to seek real estate input as to interpretations of potential
clauses and to simplify the content and procedure I dont think there is enough of this
connectivity
The concept of determining rent based on certain criteria is to assess the relevant rent for the
subject premises as at a date is considered objective The objectivity will therefore depend
on what can and what cannot be taken into account Dont overly constrain the valuer
Ive said earlier that an incentive generally is agreed between landlord and tenant on the
basis of a discount of a certain amount for taking a long term lease It is more often than not
an initial rent free with subsequent reviews to pre agreed amounts I have seen leases where
the subsequent reviews permit having regard for incentives hence subsequent incentives
have occurred Clearly this is trap for double dipping on incentives
Note silence on incentives does not preclude them being considered in a rent review
JONES LANG((C LASALLE P g e 110
~NUSUAL_P_R_EM_I_S_E_S___________
There are a number of industry sectors that have a need for specialised buildings or
operations a sample of which is listed hereunder
bull hotels
bull restaurants
caryardsbull bull airports
bull schools J bull hospitals
bull sporting facilities and
bull cinemas
bull quarries
The general industry rentals for these buildings vary and include basic rates per square
metre percentages of turnover or net profit percentage of trading volumes or throughput
dollars per head and rentals per seat per week Understandably there tends to be specialist
operators or groups unique to those related industries that tenant these properties
As a consequence the valuer would need considerable information from these industry
sectors to assess an appropriate market based rental Scarcity of data only heightens the
difficulty of his task J It would be preferable to have an agreed basis of review for these sectors based on
~ agreement between operator (tenant) and landlord Equally the availability of related
( information to be provided by the operator would be of assistance
~tr$ ~r
~ ~ V9v~ frr ~~1
~ iUJ~ v ~ iv ampts(~9lt ~~~~
JONES LANG LASALLE
age 111
Market rent review clauses within lease documents have become more detailed over recent
years as both landlord and tenant and their lawyers strive to optimise their positions as at
rent review date The extent of review criteria can run for pages and deal with numerous
issues Equally the performance of commercial property for the institutional funds is
monitored very closely and this includes a strong focus on income and growth
The review mechanism can be pivotal to this performance
I have had the need on several occasions to seek legal advice on clause definition
Awareness of prevailing market conditions by tenants has grown considerably in the past few
decades particularly with in house expertise or tenant advocate input This enables them to
be savvy to circumstances revolving around rent review criteria when negotiating lease terms
Given the above comments and concerted input from both landlord and tenant from opposing
viewpoints it is highly unlikely that we will ever have a generic rent review clause for
commercial office space Equally the commercial acumen of informed tenants would
probably preclude any industry reform akin to what has happened to the retail sector since
the mid 1980s
I still believe that lawyers and leasingvaluation operatives can work more closely for their
mutual clientele There is a need for owners to secure a positive commercial and valuation
flavour from a lease document but equally the legal structure of the lease should work in the
commercial world
Unusual properties can provide some difficulty in relation to basis of rental structure and
indeed review of rent The divergence of revenue structures and unique operational
peculiarities from hotels through to hospitals and airports creates a challenge for the
commercial drafting of leases and review mechanisms Ideally an agreement between
landlord and tenant up front would alleviate much of this difficulty and the provision of
relevant information on operational aspects would be of assistance
On a closing note I would say market rent review criteria with so many dos and donts
generally is a touch restrictive on the valuation profession The courts have repeatedly said
JONES LANG(((1 LASALLE Page 112
they do not want to trespass on the valuers territory so the direction we are given to
undertake our brief is critical
Copyright copy These materials are subject to copyright which is retained by the author No part may be reproduced adapted or communicated without consent except as permitted under applicable copyright law
Disclaimer This seminar paper is intended only to provide a summary of the subject matter covered It does not purport to be comprehensive or to render legal advice Readers should not act on the basis of any matter contained in this seminar paper without first obtaining their own professional advice
(f JONES LANGWJJ LASALLE
A Valuation Perspective on Market Rent Review clauses
Graham director
Valuations and Consulting September 2011
Contents
bull What does rent mean
bull What valuation principles apply
bull Market rent review criteria
bull Avoiding traps in market rent review
bull Unusual premises
bull Summary
What does rent mean
bull Rent
bull Gross rent
bull Semi-gross rent
bull Net rent
bull Face rent
bull Effective rent
bull Base rent plus increases in outgoings
bull Reasonable rent
bull Best rent
bull Open market rental vOpen market rental value
~ JONES 1ANGWJ LASALLE
Valuation Principles 2 A licensed valuer shall notshy26 adopt the role of advocate in a matter whereshybull Adherence to lease terms-basis of review (a) their duty is to exercise independence and impartiality~bull What basis of rent is apDIicttbre
bull Impartiality
bull Comparability of premises
bull Spencer concep~
bull Analysis of rental evidence
Mar1ltet rent is the estimated amount for which a property or space within a property should lease on the date of valuation between awilling lessor and awilling lessee on appropriate terms in an arms length transaction after proper mar1lteling wherein the parties had each acted knowledgeably prudently and without compulsion
laquo0)) JONES LANe LASAIU 4
Retai 1 lease
Section 11 (2)(a) Rent Review of the Commercial Tenancy (Retail Shops) Agreements act 1985 states the following definition for Market Rent
The market rent shall for that purposes be taken to be the rent obtainable at the time ofthat review in a free and open market as if all the relevant factors matters or variables used in proper land valuation practice having been taken into account that retail shop were vacant and to let on similar terms as are contained in the current retail shop lease
First halfof review clause
bull In determining the market Rent the Valuer must act as an expert and not as an arbitrator and his determination shall be final and binding on the parties (except for manifest error) The assessment must be made on a GST-exclusive basis
bull The annual market rent of the Premises as at the subject review date must be determined on the basis of the following
bull Rents as at the review date ofany comparable premises
bull The Permitted use
bull The period of time until the next Review Date
The Valuer must disregard as evidence for determining the market rent of the Premises Jeases of comparable premises of less than a whole floor
bull The length of the Term
That any deleterious condition of the Premises is deemed not to have occurred if it has been caused by the Tenant or the Tenants predecessors
bull That if the Premises or any other part of the Building have been destroyed damaged rendered inaccassible or are being refurbished they are deemed to have been fully repaired and restored
Second half of review clause
-That no account must be taken of
-The value of any goodwill attached to the Premises due to the Tenants business
-The value of the Tenants Property
-Rents in respect of any sub-letting or licensing of the Premises or any comparable premises
-That the Valuer should disregard any reduction in the Rent ofany comparable premises or in the annual market rent of the Premises to take account of any abatement concession inducement or reduction paid payable granted or allowed to anew tenant or any other person or to retain apotentially outgoing tenant in respect of the Premises or this lease or any comparable premises or any lease of any comparable premises that this lease is between a willing but not anxious Landlord and awilling but not anxious Tenant and the Premises are ready for immediate use and occupation
-Any other criteria that may in the opinion of the person making the determination be relevant to his determination of the annual market rent of the Premises as at the subject review date (except for criteria that are not consistent with the criteria listed in DaraaraDhs ftl to (9)
11amp) JONES LANG YJ) lASAI1E
Lease terms-basis of review bull Example 2 (Cap and Collar)
bull On the commencement of Year 4of the Lease the face rent (disregarding any incentives) will be reviewed to the then open market and can be reduced up to amaximum of 10 or increased up to amaximum of 10 of the previous years Annual Rent
- Example 3 (Effective)
- The Valuer will be required to determine the effective market rental value of the Premises being the rental that has not been inflated or distorted by the provision ofany leasing incentive to the Tenant
Example 4 (Selective options)
bull The rent review clause provides for the reviewed rental to be the higher of
bull 1 CPI increase
bull 2 25 of sub-lease rents
bull 3 Fair Market Rental
Market review criteria Avoiding traps
bull Adherence to lease terms-basis of review
bull Assumption and disregards
bull Avoid ambiguity and contradictions
bull Seek valuation input for interpretation
bull Dont constrain the valuer
bull Preclude 2nd incentive in review process
Unusual Premises
bull Hotels restaurants caryards airports schools hospitals sporting facilities cinemas amp quarries
bull Different rental basis
bull Rental assessment is difficult
bull Preferable to have an agreed basis of review
bull Disclosure of information
(11 JONES LANG WI) LASALLpound 10
Summary
bull Market review clauses have become more difficult and often require legal guidance
bull Owners and tenants are far more informed
bull Common commercial review clause not possible
bull More industry collaboration required
bull Preferable to have an agreed basis of review for special properties
bull Market review criteria often restrictive on valuer J
11
JONES LANG((0)) LASALLE
Disclaimer TIlisdocument is confideotlal t0the recipient of he documeAt No reference 10 he document or any part Ihereof may be published stated or circulated in any communication with third parties without prior written approval from Jones Lang laSalle TIlis document has been produced solely as ageneral guide and does not constitute advice WhHstlhe document has been prepared in good failh and willi due care no representation is made for Ihe accuracy of Ihe whole or any part of Ihe document Jones Lang laSalle accepts no liability for damages suffered by any party resulting from thQir use of his document
JONES LANG LASALLE
Page 11
A VALUATION PERSPECTIVE ON MARKET RENT REVIEW CLAUSES
GRAHAM KENNEDY
JONES LANG LASALLE
I venture to say that the common commercial lease agreement is one of the most complex
documents involved in property transactions and rent reviews The implications for property
performance funding and general function cannot be under estimated The wording in review
clauses can lead to very different results
Property market conditions change pursuant to the cycles of economic performance and
supplydemand fundamentals It follows that a lease document can be drafted to the
circumstances of a particular market or client requirements only to be exposed to the
vagaries of a completely different market
Examples include
bull The development of a 2 tiered market
bull The boom of the late 1980s
bull The subsequent recession
bull Incentives
While those matters provide an extreme range of discussion topics Im here today to discuss
or deal with the one issue of market rent review provisions I preface my comments by
saying I dont for a moment pretend to have the legal wisdom of our gathered colleagues so I
ask for their forgiveness in advance of my talk for any perceived indiscretions that might
arise
JONES LANG LASALLE
Pel 2
I CONTENTS OF PRESENTATION
The content of my presentation includes the following
What does rent mean
What valuation principles apply
Market rent review criteria
Avoiding traps in market rent review
Dealing with special characteristics and unusual premises
Summary
JONES LANG LASALLE
Page 13
IWHAT DOES RENT MEAN
Rent in its simplest form means a sum of money that is paid by a tenant to a landlord for the
use of premises
_ sle lH ckt$e ~~(~ 64~ ~ Gross rent Net rent plus all outgoings i~ ~cvlctv b I~~s yeuroltft
ot~IV~ ~ +qxpeWfcJ~ lMiJ~ Semi-Gross rent Net rent plus limited outgoings-usually ITmit~ to statutory costs and
insurance ~ lit t~ ~ (~I~~ caltA r- C~ cf MQIYIkJACUct)~
Net rent Base rent exclusive of all outgoings J
Face rent A quoted rental before adjustment for incentives It can be net or gross
Effective rent A quoted rental after adjustment for incentives The accepted calculation of an
effective rent is one which is calculated over the full lease term Its not simply a matter of
taking a rent of say $500-20 equals $400 ltt- usi- ~ cbsc~ bclct St ~ltfcf~ ~ IN ~ ~s
Base rent plus increases in outgoings Usually a gross rental inclusive of outgoings as at a
certain date but with the tenant to pay increases in outgoings over initial outgoings
(Woolworths is a good example) It is predominantly found in retail leases
Reasonable rent-Can mean something totally different from market rent Cases include
Ponsford v HMS Aerosols and Email Limited v Robert Bray (Langwarrin) PtyLimited This
case dealt with premises that were built for the tenants particular requirements ~~ IWlpnrved pngtp-
Best rent The court said the best rent should be established on the presumption of a
reasonable lease irrespective of the reasonableness or unreasonableness of the actual lease
involved
Open market rental v open market rental value The distinction being that the addition of the
word value requires an obligation to consider incentives and other matters which may
impact the value of the lease
JONES LANG LASALLE
Page 14
PRINCIPLES
Adherence to lease terms
Quite simply the valuer is required to comply with what the lease dictates to be done Ill
show a couple of examples of a rental brief at the end of this slide
Basis of rent
Is it gross semi-gross net face rent effective rent base rent plus outgoings reasonable
rent best rent or the distinction between OMR and OMRV J Impartiality
LAND VALUERS LICENSING ACT 1978
LICENSED VALUERS CODE OF CONDUCT
2 A licensed valuer shall notshy
28 adopt the role of advocate in a matter whereshy
(a) their duty is to exercise independence and impartiality
Comparability of Premises
Usually the valuers domain to determine this aspect but occasionally there is specific
direction Ideally one should have regard to similar quality accommodation in similar office
precincts
Spencer Concept (l~o7 )
Market rent is the estimated amount for which a property or space within a property should
lease on the date of valuation between a willing lessor and a willing lessee on appropriate
terms in an arms length transaction after proper marketing wherein the parties had each
acted knowledgeably prudently and without compulsion
JONES LANG LASALLE
Page IS
Analysis of rental evidence
V~~~ bull Evidence in accordance with lease direction
bull Comparable premises
bull Similar locations
bull As at similar date (Pre and post GFC relevant examples of date specific)
bull Circumstances behind a negotiation
bull Undertake a procesfgt of weighting the evidence (Look for the most probative evidence) I II 11 I
- 11 ~
Ii ~~j ~lt
II rO K - r Lt lt
t smiddot1gtshy
JONES LANG((C LASALLE
Page 16
I RETAIL LEASE EXAMPLE
Example 1
Section 11(a) - Rent Review of the Commercial Tenancy (Retail Shops) Agreements act
1985 states the following definition for Market Rent
That market rent shall for that purpose be taken to be the rent obtainable at the time of that
review in a free and open market as if all the relevant factors matters or variables used in
proper land valuation practice having been taken into account that retail shop were vacant
and to let on similar terms as are contained in the current retail shop lease
J
JONES LANG LASALLE
Page 17
ITYPICAL OFFICE REVIEW CLAUSE ~~ l
In determining the market Rent the Valuer must act as an expert and not as an arbitrator ~
and his determination shall be final and binding on the parties (except for manifest error) shy9
The assessment must be made on a GST -exclusive basis S~
tfl-~The annual market rent of the Premises as at the subject review date must be determined on
the basis of the following
(1) Rents as at the review date of any comparable premises
(2) The Permitted use I-p~ A_
(3) The period of time until the next Review Date ~-
(4) The Valuer must disregard as evidence for determining the market rent of the Premises
leases ofcomparable premises of less than a whole floor
(5) The length of the Term
(6) That any deleterious condition of the Premises is deemed not to have occurred if it has
been caused by the Tenant or the Tenants predecessors
(7) That if the Premises or any other part of the Building have been destroyed damaged
rendered inaccessible or are being refurbished they are deemed to have been fully
repaired and restored
(8) That no account must be taken of
(A) The value of any goodwill attached to the Premises due to the Tenants business
(B) The value of the Tenants Property
(C) Rents in respect of any sub-letting or licensing of the Premises or any
comparable premises
(9) That the Valuer should disregard any reduction in the Rent of any comparable
premises or in the annual market rent of the Premises to take account of any
abatement concession inducement or reduction paid payable granted or allowed to a
new tenant or any other person or to retain a potentially outgoing tenant in respect of
the Premises or this lease or any comparable premises or any lease of any comparable
premises that this lease is between a willing but not anxious Landlord and a willing but
not anxious Tenant and the Premises are ready for immediate use and occupation
(10) Any other criteria that may in the opinion of the person making the determination be
relevant to his determination of the annual market rent of the Premises as at the
JONES LANG((( LASAlLE
Page 18
subject review date (except for criteria that are not consistent with the criteria listed in
paragraphs (1) to (9)
Or
Example 2 (Cap and Collar)
On the commencement of Year 4 of the Lease the face rent (disregarding any incentives)
will be reviewed to the then open market and can be reduced up to a maximum of 10 or
increased up to a maximum of 10 of the previous years Annual Rent
Example 3 (Effective) bvl-- ea ( 0MA( ~ ~ t~ ~
The Valuer will be required to determine the effectie market rental value of the pre~t_(~~ being the rental that has not been inflated or distorted by the provision of any leasing bull V~
llt--t ~incentive to the Tenant c
Example 4 (Selective options)
The rent review clause provides for the reviewed rental to be the higher of
1 CPI increase
2 25 of sub-lease rents
3 Fair Market Rental
JONES LANG( LASA1LE p g e 19
[MARKET RENT REVIEW CRITERIAAVOIDING TRAPS
The market rent review criteria is that drawn from the lease
Quite simply the valuer is required to comply with what the lease dictates to be done We
saw a few examples earlier where the valuer was directed to consider or disregard certain
matters in the determination process There are countless examples of such matters Clarity
in such examples is highly desirable although Im sure that the difficulty associated with the
construction of rent review clauses is not lost on the legal profession
The review criteria is often referred to as assumptions and disregards Such directions
can be in direct conflict with normal industry convention and for this reason there is a
compelling case to simplify the wording for the benefit of clarity
It becomes frustrating when there is ambiguity or perceived contradictions
It can be extremely beneficial to seek real estate input as to interpretations of potential
clauses and to simplify the content and procedure I dont think there is enough of this
connectivity
The concept of determining rent based on certain criteria is to assess the relevant rent for the
subject premises as at a date is considered objective The objectivity will therefore depend
on what can and what cannot be taken into account Dont overly constrain the valuer
Ive said earlier that an incentive generally is agreed between landlord and tenant on the
basis of a discount of a certain amount for taking a long term lease It is more often than not
an initial rent free with subsequent reviews to pre agreed amounts I have seen leases where
the subsequent reviews permit having regard for incentives hence subsequent incentives
have occurred Clearly this is trap for double dipping on incentives
Note silence on incentives does not preclude them being considered in a rent review
JONES LANG((C LASALLE P g e 110
~NUSUAL_P_R_EM_I_S_E_S___________
There are a number of industry sectors that have a need for specialised buildings or
operations a sample of which is listed hereunder
bull hotels
bull restaurants
caryardsbull bull airports
bull schools J bull hospitals
bull sporting facilities and
bull cinemas
bull quarries
The general industry rentals for these buildings vary and include basic rates per square
metre percentages of turnover or net profit percentage of trading volumes or throughput
dollars per head and rentals per seat per week Understandably there tends to be specialist
operators or groups unique to those related industries that tenant these properties
As a consequence the valuer would need considerable information from these industry
sectors to assess an appropriate market based rental Scarcity of data only heightens the
difficulty of his task J It would be preferable to have an agreed basis of review for these sectors based on
~ agreement between operator (tenant) and landlord Equally the availability of related
( information to be provided by the operator would be of assistance
~tr$ ~r
~ ~ V9v~ frr ~~1
~ iUJ~ v ~ iv ampts(~9lt ~~~~
JONES LANG LASALLE
age 111
Market rent review clauses within lease documents have become more detailed over recent
years as both landlord and tenant and their lawyers strive to optimise their positions as at
rent review date The extent of review criteria can run for pages and deal with numerous
issues Equally the performance of commercial property for the institutional funds is
monitored very closely and this includes a strong focus on income and growth
The review mechanism can be pivotal to this performance
I have had the need on several occasions to seek legal advice on clause definition
Awareness of prevailing market conditions by tenants has grown considerably in the past few
decades particularly with in house expertise or tenant advocate input This enables them to
be savvy to circumstances revolving around rent review criteria when negotiating lease terms
Given the above comments and concerted input from both landlord and tenant from opposing
viewpoints it is highly unlikely that we will ever have a generic rent review clause for
commercial office space Equally the commercial acumen of informed tenants would
probably preclude any industry reform akin to what has happened to the retail sector since
the mid 1980s
I still believe that lawyers and leasingvaluation operatives can work more closely for their
mutual clientele There is a need for owners to secure a positive commercial and valuation
flavour from a lease document but equally the legal structure of the lease should work in the
commercial world
Unusual properties can provide some difficulty in relation to basis of rental structure and
indeed review of rent The divergence of revenue structures and unique operational
peculiarities from hotels through to hospitals and airports creates a challenge for the
commercial drafting of leases and review mechanisms Ideally an agreement between
landlord and tenant up front would alleviate much of this difficulty and the provision of
relevant information on operational aspects would be of assistance
On a closing note I would say market rent review criteria with so many dos and donts
generally is a touch restrictive on the valuation profession The courts have repeatedly said
JONES LANG(((1 LASALLE Page 112
they do not want to trespass on the valuers territory so the direction we are given to
undertake our brief is critical
Copyright copy These materials are subject to copyright which is retained by the author No part may be reproduced adapted or communicated without consent except as permitted under applicable copyright law
Disclaimer This seminar paper is intended only to provide a summary of the subject matter covered It does not purport to be comprehensive or to render legal advice Readers should not act on the basis of any matter contained in this seminar paper without first obtaining their own professional advice
(f JONES LANGWJJ LASALLE
A Valuation Perspective on Market Rent Review clauses
Graham director
Valuations and Consulting September 2011
Contents
bull What does rent mean
bull What valuation principles apply
bull Market rent review criteria
bull Avoiding traps in market rent review
bull Unusual premises
bull Summary
What does rent mean
bull Rent
bull Gross rent
bull Semi-gross rent
bull Net rent
bull Face rent
bull Effective rent
bull Base rent plus increases in outgoings
bull Reasonable rent
bull Best rent
bull Open market rental vOpen market rental value
~ JONES 1ANGWJ LASALLE
Valuation Principles 2 A licensed valuer shall notshy26 adopt the role of advocate in a matter whereshybull Adherence to lease terms-basis of review (a) their duty is to exercise independence and impartiality~bull What basis of rent is apDIicttbre
bull Impartiality
bull Comparability of premises
bull Spencer concep~
bull Analysis of rental evidence
Mar1ltet rent is the estimated amount for which a property or space within a property should lease on the date of valuation between awilling lessor and awilling lessee on appropriate terms in an arms length transaction after proper mar1lteling wherein the parties had each acted knowledgeably prudently and without compulsion
laquo0)) JONES LANe LASAIU 4
Retai 1 lease
Section 11 (2)(a) Rent Review of the Commercial Tenancy (Retail Shops) Agreements act 1985 states the following definition for Market Rent
The market rent shall for that purposes be taken to be the rent obtainable at the time ofthat review in a free and open market as if all the relevant factors matters or variables used in proper land valuation practice having been taken into account that retail shop were vacant and to let on similar terms as are contained in the current retail shop lease
First halfof review clause
bull In determining the market Rent the Valuer must act as an expert and not as an arbitrator and his determination shall be final and binding on the parties (except for manifest error) The assessment must be made on a GST-exclusive basis
bull The annual market rent of the Premises as at the subject review date must be determined on the basis of the following
bull Rents as at the review date ofany comparable premises
bull The Permitted use
bull The period of time until the next Review Date
The Valuer must disregard as evidence for determining the market rent of the Premises Jeases of comparable premises of less than a whole floor
bull The length of the Term
That any deleterious condition of the Premises is deemed not to have occurred if it has been caused by the Tenant or the Tenants predecessors
bull That if the Premises or any other part of the Building have been destroyed damaged rendered inaccassible or are being refurbished they are deemed to have been fully repaired and restored
Second half of review clause
-That no account must be taken of
-The value of any goodwill attached to the Premises due to the Tenants business
-The value of the Tenants Property
-Rents in respect of any sub-letting or licensing of the Premises or any comparable premises
-That the Valuer should disregard any reduction in the Rent ofany comparable premises or in the annual market rent of the Premises to take account of any abatement concession inducement or reduction paid payable granted or allowed to anew tenant or any other person or to retain apotentially outgoing tenant in respect of the Premises or this lease or any comparable premises or any lease of any comparable premises that this lease is between a willing but not anxious Landlord and awilling but not anxious Tenant and the Premises are ready for immediate use and occupation
-Any other criteria that may in the opinion of the person making the determination be relevant to his determination of the annual market rent of the Premises as at the subject review date (except for criteria that are not consistent with the criteria listed in DaraaraDhs ftl to (9)
11amp) JONES LANG YJ) lASAI1E
Lease terms-basis of review bull Example 2 (Cap and Collar)
bull On the commencement of Year 4of the Lease the face rent (disregarding any incentives) will be reviewed to the then open market and can be reduced up to amaximum of 10 or increased up to amaximum of 10 of the previous years Annual Rent
- Example 3 (Effective)
- The Valuer will be required to determine the effective market rental value of the Premises being the rental that has not been inflated or distorted by the provision ofany leasing incentive to the Tenant
Example 4 (Selective options)
bull The rent review clause provides for the reviewed rental to be the higher of
bull 1 CPI increase
bull 2 25 of sub-lease rents
bull 3 Fair Market Rental
Market review criteria Avoiding traps
bull Adherence to lease terms-basis of review
bull Assumption and disregards
bull Avoid ambiguity and contradictions
bull Seek valuation input for interpretation
bull Dont constrain the valuer
bull Preclude 2nd incentive in review process
Unusual Premises
bull Hotels restaurants caryards airports schools hospitals sporting facilities cinemas amp quarries
bull Different rental basis
bull Rental assessment is difficult
bull Preferable to have an agreed basis of review
bull Disclosure of information
(11 JONES LANG WI) LASALLpound 10
Summary
bull Market review clauses have become more difficult and often require legal guidance
bull Owners and tenants are far more informed
bull Common commercial review clause not possible
bull More industry collaboration required
bull Preferable to have an agreed basis of review for special properties
bull Market review criteria often restrictive on valuer J
11
JONES LANG((0)) LASALLE
Disclaimer TIlisdocument is confideotlal t0the recipient of he documeAt No reference 10 he document or any part Ihereof may be published stated or circulated in any communication with third parties without prior written approval from Jones Lang laSalle TIlis document has been produced solely as ageneral guide and does not constitute advice WhHstlhe document has been prepared in good failh and willi due care no representation is made for Ihe accuracy of Ihe whole or any part of Ihe document Jones Lang laSalle accepts no liability for damages suffered by any party resulting from thQir use of his document
JONES LANG LASALLE
Pel 2
I CONTENTS OF PRESENTATION
The content of my presentation includes the following
What does rent mean
What valuation principles apply
Market rent review criteria
Avoiding traps in market rent review
Dealing with special characteristics and unusual premises
Summary
JONES LANG LASALLE
Page 13
IWHAT DOES RENT MEAN
Rent in its simplest form means a sum of money that is paid by a tenant to a landlord for the
use of premises
_ sle lH ckt$e ~~(~ 64~ ~ Gross rent Net rent plus all outgoings i~ ~cvlctv b I~~s yeuroltft
ot~IV~ ~ +qxpeWfcJ~ lMiJ~ Semi-Gross rent Net rent plus limited outgoings-usually ITmit~ to statutory costs and
insurance ~ lit t~ ~ (~I~~ caltA r- C~ cf MQIYIkJACUct)~
Net rent Base rent exclusive of all outgoings J
Face rent A quoted rental before adjustment for incentives It can be net or gross
Effective rent A quoted rental after adjustment for incentives The accepted calculation of an
effective rent is one which is calculated over the full lease term Its not simply a matter of
taking a rent of say $500-20 equals $400 ltt- usi- ~ cbsc~ bclct St ~ltfcf~ ~ IN ~ ~s
Base rent plus increases in outgoings Usually a gross rental inclusive of outgoings as at a
certain date but with the tenant to pay increases in outgoings over initial outgoings
(Woolworths is a good example) It is predominantly found in retail leases
Reasonable rent-Can mean something totally different from market rent Cases include
Ponsford v HMS Aerosols and Email Limited v Robert Bray (Langwarrin) PtyLimited This
case dealt with premises that were built for the tenants particular requirements ~~ IWlpnrved pngtp-
Best rent The court said the best rent should be established on the presumption of a
reasonable lease irrespective of the reasonableness or unreasonableness of the actual lease
involved
Open market rental v open market rental value The distinction being that the addition of the
word value requires an obligation to consider incentives and other matters which may
impact the value of the lease
JONES LANG LASALLE
Page 14
PRINCIPLES
Adherence to lease terms
Quite simply the valuer is required to comply with what the lease dictates to be done Ill
show a couple of examples of a rental brief at the end of this slide
Basis of rent
Is it gross semi-gross net face rent effective rent base rent plus outgoings reasonable
rent best rent or the distinction between OMR and OMRV J Impartiality
LAND VALUERS LICENSING ACT 1978
LICENSED VALUERS CODE OF CONDUCT
2 A licensed valuer shall notshy
28 adopt the role of advocate in a matter whereshy
(a) their duty is to exercise independence and impartiality
Comparability of Premises
Usually the valuers domain to determine this aspect but occasionally there is specific
direction Ideally one should have regard to similar quality accommodation in similar office
precincts
Spencer Concept (l~o7 )
Market rent is the estimated amount for which a property or space within a property should
lease on the date of valuation between a willing lessor and a willing lessee on appropriate
terms in an arms length transaction after proper marketing wherein the parties had each
acted knowledgeably prudently and without compulsion
JONES LANG LASALLE
Page IS
Analysis of rental evidence
V~~~ bull Evidence in accordance with lease direction
bull Comparable premises
bull Similar locations
bull As at similar date (Pre and post GFC relevant examples of date specific)
bull Circumstances behind a negotiation
bull Undertake a procesfgt of weighting the evidence (Look for the most probative evidence) I II 11 I
- 11 ~
Ii ~~j ~lt
II rO K - r Lt lt
t smiddot1gtshy
JONES LANG((C LASALLE
Page 16
I RETAIL LEASE EXAMPLE
Example 1
Section 11(a) - Rent Review of the Commercial Tenancy (Retail Shops) Agreements act
1985 states the following definition for Market Rent
That market rent shall for that purpose be taken to be the rent obtainable at the time of that
review in a free and open market as if all the relevant factors matters or variables used in
proper land valuation practice having been taken into account that retail shop were vacant
and to let on similar terms as are contained in the current retail shop lease
J
JONES LANG LASALLE
Page 17
ITYPICAL OFFICE REVIEW CLAUSE ~~ l
In determining the market Rent the Valuer must act as an expert and not as an arbitrator ~
and his determination shall be final and binding on the parties (except for manifest error) shy9
The assessment must be made on a GST -exclusive basis S~
tfl-~The annual market rent of the Premises as at the subject review date must be determined on
the basis of the following
(1) Rents as at the review date of any comparable premises
(2) The Permitted use I-p~ A_
(3) The period of time until the next Review Date ~-
(4) The Valuer must disregard as evidence for determining the market rent of the Premises
leases ofcomparable premises of less than a whole floor
(5) The length of the Term
(6) That any deleterious condition of the Premises is deemed not to have occurred if it has
been caused by the Tenant or the Tenants predecessors
(7) That if the Premises or any other part of the Building have been destroyed damaged
rendered inaccessible or are being refurbished they are deemed to have been fully
repaired and restored
(8) That no account must be taken of
(A) The value of any goodwill attached to the Premises due to the Tenants business
(B) The value of the Tenants Property
(C) Rents in respect of any sub-letting or licensing of the Premises or any
comparable premises
(9) That the Valuer should disregard any reduction in the Rent of any comparable
premises or in the annual market rent of the Premises to take account of any
abatement concession inducement or reduction paid payable granted or allowed to a
new tenant or any other person or to retain a potentially outgoing tenant in respect of
the Premises or this lease or any comparable premises or any lease of any comparable
premises that this lease is between a willing but not anxious Landlord and a willing but
not anxious Tenant and the Premises are ready for immediate use and occupation
(10) Any other criteria that may in the opinion of the person making the determination be
relevant to his determination of the annual market rent of the Premises as at the
JONES LANG((( LASAlLE
Page 18
subject review date (except for criteria that are not consistent with the criteria listed in
paragraphs (1) to (9)
Or
Example 2 (Cap and Collar)
On the commencement of Year 4 of the Lease the face rent (disregarding any incentives)
will be reviewed to the then open market and can be reduced up to a maximum of 10 or
increased up to a maximum of 10 of the previous years Annual Rent
Example 3 (Effective) bvl-- ea ( 0MA( ~ ~ t~ ~
The Valuer will be required to determine the effectie market rental value of the pre~t_(~~ being the rental that has not been inflated or distorted by the provision of any leasing bull V~
llt--t ~incentive to the Tenant c
Example 4 (Selective options)
The rent review clause provides for the reviewed rental to be the higher of
1 CPI increase
2 25 of sub-lease rents
3 Fair Market Rental
JONES LANG( LASA1LE p g e 19
[MARKET RENT REVIEW CRITERIAAVOIDING TRAPS
The market rent review criteria is that drawn from the lease
Quite simply the valuer is required to comply with what the lease dictates to be done We
saw a few examples earlier where the valuer was directed to consider or disregard certain
matters in the determination process There are countless examples of such matters Clarity
in such examples is highly desirable although Im sure that the difficulty associated with the
construction of rent review clauses is not lost on the legal profession
The review criteria is often referred to as assumptions and disregards Such directions
can be in direct conflict with normal industry convention and for this reason there is a
compelling case to simplify the wording for the benefit of clarity
It becomes frustrating when there is ambiguity or perceived contradictions
It can be extremely beneficial to seek real estate input as to interpretations of potential
clauses and to simplify the content and procedure I dont think there is enough of this
connectivity
The concept of determining rent based on certain criteria is to assess the relevant rent for the
subject premises as at a date is considered objective The objectivity will therefore depend
on what can and what cannot be taken into account Dont overly constrain the valuer
Ive said earlier that an incentive generally is agreed between landlord and tenant on the
basis of a discount of a certain amount for taking a long term lease It is more often than not
an initial rent free with subsequent reviews to pre agreed amounts I have seen leases where
the subsequent reviews permit having regard for incentives hence subsequent incentives
have occurred Clearly this is trap for double dipping on incentives
Note silence on incentives does not preclude them being considered in a rent review
JONES LANG((C LASALLE P g e 110
~NUSUAL_P_R_EM_I_S_E_S___________
There are a number of industry sectors that have a need for specialised buildings or
operations a sample of which is listed hereunder
bull hotels
bull restaurants
caryardsbull bull airports
bull schools J bull hospitals
bull sporting facilities and
bull cinemas
bull quarries
The general industry rentals for these buildings vary and include basic rates per square
metre percentages of turnover or net profit percentage of trading volumes or throughput
dollars per head and rentals per seat per week Understandably there tends to be specialist
operators or groups unique to those related industries that tenant these properties
As a consequence the valuer would need considerable information from these industry
sectors to assess an appropriate market based rental Scarcity of data only heightens the
difficulty of his task J It would be preferable to have an agreed basis of review for these sectors based on
~ agreement between operator (tenant) and landlord Equally the availability of related
( information to be provided by the operator would be of assistance
~tr$ ~r
~ ~ V9v~ frr ~~1
~ iUJ~ v ~ iv ampts(~9lt ~~~~
JONES LANG LASALLE
age 111
Market rent review clauses within lease documents have become more detailed over recent
years as both landlord and tenant and their lawyers strive to optimise their positions as at
rent review date The extent of review criteria can run for pages and deal with numerous
issues Equally the performance of commercial property for the institutional funds is
monitored very closely and this includes a strong focus on income and growth
The review mechanism can be pivotal to this performance
I have had the need on several occasions to seek legal advice on clause definition
Awareness of prevailing market conditions by tenants has grown considerably in the past few
decades particularly with in house expertise or tenant advocate input This enables them to
be savvy to circumstances revolving around rent review criteria when negotiating lease terms
Given the above comments and concerted input from both landlord and tenant from opposing
viewpoints it is highly unlikely that we will ever have a generic rent review clause for
commercial office space Equally the commercial acumen of informed tenants would
probably preclude any industry reform akin to what has happened to the retail sector since
the mid 1980s
I still believe that lawyers and leasingvaluation operatives can work more closely for their
mutual clientele There is a need for owners to secure a positive commercial and valuation
flavour from a lease document but equally the legal structure of the lease should work in the
commercial world
Unusual properties can provide some difficulty in relation to basis of rental structure and
indeed review of rent The divergence of revenue structures and unique operational
peculiarities from hotels through to hospitals and airports creates a challenge for the
commercial drafting of leases and review mechanisms Ideally an agreement between
landlord and tenant up front would alleviate much of this difficulty and the provision of
relevant information on operational aspects would be of assistance
On a closing note I would say market rent review criteria with so many dos and donts
generally is a touch restrictive on the valuation profession The courts have repeatedly said
JONES LANG(((1 LASALLE Page 112
they do not want to trespass on the valuers territory so the direction we are given to
undertake our brief is critical
Copyright copy These materials are subject to copyright which is retained by the author No part may be reproduced adapted or communicated without consent except as permitted under applicable copyright law
Disclaimer This seminar paper is intended only to provide a summary of the subject matter covered It does not purport to be comprehensive or to render legal advice Readers should not act on the basis of any matter contained in this seminar paper without first obtaining their own professional advice
(f JONES LANGWJJ LASALLE
A Valuation Perspective on Market Rent Review clauses
Graham director
Valuations and Consulting September 2011
Contents
bull What does rent mean
bull What valuation principles apply
bull Market rent review criteria
bull Avoiding traps in market rent review
bull Unusual premises
bull Summary
What does rent mean
bull Rent
bull Gross rent
bull Semi-gross rent
bull Net rent
bull Face rent
bull Effective rent
bull Base rent plus increases in outgoings
bull Reasonable rent
bull Best rent
bull Open market rental vOpen market rental value
~ JONES 1ANGWJ LASALLE
Valuation Principles 2 A licensed valuer shall notshy26 adopt the role of advocate in a matter whereshybull Adherence to lease terms-basis of review (a) their duty is to exercise independence and impartiality~bull What basis of rent is apDIicttbre
bull Impartiality
bull Comparability of premises
bull Spencer concep~
bull Analysis of rental evidence
Mar1ltet rent is the estimated amount for which a property or space within a property should lease on the date of valuation between awilling lessor and awilling lessee on appropriate terms in an arms length transaction after proper mar1lteling wherein the parties had each acted knowledgeably prudently and without compulsion
laquo0)) JONES LANe LASAIU 4
Retai 1 lease
Section 11 (2)(a) Rent Review of the Commercial Tenancy (Retail Shops) Agreements act 1985 states the following definition for Market Rent
The market rent shall for that purposes be taken to be the rent obtainable at the time ofthat review in a free and open market as if all the relevant factors matters or variables used in proper land valuation practice having been taken into account that retail shop were vacant and to let on similar terms as are contained in the current retail shop lease
First halfof review clause
bull In determining the market Rent the Valuer must act as an expert and not as an arbitrator and his determination shall be final and binding on the parties (except for manifest error) The assessment must be made on a GST-exclusive basis
bull The annual market rent of the Premises as at the subject review date must be determined on the basis of the following
bull Rents as at the review date ofany comparable premises
bull The Permitted use
bull The period of time until the next Review Date
The Valuer must disregard as evidence for determining the market rent of the Premises Jeases of comparable premises of less than a whole floor
bull The length of the Term
That any deleterious condition of the Premises is deemed not to have occurred if it has been caused by the Tenant or the Tenants predecessors
bull That if the Premises or any other part of the Building have been destroyed damaged rendered inaccassible or are being refurbished they are deemed to have been fully repaired and restored
Second half of review clause
-That no account must be taken of
-The value of any goodwill attached to the Premises due to the Tenants business
-The value of the Tenants Property
-Rents in respect of any sub-letting or licensing of the Premises or any comparable premises
-That the Valuer should disregard any reduction in the Rent ofany comparable premises or in the annual market rent of the Premises to take account of any abatement concession inducement or reduction paid payable granted or allowed to anew tenant or any other person or to retain apotentially outgoing tenant in respect of the Premises or this lease or any comparable premises or any lease of any comparable premises that this lease is between a willing but not anxious Landlord and awilling but not anxious Tenant and the Premises are ready for immediate use and occupation
-Any other criteria that may in the opinion of the person making the determination be relevant to his determination of the annual market rent of the Premises as at the subject review date (except for criteria that are not consistent with the criteria listed in DaraaraDhs ftl to (9)
11amp) JONES LANG YJ) lASAI1E
Lease terms-basis of review bull Example 2 (Cap and Collar)
bull On the commencement of Year 4of the Lease the face rent (disregarding any incentives) will be reviewed to the then open market and can be reduced up to amaximum of 10 or increased up to amaximum of 10 of the previous years Annual Rent
- Example 3 (Effective)
- The Valuer will be required to determine the effective market rental value of the Premises being the rental that has not been inflated or distorted by the provision ofany leasing incentive to the Tenant
Example 4 (Selective options)
bull The rent review clause provides for the reviewed rental to be the higher of
bull 1 CPI increase
bull 2 25 of sub-lease rents
bull 3 Fair Market Rental
Market review criteria Avoiding traps
bull Adherence to lease terms-basis of review
bull Assumption and disregards
bull Avoid ambiguity and contradictions
bull Seek valuation input for interpretation
bull Dont constrain the valuer
bull Preclude 2nd incentive in review process
Unusual Premises
bull Hotels restaurants caryards airports schools hospitals sporting facilities cinemas amp quarries
bull Different rental basis
bull Rental assessment is difficult
bull Preferable to have an agreed basis of review
bull Disclosure of information
(11 JONES LANG WI) LASALLpound 10
Summary
bull Market review clauses have become more difficult and often require legal guidance
bull Owners and tenants are far more informed
bull Common commercial review clause not possible
bull More industry collaboration required
bull Preferable to have an agreed basis of review for special properties
bull Market review criteria often restrictive on valuer J
11
JONES LANG((0)) LASALLE
Disclaimer TIlisdocument is confideotlal t0the recipient of he documeAt No reference 10 he document or any part Ihereof may be published stated or circulated in any communication with third parties without prior written approval from Jones Lang laSalle TIlis document has been produced solely as ageneral guide and does not constitute advice WhHstlhe document has been prepared in good failh and willi due care no representation is made for Ihe accuracy of Ihe whole or any part of Ihe document Jones Lang laSalle accepts no liability for damages suffered by any party resulting from thQir use of his document
JONES LANG LASALLE
Page 13
IWHAT DOES RENT MEAN
Rent in its simplest form means a sum of money that is paid by a tenant to a landlord for the
use of premises
_ sle lH ckt$e ~~(~ 64~ ~ Gross rent Net rent plus all outgoings i~ ~cvlctv b I~~s yeuroltft
ot~IV~ ~ +qxpeWfcJ~ lMiJ~ Semi-Gross rent Net rent plus limited outgoings-usually ITmit~ to statutory costs and
insurance ~ lit t~ ~ (~I~~ caltA r- C~ cf MQIYIkJACUct)~
Net rent Base rent exclusive of all outgoings J
Face rent A quoted rental before adjustment for incentives It can be net or gross
Effective rent A quoted rental after adjustment for incentives The accepted calculation of an
effective rent is one which is calculated over the full lease term Its not simply a matter of
taking a rent of say $500-20 equals $400 ltt- usi- ~ cbsc~ bclct St ~ltfcf~ ~ IN ~ ~s
Base rent plus increases in outgoings Usually a gross rental inclusive of outgoings as at a
certain date but with the tenant to pay increases in outgoings over initial outgoings
(Woolworths is a good example) It is predominantly found in retail leases
Reasonable rent-Can mean something totally different from market rent Cases include
Ponsford v HMS Aerosols and Email Limited v Robert Bray (Langwarrin) PtyLimited This
case dealt with premises that were built for the tenants particular requirements ~~ IWlpnrved pngtp-
Best rent The court said the best rent should be established on the presumption of a
reasonable lease irrespective of the reasonableness or unreasonableness of the actual lease
involved
Open market rental v open market rental value The distinction being that the addition of the
word value requires an obligation to consider incentives and other matters which may
impact the value of the lease
JONES LANG LASALLE
Page 14
PRINCIPLES
Adherence to lease terms
Quite simply the valuer is required to comply with what the lease dictates to be done Ill
show a couple of examples of a rental brief at the end of this slide
Basis of rent
Is it gross semi-gross net face rent effective rent base rent plus outgoings reasonable
rent best rent or the distinction between OMR and OMRV J Impartiality
LAND VALUERS LICENSING ACT 1978
LICENSED VALUERS CODE OF CONDUCT
2 A licensed valuer shall notshy
28 adopt the role of advocate in a matter whereshy
(a) their duty is to exercise independence and impartiality
Comparability of Premises
Usually the valuers domain to determine this aspect but occasionally there is specific
direction Ideally one should have regard to similar quality accommodation in similar office
precincts
Spencer Concept (l~o7 )
Market rent is the estimated amount for which a property or space within a property should
lease on the date of valuation between a willing lessor and a willing lessee on appropriate
terms in an arms length transaction after proper marketing wherein the parties had each
acted knowledgeably prudently and without compulsion
JONES LANG LASALLE
Page IS
Analysis of rental evidence
V~~~ bull Evidence in accordance with lease direction
bull Comparable premises
bull Similar locations
bull As at similar date (Pre and post GFC relevant examples of date specific)
bull Circumstances behind a negotiation
bull Undertake a procesfgt of weighting the evidence (Look for the most probative evidence) I II 11 I
- 11 ~
Ii ~~j ~lt
II rO K - r Lt lt
t smiddot1gtshy
JONES LANG((C LASALLE
Page 16
I RETAIL LEASE EXAMPLE
Example 1
Section 11(a) - Rent Review of the Commercial Tenancy (Retail Shops) Agreements act
1985 states the following definition for Market Rent
That market rent shall for that purpose be taken to be the rent obtainable at the time of that
review in a free and open market as if all the relevant factors matters or variables used in
proper land valuation practice having been taken into account that retail shop were vacant
and to let on similar terms as are contained in the current retail shop lease
J
JONES LANG LASALLE
Page 17
ITYPICAL OFFICE REVIEW CLAUSE ~~ l
In determining the market Rent the Valuer must act as an expert and not as an arbitrator ~
and his determination shall be final and binding on the parties (except for manifest error) shy9
The assessment must be made on a GST -exclusive basis S~
tfl-~The annual market rent of the Premises as at the subject review date must be determined on
the basis of the following
(1) Rents as at the review date of any comparable premises
(2) The Permitted use I-p~ A_
(3) The period of time until the next Review Date ~-
(4) The Valuer must disregard as evidence for determining the market rent of the Premises
leases ofcomparable premises of less than a whole floor
(5) The length of the Term
(6) That any deleterious condition of the Premises is deemed not to have occurred if it has
been caused by the Tenant or the Tenants predecessors
(7) That if the Premises or any other part of the Building have been destroyed damaged
rendered inaccessible or are being refurbished they are deemed to have been fully
repaired and restored
(8) That no account must be taken of
(A) The value of any goodwill attached to the Premises due to the Tenants business
(B) The value of the Tenants Property
(C) Rents in respect of any sub-letting or licensing of the Premises or any
comparable premises
(9) That the Valuer should disregard any reduction in the Rent of any comparable
premises or in the annual market rent of the Premises to take account of any
abatement concession inducement or reduction paid payable granted or allowed to a
new tenant or any other person or to retain a potentially outgoing tenant in respect of
the Premises or this lease or any comparable premises or any lease of any comparable
premises that this lease is between a willing but not anxious Landlord and a willing but
not anxious Tenant and the Premises are ready for immediate use and occupation
(10) Any other criteria that may in the opinion of the person making the determination be
relevant to his determination of the annual market rent of the Premises as at the
JONES LANG((( LASAlLE
Page 18
subject review date (except for criteria that are not consistent with the criteria listed in
paragraphs (1) to (9)
Or
Example 2 (Cap and Collar)
On the commencement of Year 4 of the Lease the face rent (disregarding any incentives)
will be reviewed to the then open market and can be reduced up to a maximum of 10 or
increased up to a maximum of 10 of the previous years Annual Rent
Example 3 (Effective) bvl-- ea ( 0MA( ~ ~ t~ ~
The Valuer will be required to determine the effectie market rental value of the pre~t_(~~ being the rental that has not been inflated or distorted by the provision of any leasing bull V~
llt--t ~incentive to the Tenant c
Example 4 (Selective options)
The rent review clause provides for the reviewed rental to be the higher of
1 CPI increase
2 25 of sub-lease rents
3 Fair Market Rental
JONES LANG( LASA1LE p g e 19
[MARKET RENT REVIEW CRITERIAAVOIDING TRAPS
The market rent review criteria is that drawn from the lease
Quite simply the valuer is required to comply with what the lease dictates to be done We
saw a few examples earlier where the valuer was directed to consider or disregard certain
matters in the determination process There are countless examples of such matters Clarity
in such examples is highly desirable although Im sure that the difficulty associated with the
construction of rent review clauses is not lost on the legal profession
The review criteria is often referred to as assumptions and disregards Such directions
can be in direct conflict with normal industry convention and for this reason there is a
compelling case to simplify the wording for the benefit of clarity
It becomes frustrating when there is ambiguity or perceived contradictions
It can be extremely beneficial to seek real estate input as to interpretations of potential
clauses and to simplify the content and procedure I dont think there is enough of this
connectivity
The concept of determining rent based on certain criteria is to assess the relevant rent for the
subject premises as at a date is considered objective The objectivity will therefore depend
on what can and what cannot be taken into account Dont overly constrain the valuer
Ive said earlier that an incentive generally is agreed between landlord and tenant on the
basis of a discount of a certain amount for taking a long term lease It is more often than not
an initial rent free with subsequent reviews to pre agreed amounts I have seen leases where
the subsequent reviews permit having regard for incentives hence subsequent incentives
have occurred Clearly this is trap for double dipping on incentives
Note silence on incentives does not preclude them being considered in a rent review
JONES LANG((C LASALLE P g e 110
~NUSUAL_P_R_EM_I_S_E_S___________
There are a number of industry sectors that have a need for specialised buildings or
operations a sample of which is listed hereunder
bull hotels
bull restaurants
caryardsbull bull airports
bull schools J bull hospitals
bull sporting facilities and
bull cinemas
bull quarries
The general industry rentals for these buildings vary and include basic rates per square
metre percentages of turnover or net profit percentage of trading volumes or throughput
dollars per head and rentals per seat per week Understandably there tends to be specialist
operators or groups unique to those related industries that tenant these properties
As a consequence the valuer would need considerable information from these industry
sectors to assess an appropriate market based rental Scarcity of data only heightens the
difficulty of his task J It would be preferable to have an agreed basis of review for these sectors based on
~ agreement between operator (tenant) and landlord Equally the availability of related
( information to be provided by the operator would be of assistance
~tr$ ~r
~ ~ V9v~ frr ~~1
~ iUJ~ v ~ iv ampts(~9lt ~~~~
JONES LANG LASALLE
age 111
Market rent review clauses within lease documents have become more detailed over recent
years as both landlord and tenant and their lawyers strive to optimise their positions as at
rent review date The extent of review criteria can run for pages and deal with numerous
issues Equally the performance of commercial property for the institutional funds is
monitored very closely and this includes a strong focus on income and growth
The review mechanism can be pivotal to this performance
I have had the need on several occasions to seek legal advice on clause definition
Awareness of prevailing market conditions by tenants has grown considerably in the past few
decades particularly with in house expertise or tenant advocate input This enables them to
be savvy to circumstances revolving around rent review criteria when negotiating lease terms
Given the above comments and concerted input from both landlord and tenant from opposing
viewpoints it is highly unlikely that we will ever have a generic rent review clause for
commercial office space Equally the commercial acumen of informed tenants would
probably preclude any industry reform akin to what has happened to the retail sector since
the mid 1980s
I still believe that lawyers and leasingvaluation operatives can work more closely for their
mutual clientele There is a need for owners to secure a positive commercial and valuation
flavour from a lease document but equally the legal structure of the lease should work in the
commercial world
Unusual properties can provide some difficulty in relation to basis of rental structure and
indeed review of rent The divergence of revenue structures and unique operational
peculiarities from hotels through to hospitals and airports creates a challenge for the
commercial drafting of leases and review mechanisms Ideally an agreement between
landlord and tenant up front would alleviate much of this difficulty and the provision of
relevant information on operational aspects would be of assistance
On a closing note I would say market rent review criteria with so many dos and donts
generally is a touch restrictive on the valuation profession The courts have repeatedly said
JONES LANG(((1 LASALLE Page 112
they do not want to trespass on the valuers territory so the direction we are given to
undertake our brief is critical
Copyright copy These materials are subject to copyright which is retained by the author No part may be reproduced adapted or communicated without consent except as permitted under applicable copyright law
Disclaimer This seminar paper is intended only to provide a summary of the subject matter covered It does not purport to be comprehensive or to render legal advice Readers should not act on the basis of any matter contained in this seminar paper without first obtaining their own professional advice
(f JONES LANGWJJ LASALLE
A Valuation Perspective on Market Rent Review clauses
Graham director
Valuations and Consulting September 2011
Contents
bull What does rent mean
bull What valuation principles apply
bull Market rent review criteria
bull Avoiding traps in market rent review
bull Unusual premises
bull Summary
What does rent mean
bull Rent
bull Gross rent
bull Semi-gross rent
bull Net rent
bull Face rent
bull Effective rent
bull Base rent plus increases in outgoings
bull Reasonable rent
bull Best rent
bull Open market rental vOpen market rental value
~ JONES 1ANGWJ LASALLE
Valuation Principles 2 A licensed valuer shall notshy26 adopt the role of advocate in a matter whereshybull Adherence to lease terms-basis of review (a) their duty is to exercise independence and impartiality~bull What basis of rent is apDIicttbre
bull Impartiality
bull Comparability of premises
bull Spencer concep~
bull Analysis of rental evidence
Mar1ltet rent is the estimated amount for which a property or space within a property should lease on the date of valuation between awilling lessor and awilling lessee on appropriate terms in an arms length transaction after proper mar1lteling wherein the parties had each acted knowledgeably prudently and without compulsion
laquo0)) JONES LANe LASAIU 4
Retai 1 lease
Section 11 (2)(a) Rent Review of the Commercial Tenancy (Retail Shops) Agreements act 1985 states the following definition for Market Rent
The market rent shall for that purposes be taken to be the rent obtainable at the time ofthat review in a free and open market as if all the relevant factors matters or variables used in proper land valuation practice having been taken into account that retail shop were vacant and to let on similar terms as are contained in the current retail shop lease
First halfof review clause
bull In determining the market Rent the Valuer must act as an expert and not as an arbitrator and his determination shall be final and binding on the parties (except for manifest error) The assessment must be made on a GST-exclusive basis
bull The annual market rent of the Premises as at the subject review date must be determined on the basis of the following
bull Rents as at the review date ofany comparable premises
bull The Permitted use
bull The period of time until the next Review Date
The Valuer must disregard as evidence for determining the market rent of the Premises Jeases of comparable premises of less than a whole floor
bull The length of the Term
That any deleterious condition of the Premises is deemed not to have occurred if it has been caused by the Tenant or the Tenants predecessors
bull That if the Premises or any other part of the Building have been destroyed damaged rendered inaccassible or are being refurbished they are deemed to have been fully repaired and restored
Second half of review clause
-That no account must be taken of
-The value of any goodwill attached to the Premises due to the Tenants business
-The value of the Tenants Property
-Rents in respect of any sub-letting or licensing of the Premises or any comparable premises
-That the Valuer should disregard any reduction in the Rent ofany comparable premises or in the annual market rent of the Premises to take account of any abatement concession inducement or reduction paid payable granted or allowed to anew tenant or any other person or to retain apotentially outgoing tenant in respect of the Premises or this lease or any comparable premises or any lease of any comparable premises that this lease is between a willing but not anxious Landlord and awilling but not anxious Tenant and the Premises are ready for immediate use and occupation
-Any other criteria that may in the opinion of the person making the determination be relevant to his determination of the annual market rent of the Premises as at the subject review date (except for criteria that are not consistent with the criteria listed in DaraaraDhs ftl to (9)
11amp) JONES LANG YJ) lASAI1E
Lease terms-basis of review bull Example 2 (Cap and Collar)
bull On the commencement of Year 4of the Lease the face rent (disregarding any incentives) will be reviewed to the then open market and can be reduced up to amaximum of 10 or increased up to amaximum of 10 of the previous years Annual Rent
- Example 3 (Effective)
- The Valuer will be required to determine the effective market rental value of the Premises being the rental that has not been inflated or distorted by the provision ofany leasing incentive to the Tenant
Example 4 (Selective options)
bull The rent review clause provides for the reviewed rental to be the higher of
bull 1 CPI increase
bull 2 25 of sub-lease rents
bull 3 Fair Market Rental
Market review criteria Avoiding traps
bull Adherence to lease terms-basis of review
bull Assumption and disregards
bull Avoid ambiguity and contradictions
bull Seek valuation input for interpretation
bull Dont constrain the valuer
bull Preclude 2nd incentive in review process
Unusual Premises
bull Hotels restaurants caryards airports schools hospitals sporting facilities cinemas amp quarries
bull Different rental basis
bull Rental assessment is difficult
bull Preferable to have an agreed basis of review
bull Disclosure of information
(11 JONES LANG WI) LASALLpound 10
Summary
bull Market review clauses have become more difficult and often require legal guidance
bull Owners and tenants are far more informed
bull Common commercial review clause not possible
bull More industry collaboration required
bull Preferable to have an agreed basis of review for special properties
bull Market review criteria often restrictive on valuer J
11
JONES LANG((0)) LASALLE
Disclaimer TIlisdocument is confideotlal t0the recipient of he documeAt No reference 10 he document or any part Ihereof may be published stated or circulated in any communication with third parties without prior written approval from Jones Lang laSalle TIlis document has been produced solely as ageneral guide and does not constitute advice WhHstlhe document has been prepared in good failh and willi due care no representation is made for Ihe accuracy of Ihe whole or any part of Ihe document Jones Lang laSalle accepts no liability for damages suffered by any party resulting from thQir use of his document
JONES LANG LASALLE
Page 14
PRINCIPLES
Adherence to lease terms
Quite simply the valuer is required to comply with what the lease dictates to be done Ill
show a couple of examples of a rental brief at the end of this slide
Basis of rent
Is it gross semi-gross net face rent effective rent base rent plus outgoings reasonable
rent best rent or the distinction between OMR and OMRV J Impartiality
LAND VALUERS LICENSING ACT 1978
LICENSED VALUERS CODE OF CONDUCT
2 A licensed valuer shall notshy
28 adopt the role of advocate in a matter whereshy
(a) their duty is to exercise independence and impartiality
Comparability of Premises
Usually the valuers domain to determine this aspect but occasionally there is specific
direction Ideally one should have regard to similar quality accommodation in similar office
precincts
Spencer Concept (l~o7 )
Market rent is the estimated amount for which a property or space within a property should
lease on the date of valuation between a willing lessor and a willing lessee on appropriate
terms in an arms length transaction after proper marketing wherein the parties had each
acted knowledgeably prudently and without compulsion
JONES LANG LASALLE
Page IS
Analysis of rental evidence
V~~~ bull Evidence in accordance with lease direction
bull Comparable premises
bull Similar locations
bull As at similar date (Pre and post GFC relevant examples of date specific)
bull Circumstances behind a negotiation
bull Undertake a procesfgt of weighting the evidence (Look for the most probative evidence) I II 11 I
- 11 ~
Ii ~~j ~lt
II rO K - r Lt lt
t smiddot1gtshy
JONES LANG((C LASALLE
Page 16
I RETAIL LEASE EXAMPLE
Example 1
Section 11(a) - Rent Review of the Commercial Tenancy (Retail Shops) Agreements act
1985 states the following definition for Market Rent
That market rent shall for that purpose be taken to be the rent obtainable at the time of that
review in a free and open market as if all the relevant factors matters or variables used in
proper land valuation practice having been taken into account that retail shop were vacant
and to let on similar terms as are contained in the current retail shop lease
J
JONES LANG LASALLE
Page 17
ITYPICAL OFFICE REVIEW CLAUSE ~~ l
In determining the market Rent the Valuer must act as an expert and not as an arbitrator ~
and his determination shall be final and binding on the parties (except for manifest error) shy9
The assessment must be made on a GST -exclusive basis S~
tfl-~The annual market rent of the Premises as at the subject review date must be determined on
the basis of the following
(1) Rents as at the review date of any comparable premises
(2) The Permitted use I-p~ A_
(3) The period of time until the next Review Date ~-
(4) The Valuer must disregard as evidence for determining the market rent of the Premises
leases ofcomparable premises of less than a whole floor
(5) The length of the Term
(6) That any deleterious condition of the Premises is deemed not to have occurred if it has
been caused by the Tenant or the Tenants predecessors
(7) That if the Premises or any other part of the Building have been destroyed damaged
rendered inaccessible or are being refurbished they are deemed to have been fully
repaired and restored
(8) That no account must be taken of
(A) The value of any goodwill attached to the Premises due to the Tenants business
(B) The value of the Tenants Property
(C) Rents in respect of any sub-letting or licensing of the Premises or any
comparable premises
(9) That the Valuer should disregard any reduction in the Rent of any comparable
premises or in the annual market rent of the Premises to take account of any
abatement concession inducement or reduction paid payable granted or allowed to a
new tenant or any other person or to retain a potentially outgoing tenant in respect of
the Premises or this lease or any comparable premises or any lease of any comparable
premises that this lease is between a willing but not anxious Landlord and a willing but
not anxious Tenant and the Premises are ready for immediate use and occupation
(10) Any other criteria that may in the opinion of the person making the determination be
relevant to his determination of the annual market rent of the Premises as at the
JONES LANG((( LASAlLE
Page 18
subject review date (except for criteria that are not consistent with the criteria listed in
paragraphs (1) to (9)
Or
Example 2 (Cap and Collar)
On the commencement of Year 4 of the Lease the face rent (disregarding any incentives)
will be reviewed to the then open market and can be reduced up to a maximum of 10 or
increased up to a maximum of 10 of the previous years Annual Rent
Example 3 (Effective) bvl-- ea ( 0MA( ~ ~ t~ ~
The Valuer will be required to determine the effectie market rental value of the pre~t_(~~ being the rental that has not been inflated or distorted by the provision of any leasing bull V~
llt--t ~incentive to the Tenant c
Example 4 (Selective options)
The rent review clause provides for the reviewed rental to be the higher of
1 CPI increase
2 25 of sub-lease rents
3 Fair Market Rental
JONES LANG( LASA1LE p g e 19
[MARKET RENT REVIEW CRITERIAAVOIDING TRAPS
The market rent review criteria is that drawn from the lease
Quite simply the valuer is required to comply with what the lease dictates to be done We
saw a few examples earlier where the valuer was directed to consider or disregard certain
matters in the determination process There are countless examples of such matters Clarity
in such examples is highly desirable although Im sure that the difficulty associated with the
construction of rent review clauses is not lost on the legal profession
The review criteria is often referred to as assumptions and disregards Such directions
can be in direct conflict with normal industry convention and for this reason there is a
compelling case to simplify the wording for the benefit of clarity
It becomes frustrating when there is ambiguity or perceived contradictions
It can be extremely beneficial to seek real estate input as to interpretations of potential
clauses and to simplify the content and procedure I dont think there is enough of this
connectivity
The concept of determining rent based on certain criteria is to assess the relevant rent for the
subject premises as at a date is considered objective The objectivity will therefore depend
on what can and what cannot be taken into account Dont overly constrain the valuer
Ive said earlier that an incentive generally is agreed between landlord and tenant on the
basis of a discount of a certain amount for taking a long term lease It is more often than not
an initial rent free with subsequent reviews to pre agreed amounts I have seen leases where
the subsequent reviews permit having regard for incentives hence subsequent incentives
have occurred Clearly this is trap for double dipping on incentives
Note silence on incentives does not preclude them being considered in a rent review
JONES LANG((C LASALLE P g e 110
~NUSUAL_P_R_EM_I_S_E_S___________
There are a number of industry sectors that have a need for specialised buildings or
operations a sample of which is listed hereunder
bull hotels
bull restaurants
caryardsbull bull airports
bull schools J bull hospitals
bull sporting facilities and
bull cinemas
bull quarries
The general industry rentals for these buildings vary and include basic rates per square
metre percentages of turnover or net profit percentage of trading volumes or throughput
dollars per head and rentals per seat per week Understandably there tends to be specialist
operators or groups unique to those related industries that tenant these properties
As a consequence the valuer would need considerable information from these industry
sectors to assess an appropriate market based rental Scarcity of data only heightens the
difficulty of his task J It would be preferable to have an agreed basis of review for these sectors based on
~ agreement between operator (tenant) and landlord Equally the availability of related
( information to be provided by the operator would be of assistance
~tr$ ~r
~ ~ V9v~ frr ~~1
~ iUJ~ v ~ iv ampts(~9lt ~~~~
JONES LANG LASALLE
age 111
Market rent review clauses within lease documents have become more detailed over recent
years as both landlord and tenant and their lawyers strive to optimise their positions as at
rent review date The extent of review criteria can run for pages and deal with numerous
issues Equally the performance of commercial property for the institutional funds is
monitored very closely and this includes a strong focus on income and growth
The review mechanism can be pivotal to this performance
I have had the need on several occasions to seek legal advice on clause definition
Awareness of prevailing market conditions by tenants has grown considerably in the past few
decades particularly with in house expertise or tenant advocate input This enables them to
be savvy to circumstances revolving around rent review criteria when negotiating lease terms
Given the above comments and concerted input from both landlord and tenant from opposing
viewpoints it is highly unlikely that we will ever have a generic rent review clause for
commercial office space Equally the commercial acumen of informed tenants would
probably preclude any industry reform akin to what has happened to the retail sector since
the mid 1980s
I still believe that lawyers and leasingvaluation operatives can work more closely for their
mutual clientele There is a need for owners to secure a positive commercial and valuation
flavour from a lease document but equally the legal structure of the lease should work in the
commercial world
Unusual properties can provide some difficulty in relation to basis of rental structure and
indeed review of rent The divergence of revenue structures and unique operational
peculiarities from hotels through to hospitals and airports creates a challenge for the
commercial drafting of leases and review mechanisms Ideally an agreement between
landlord and tenant up front would alleviate much of this difficulty and the provision of
relevant information on operational aspects would be of assistance
On a closing note I would say market rent review criteria with so many dos and donts
generally is a touch restrictive on the valuation profession The courts have repeatedly said
JONES LANG(((1 LASALLE Page 112
they do not want to trespass on the valuers territory so the direction we are given to
undertake our brief is critical
Copyright copy These materials are subject to copyright which is retained by the author No part may be reproduced adapted or communicated without consent except as permitted under applicable copyright law
Disclaimer This seminar paper is intended only to provide a summary of the subject matter covered It does not purport to be comprehensive or to render legal advice Readers should not act on the basis of any matter contained in this seminar paper without first obtaining their own professional advice
(f JONES LANGWJJ LASALLE
A Valuation Perspective on Market Rent Review clauses
Graham director
Valuations and Consulting September 2011
Contents
bull What does rent mean
bull What valuation principles apply
bull Market rent review criteria
bull Avoiding traps in market rent review
bull Unusual premises
bull Summary
What does rent mean
bull Rent
bull Gross rent
bull Semi-gross rent
bull Net rent
bull Face rent
bull Effective rent
bull Base rent plus increases in outgoings
bull Reasonable rent
bull Best rent
bull Open market rental vOpen market rental value
~ JONES 1ANGWJ LASALLE
Valuation Principles 2 A licensed valuer shall notshy26 adopt the role of advocate in a matter whereshybull Adherence to lease terms-basis of review (a) their duty is to exercise independence and impartiality~bull What basis of rent is apDIicttbre
bull Impartiality
bull Comparability of premises
bull Spencer concep~
bull Analysis of rental evidence
Mar1ltet rent is the estimated amount for which a property or space within a property should lease on the date of valuation between awilling lessor and awilling lessee on appropriate terms in an arms length transaction after proper mar1lteling wherein the parties had each acted knowledgeably prudently and without compulsion
laquo0)) JONES LANe LASAIU 4
Retai 1 lease
Section 11 (2)(a) Rent Review of the Commercial Tenancy (Retail Shops) Agreements act 1985 states the following definition for Market Rent
The market rent shall for that purposes be taken to be the rent obtainable at the time ofthat review in a free and open market as if all the relevant factors matters or variables used in proper land valuation practice having been taken into account that retail shop were vacant and to let on similar terms as are contained in the current retail shop lease
First halfof review clause
bull In determining the market Rent the Valuer must act as an expert and not as an arbitrator and his determination shall be final and binding on the parties (except for manifest error) The assessment must be made on a GST-exclusive basis
bull The annual market rent of the Premises as at the subject review date must be determined on the basis of the following
bull Rents as at the review date ofany comparable premises
bull The Permitted use
bull The period of time until the next Review Date
The Valuer must disregard as evidence for determining the market rent of the Premises Jeases of comparable premises of less than a whole floor
bull The length of the Term
That any deleterious condition of the Premises is deemed not to have occurred if it has been caused by the Tenant or the Tenants predecessors
bull That if the Premises or any other part of the Building have been destroyed damaged rendered inaccassible or are being refurbished they are deemed to have been fully repaired and restored
Second half of review clause
-That no account must be taken of
-The value of any goodwill attached to the Premises due to the Tenants business
-The value of the Tenants Property
-Rents in respect of any sub-letting or licensing of the Premises or any comparable premises
-That the Valuer should disregard any reduction in the Rent ofany comparable premises or in the annual market rent of the Premises to take account of any abatement concession inducement or reduction paid payable granted or allowed to anew tenant or any other person or to retain apotentially outgoing tenant in respect of the Premises or this lease or any comparable premises or any lease of any comparable premises that this lease is between a willing but not anxious Landlord and awilling but not anxious Tenant and the Premises are ready for immediate use and occupation
-Any other criteria that may in the opinion of the person making the determination be relevant to his determination of the annual market rent of the Premises as at the subject review date (except for criteria that are not consistent with the criteria listed in DaraaraDhs ftl to (9)
11amp) JONES LANG YJ) lASAI1E
Lease terms-basis of review bull Example 2 (Cap and Collar)
bull On the commencement of Year 4of the Lease the face rent (disregarding any incentives) will be reviewed to the then open market and can be reduced up to amaximum of 10 or increased up to amaximum of 10 of the previous years Annual Rent
- Example 3 (Effective)
- The Valuer will be required to determine the effective market rental value of the Premises being the rental that has not been inflated or distorted by the provision ofany leasing incentive to the Tenant
Example 4 (Selective options)
bull The rent review clause provides for the reviewed rental to be the higher of
bull 1 CPI increase
bull 2 25 of sub-lease rents
bull 3 Fair Market Rental
Market review criteria Avoiding traps
bull Adherence to lease terms-basis of review
bull Assumption and disregards
bull Avoid ambiguity and contradictions
bull Seek valuation input for interpretation
bull Dont constrain the valuer
bull Preclude 2nd incentive in review process
Unusual Premises
bull Hotels restaurants caryards airports schools hospitals sporting facilities cinemas amp quarries
bull Different rental basis
bull Rental assessment is difficult
bull Preferable to have an agreed basis of review
bull Disclosure of information
(11 JONES LANG WI) LASALLpound 10
Summary
bull Market review clauses have become more difficult and often require legal guidance
bull Owners and tenants are far more informed
bull Common commercial review clause not possible
bull More industry collaboration required
bull Preferable to have an agreed basis of review for special properties
bull Market review criteria often restrictive on valuer J
11
JONES LANG((0)) LASALLE
Disclaimer TIlisdocument is confideotlal t0the recipient of he documeAt No reference 10 he document or any part Ihereof may be published stated or circulated in any communication with third parties without prior written approval from Jones Lang laSalle TIlis document has been produced solely as ageneral guide and does not constitute advice WhHstlhe document has been prepared in good failh and willi due care no representation is made for Ihe accuracy of Ihe whole or any part of Ihe document Jones Lang laSalle accepts no liability for damages suffered by any party resulting from thQir use of his document
JONES LANG LASALLE
Page IS
Analysis of rental evidence
V~~~ bull Evidence in accordance with lease direction
bull Comparable premises
bull Similar locations
bull As at similar date (Pre and post GFC relevant examples of date specific)
bull Circumstances behind a negotiation
bull Undertake a procesfgt of weighting the evidence (Look for the most probative evidence) I II 11 I
- 11 ~
Ii ~~j ~lt
II rO K - r Lt lt
t smiddot1gtshy
JONES LANG((C LASALLE
Page 16
I RETAIL LEASE EXAMPLE
Example 1
Section 11(a) - Rent Review of the Commercial Tenancy (Retail Shops) Agreements act
1985 states the following definition for Market Rent
That market rent shall for that purpose be taken to be the rent obtainable at the time of that
review in a free and open market as if all the relevant factors matters or variables used in
proper land valuation practice having been taken into account that retail shop were vacant
and to let on similar terms as are contained in the current retail shop lease
J
JONES LANG LASALLE
Page 17
ITYPICAL OFFICE REVIEW CLAUSE ~~ l
In determining the market Rent the Valuer must act as an expert and not as an arbitrator ~
and his determination shall be final and binding on the parties (except for manifest error) shy9
The assessment must be made on a GST -exclusive basis S~
tfl-~The annual market rent of the Premises as at the subject review date must be determined on
the basis of the following
(1) Rents as at the review date of any comparable premises
(2) The Permitted use I-p~ A_
(3) The period of time until the next Review Date ~-
(4) The Valuer must disregard as evidence for determining the market rent of the Premises
leases ofcomparable premises of less than a whole floor
(5) The length of the Term
(6) That any deleterious condition of the Premises is deemed not to have occurred if it has
been caused by the Tenant or the Tenants predecessors
(7) That if the Premises or any other part of the Building have been destroyed damaged
rendered inaccessible or are being refurbished they are deemed to have been fully
repaired and restored
(8) That no account must be taken of
(A) The value of any goodwill attached to the Premises due to the Tenants business
(B) The value of the Tenants Property
(C) Rents in respect of any sub-letting or licensing of the Premises or any
comparable premises
(9) That the Valuer should disregard any reduction in the Rent of any comparable
premises or in the annual market rent of the Premises to take account of any
abatement concession inducement or reduction paid payable granted or allowed to a
new tenant or any other person or to retain a potentially outgoing tenant in respect of
the Premises or this lease or any comparable premises or any lease of any comparable
premises that this lease is between a willing but not anxious Landlord and a willing but
not anxious Tenant and the Premises are ready for immediate use and occupation
(10) Any other criteria that may in the opinion of the person making the determination be
relevant to his determination of the annual market rent of the Premises as at the
JONES LANG((( LASAlLE
Page 18
subject review date (except for criteria that are not consistent with the criteria listed in
paragraphs (1) to (9)
Or
Example 2 (Cap and Collar)
On the commencement of Year 4 of the Lease the face rent (disregarding any incentives)
will be reviewed to the then open market and can be reduced up to a maximum of 10 or
increased up to a maximum of 10 of the previous years Annual Rent
Example 3 (Effective) bvl-- ea ( 0MA( ~ ~ t~ ~
The Valuer will be required to determine the effectie market rental value of the pre~t_(~~ being the rental that has not been inflated or distorted by the provision of any leasing bull V~
llt--t ~incentive to the Tenant c
Example 4 (Selective options)
The rent review clause provides for the reviewed rental to be the higher of
1 CPI increase
2 25 of sub-lease rents
3 Fair Market Rental
JONES LANG( LASA1LE p g e 19
[MARKET RENT REVIEW CRITERIAAVOIDING TRAPS
The market rent review criteria is that drawn from the lease
Quite simply the valuer is required to comply with what the lease dictates to be done We
saw a few examples earlier where the valuer was directed to consider or disregard certain
matters in the determination process There are countless examples of such matters Clarity
in such examples is highly desirable although Im sure that the difficulty associated with the
construction of rent review clauses is not lost on the legal profession
The review criteria is often referred to as assumptions and disregards Such directions
can be in direct conflict with normal industry convention and for this reason there is a
compelling case to simplify the wording for the benefit of clarity
It becomes frustrating when there is ambiguity or perceived contradictions
It can be extremely beneficial to seek real estate input as to interpretations of potential
clauses and to simplify the content and procedure I dont think there is enough of this
connectivity
The concept of determining rent based on certain criteria is to assess the relevant rent for the
subject premises as at a date is considered objective The objectivity will therefore depend
on what can and what cannot be taken into account Dont overly constrain the valuer
Ive said earlier that an incentive generally is agreed between landlord and tenant on the
basis of a discount of a certain amount for taking a long term lease It is more often than not
an initial rent free with subsequent reviews to pre agreed amounts I have seen leases where
the subsequent reviews permit having regard for incentives hence subsequent incentives
have occurred Clearly this is trap for double dipping on incentives
Note silence on incentives does not preclude them being considered in a rent review
JONES LANG((C LASALLE P g e 110
~NUSUAL_P_R_EM_I_S_E_S___________
There are a number of industry sectors that have a need for specialised buildings or
operations a sample of which is listed hereunder
bull hotels
bull restaurants
caryardsbull bull airports
bull schools J bull hospitals
bull sporting facilities and
bull cinemas
bull quarries
The general industry rentals for these buildings vary and include basic rates per square
metre percentages of turnover or net profit percentage of trading volumes or throughput
dollars per head and rentals per seat per week Understandably there tends to be specialist
operators or groups unique to those related industries that tenant these properties
As a consequence the valuer would need considerable information from these industry
sectors to assess an appropriate market based rental Scarcity of data only heightens the
difficulty of his task J It would be preferable to have an agreed basis of review for these sectors based on
~ agreement between operator (tenant) and landlord Equally the availability of related
( information to be provided by the operator would be of assistance
~tr$ ~r
~ ~ V9v~ frr ~~1
~ iUJ~ v ~ iv ampts(~9lt ~~~~
JONES LANG LASALLE
age 111
Market rent review clauses within lease documents have become more detailed over recent
years as both landlord and tenant and their lawyers strive to optimise their positions as at
rent review date The extent of review criteria can run for pages and deal with numerous
issues Equally the performance of commercial property for the institutional funds is
monitored very closely and this includes a strong focus on income and growth
The review mechanism can be pivotal to this performance
I have had the need on several occasions to seek legal advice on clause definition
Awareness of prevailing market conditions by tenants has grown considerably in the past few
decades particularly with in house expertise or tenant advocate input This enables them to
be savvy to circumstances revolving around rent review criteria when negotiating lease terms
Given the above comments and concerted input from both landlord and tenant from opposing
viewpoints it is highly unlikely that we will ever have a generic rent review clause for
commercial office space Equally the commercial acumen of informed tenants would
probably preclude any industry reform akin to what has happened to the retail sector since
the mid 1980s
I still believe that lawyers and leasingvaluation operatives can work more closely for their
mutual clientele There is a need for owners to secure a positive commercial and valuation
flavour from a lease document but equally the legal structure of the lease should work in the
commercial world
Unusual properties can provide some difficulty in relation to basis of rental structure and
indeed review of rent The divergence of revenue structures and unique operational
peculiarities from hotels through to hospitals and airports creates a challenge for the
commercial drafting of leases and review mechanisms Ideally an agreement between
landlord and tenant up front would alleviate much of this difficulty and the provision of
relevant information on operational aspects would be of assistance
On a closing note I would say market rent review criteria with so many dos and donts
generally is a touch restrictive on the valuation profession The courts have repeatedly said
JONES LANG(((1 LASALLE Page 112
they do not want to trespass on the valuers territory so the direction we are given to
undertake our brief is critical
Copyright copy These materials are subject to copyright which is retained by the author No part may be reproduced adapted or communicated without consent except as permitted under applicable copyright law
Disclaimer This seminar paper is intended only to provide a summary of the subject matter covered It does not purport to be comprehensive or to render legal advice Readers should not act on the basis of any matter contained in this seminar paper without first obtaining their own professional advice
(f JONES LANGWJJ LASALLE
A Valuation Perspective on Market Rent Review clauses
Graham director
Valuations and Consulting September 2011
Contents
bull What does rent mean
bull What valuation principles apply
bull Market rent review criteria
bull Avoiding traps in market rent review
bull Unusual premises
bull Summary
What does rent mean
bull Rent
bull Gross rent
bull Semi-gross rent
bull Net rent
bull Face rent
bull Effective rent
bull Base rent plus increases in outgoings
bull Reasonable rent
bull Best rent
bull Open market rental vOpen market rental value
~ JONES 1ANGWJ LASALLE
Valuation Principles 2 A licensed valuer shall notshy26 adopt the role of advocate in a matter whereshybull Adherence to lease terms-basis of review (a) their duty is to exercise independence and impartiality~bull What basis of rent is apDIicttbre
bull Impartiality
bull Comparability of premises
bull Spencer concep~
bull Analysis of rental evidence
Mar1ltet rent is the estimated amount for which a property or space within a property should lease on the date of valuation between awilling lessor and awilling lessee on appropriate terms in an arms length transaction after proper mar1lteling wherein the parties had each acted knowledgeably prudently and without compulsion
laquo0)) JONES LANe LASAIU 4
Retai 1 lease
Section 11 (2)(a) Rent Review of the Commercial Tenancy (Retail Shops) Agreements act 1985 states the following definition for Market Rent
The market rent shall for that purposes be taken to be the rent obtainable at the time ofthat review in a free and open market as if all the relevant factors matters or variables used in proper land valuation practice having been taken into account that retail shop were vacant and to let on similar terms as are contained in the current retail shop lease
First halfof review clause
bull In determining the market Rent the Valuer must act as an expert and not as an arbitrator and his determination shall be final and binding on the parties (except for manifest error) The assessment must be made on a GST-exclusive basis
bull The annual market rent of the Premises as at the subject review date must be determined on the basis of the following
bull Rents as at the review date ofany comparable premises
bull The Permitted use
bull The period of time until the next Review Date
The Valuer must disregard as evidence for determining the market rent of the Premises Jeases of comparable premises of less than a whole floor
bull The length of the Term
That any deleterious condition of the Premises is deemed not to have occurred if it has been caused by the Tenant or the Tenants predecessors
bull That if the Premises or any other part of the Building have been destroyed damaged rendered inaccassible or are being refurbished they are deemed to have been fully repaired and restored
Second half of review clause
-That no account must be taken of
-The value of any goodwill attached to the Premises due to the Tenants business
-The value of the Tenants Property
-Rents in respect of any sub-letting or licensing of the Premises or any comparable premises
-That the Valuer should disregard any reduction in the Rent ofany comparable premises or in the annual market rent of the Premises to take account of any abatement concession inducement or reduction paid payable granted or allowed to anew tenant or any other person or to retain apotentially outgoing tenant in respect of the Premises or this lease or any comparable premises or any lease of any comparable premises that this lease is between a willing but not anxious Landlord and awilling but not anxious Tenant and the Premises are ready for immediate use and occupation
-Any other criteria that may in the opinion of the person making the determination be relevant to his determination of the annual market rent of the Premises as at the subject review date (except for criteria that are not consistent with the criteria listed in DaraaraDhs ftl to (9)
11amp) JONES LANG YJ) lASAI1E
Lease terms-basis of review bull Example 2 (Cap and Collar)
bull On the commencement of Year 4of the Lease the face rent (disregarding any incentives) will be reviewed to the then open market and can be reduced up to amaximum of 10 or increased up to amaximum of 10 of the previous years Annual Rent
- Example 3 (Effective)
- The Valuer will be required to determine the effective market rental value of the Premises being the rental that has not been inflated or distorted by the provision ofany leasing incentive to the Tenant
Example 4 (Selective options)
bull The rent review clause provides for the reviewed rental to be the higher of
bull 1 CPI increase
bull 2 25 of sub-lease rents
bull 3 Fair Market Rental
Market review criteria Avoiding traps
bull Adherence to lease terms-basis of review
bull Assumption and disregards
bull Avoid ambiguity and contradictions
bull Seek valuation input for interpretation
bull Dont constrain the valuer
bull Preclude 2nd incentive in review process
Unusual Premises
bull Hotels restaurants caryards airports schools hospitals sporting facilities cinemas amp quarries
bull Different rental basis
bull Rental assessment is difficult
bull Preferable to have an agreed basis of review
bull Disclosure of information
(11 JONES LANG WI) LASALLpound 10
Summary
bull Market review clauses have become more difficult and often require legal guidance
bull Owners and tenants are far more informed
bull Common commercial review clause not possible
bull More industry collaboration required
bull Preferable to have an agreed basis of review for special properties
bull Market review criteria often restrictive on valuer J
11
JONES LANG((0)) LASALLE
Disclaimer TIlisdocument is confideotlal t0the recipient of he documeAt No reference 10 he document or any part Ihereof may be published stated or circulated in any communication with third parties without prior written approval from Jones Lang laSalle TIlis document has been produced solely as ageneral guide and does not constitute advice WhHstlhe document has been prepared in good failh and willi due care no representation is made for Ihe accuracy of Ihe whole or any part of Ihe document Jones Lang laSalle accepts no liability for damages suffered by any party resulting from thQir use of his document
JONES LANG((C LASALLE
Page 16
I RETAIL LEASE EXAMPLE
Example 1
Section 11(a) - Rent Review of the Commercial Tenancy (Retail Shops) Agreements act
1985 states the following definition for Market Rent
That market rent shall for that purpose be taken to be the rent obtainable at the time of that
review in a free and open market as if all the relevant factors matters or variables used in
proper land valuation practice having been taken into account that retail shop were vacant
and to let on similar terms as are contained in the current retail shop lease
J
JONES LANG LASALLE
Page 17
ITYPICAL OFFICE REVIEW CLAUSE ~~ l
In determining the market Rent the Valuer must act as an expert and not as an arbitrator ~
and his determination shall be final and binding on the parties (except for manifest error) shy9
The assessment must be made on a GST -exclusive basis S~
tfl-~The annual market rent of the Premises as at the subject review date must be determined on
the basis of the following
(1) Rents as at the review date of any comparable premises
(2) The Permitted use I-p~ A_
(3) The period of time until the next Review Date ~-
(4) The Valuer must disregard as evidence for determining the market rent of the Premises
leases ofcomparable premises of less than a whole floor
(5) The length of the Term
(6) That any deleterious condition of the Premises is deemed not to have occurred if it has
been caused by the Tenant or the Tenants predecessors
(7) That if the Premises or any other part of the Building have been destroyed damaged
rendered inaccessible or are being refurbished they are deemed to have been fully
repaired and restored
(8) That no account must be taken of
(A) The value of any goodwill attached to the Premises due to the Tenants business
(B) The value of the Tenants Property
(C) Rents in respect of any sub-letting or licensing of the Premises or any
comparable premises
(9) That the Valuer should disregard any reduction in the Rent of any comparable
premises or in the annual market rent of the Premises to take account of any
abatement concession inducement or reduction paid payable granted or allowed to a
new tenant or any other person or to retain a potentially outgoing tenant in respect of
the Premises or this lease or any comparable premises or any lease of any comparable
premises that this lease is between a willing but not anxious Landlord and a willing but
not anxious Tenant and the Premises are ready for immediate use and occupation
(10) Any other criteria that may in the opinion of the person making the determination be
relevant to his determination of the annual market rent of the Premises as at the
JONES LANG((( LASAlLE
Page 18
subject review date (except for criteria that are not consistent with the criteria listed in
paragraphs (1) to (9)
Or
Example 2 (Cap and Collar)
On the commencement of Year 4 of the Lease the face rent (disregarding any incentives)
will be reviewed to the then open market and can be reduced up to a maximum of 10 or
increased up to a maximum of 10 of the previous years Annual Rent
Example 3 (Effective) bvl-- ea ( 0MA( ~ ~ t~ ~
The Valuer will be required to determine the effectie market rental value of the pre~t_(~~ being the rental that has not been inflated or distorted by the provision of any leasing bull V~
llt--t ~incentive to the Tenant c
Example 4 (Selective options)
The rent review clause provides for the reviewed rental to be the higher of
1 CPI increase
2 25 of sub-lease rents
3 Fair Market Rental
JONES LANG( LASA1LE p g e 19
[MARKET RENT REVIEW CRITERIAAVOIDING TRAPS
The market rent review criteria is that drawn from the lease
Quite simply the valuer is required to comply with what the lease dictates to be done We
saw a few examples earlier where the valuer was directed to consider or disregard certain
matters in the determination process There are countless examples of such matters Clarity
in such examples is highly desirable although Im sure that the difficulty associated with the
construction of rent review clauses is not lost on the legal profession
The review criteria is often referred to as assumptions and disregards Such directions
can be in direct conflict with normal industry convention and for this reason there is a
compelling case to simplify the wording for the benefit of clarity
It becomes frustrating when there is ambiguity or perceived contradictions
It can be extremely beneficial to seek real estate input as to interpretations of potential
clauses and to simplify the content and procedure I dont think there is enough of this
connectivity
The concept of determining rent based on certain criteria is to assess the relevant rent for the
subject premises as at a date is considered objective The objectivity will therefore depend
on what can and what cannot be taken into account Dont overly constrain the valuer
Ive said earlier that an incentive generally is agreed between landlord and tenant on the
basis of a discount of a certain amount for taking a long term lease It is more often than not
an initial rent free with subsequent reviews to pre agreed amounts I have seen leases where
the subsequent reviews permit having regard for incentives hence subsequent incentives
have occurred Clearly this is trap for double dipping on incentives
Note silence on incentives does not preclude them being considered in a rent review
JONES LANG((C LASALLE P g e 110
~NUSUAL_P_R_EM_I_S_E_S___________
There are a number of industry sectors that have a need for specialised buildings or
operations a sample of which is listed hereunder
bull hotels
bull restaurants
caryardsbull bull airports
bull schools J bull hospitals
bull sporting facilities and
bull cinemas
bull quarries
The general industry rentals for these buildings vary and include basic rates per square
metre percentages of turnover or net profit percentage of trading volumes or throughput
dollars per head and rentals per seat per week Understandably there tends to be specialist
operators or groups unique to those related industries that tenant these properties
As a consequence the valuer would need considerable information from these industry
sectors to assess an appropriate market based rental Scarcity of data only heightens the
difficulty of his task J It would be preferable to have an agreed basis of review for these sectors based on
~ agreement between operator (tenant) and landlord Equally the availability of related
( information to be provided by the operator would be of assistance
~tr$ ~r
~ ~ V9v~ frr ~~1
~ iUJ~ v ~ iv ampts(~9lt ~~~~
JONES LANG LASALLE
age 111
Market rent review clauses within lease documents have become more detailed over recent
years as both landlord and tenant and their lawyers strive to optimise their positions as at
rent review date The extent of review criteria can run for pages and deal with numerous
issues Equally the performance of commercial property for the institutional funds is
monitored very closely and this includes a strong focus on income and growth
The review mechanism can be pivotal to this performance
I have had the need on several occasions to seek legal advice on clause definition
Awareness of prevailing market conditions by tenants has grown considerably in the past few
decades particularly with in house expertise or tenant advocate input This enables them to
be savvy to circumstances revolving around rent review criteria when negotiating lease terms
Given the above comments and concerted input from both landlord and tenant from opposing
viewpoints it is highly unlikely that we will ever have a generic rent review clause for
commercial office space Equally the commercial acumen of informed tenants would
probably preclude any industry reform akin to what has happened to the retail sector since
the mid 1980s
I still believe that lawyers and leasingvaluation operatives can work more closely for their
mutual clientele There is a need for owners to secure a positive commercial and valuation
flavour from a lease document but equally the legal structure of the lease should work in the
commercial world
Unusual properties can provide some difficulty in relation to basis of rental structure and
indeed review of rent The divergence of revenue structures and unique operational
peculiarities from hotels through to hospitals and airports creates a challenge for the
commercial drafting of leases and review mechanisms Ideally an agreement between
landlord and tenant up front would alleviate much of this difficulty and the provision of
relevant information on operational aspects would be of assistance
On a closing note I would say market rent review criteria with so many dos and donts
generally is a touch restrictive on the valuation profession The courts have repeatedly said
JONES LANG(((1 LASALLE Page 112
they do not want to trespass on the valuers territory so the direction we are given to
undertake our brief is critical
Copyright copy These materials are subject to copyright which is retained by the author No part may be reproduced adapted or communicated without consent except as permitted under applicable copyright law
Disclaimer This seminar paper is intended only to provide a summary of the subject matter covered It does not purport to be comprehensive or to render legal advice Readers should not act on the basis of any matter contained in this seminar paper without first obtaining their own professional advice
(f JONES LANGWJJ LASALLE
A Valuation Perspective on Market Rent Review clauses
Graham director
Valuations and Consulting September 2011
Contents
bull What does rent mean
bull What valuation principles apply
bull Market rent review criteria
bull Avoiding traps in market rent review
bull Unusual premises
bull Summary
What does rent mean
bull Rent
bull Gross rent
bull Semi-gross rent
bull Net rent
bull Face rent
bull Effective rent
bull Base rent plus increases in outgoings
bull Reasonable rent
bull Best rent
bull Open market rental vOpen market rental value
~ JONES 1ANGWJ LASALLE
Valuation Principles 2 A licensed valuer shall notshy26 adopt the role of advocate in a matter whereshybull Adherence to lease terms-basis of review (a) their duty is to exercise independence and impartiality~bull What basis of rent is apDIicttbre
bull Impartiality
bull Comparability of premises
bull Spencer concep~
bull Analysis of rental evidence
Mar1ltet rent is the estimated amount for which a property or space within a property should lease on the date of valuation between awilling lessor and awilling lessee on appropriate terms in an arms length transaction after proper mar1lteling wherein the parties had each acted knowledgeably prudently and without compulsion
laquo0)) JONES LANe LASAIU 4
Retai 1 lease
Section 11 (2)(a) Rent Review of the Commercial Tenancy (Retail Shops) Agreements act 1985 states the following definition for Market Rent
The market rent shall for that purposes be taken to be the rent obtainable at the time ofthat review in a free and open market as if all the relevant factors matters or variables used in proper land valuation practice having been taken into account that retail shop were vacant and to let on similar terms as are contained in the current retail shop lease
First halfof review clause
bull In determining the market Rent the Valuer must act as an expert and not as an arbitrator and his determination shall be final and binding on the parties (except for manifest error) The assessment must be made on a GST-exclusive basis
bull The annual market rent of the Premises as at the subject review date must be determined on the basis of the following
bull Rents as at the review date ofany comparable premises
bull The Permitted use
bull The period of time until the next Review Date
The Valuer must disregard as evidence for determining the market rent of the Premises Jeases of comparable premises of less than a whole floor
bull The length of the Term
That any deleterious condition of the Premises is deemed not to have occurred if it has been caused by the Tenant or the Tenants predecessors
bull That if the Premises or any other part of the Building have been destroyed damaged rendered inaccassible or are being refurbished they are deemed to have been fully repaired and restored
Second half of review clause
-That no account must be taken of
-The value of any goodwill attached to the Premises due to the Tenants business
-The value of the Tenants Property
-Rents in respect of any sub-letting or licensing of the Premises or any comparable premises
-That the Valuer should disregard any reduction in the Rent ofany comparable premises or in the annual market rent of the Premises to take account of any abatement concession inducement or reduction paid payable granted or allowed to anew tenant or any other person or to retain apotentially outgoing tenant in respect of the Premises or this lease or any comparable premises or any lease of any comparable premises that this lease is between a willing but not anxious Landlord and awilling but not anxious Tenant and the Premises are ready for immediate use and occupation
-Any other criteria that may in the opinion of the person making the determination be relevant to his determination of the annual market rent of the Premises as at the subject review date (except for criteria that are not consistent with the criteria listed in DaraaraDhs ftl to (9)
11amp) JONES LANG YJ) lASAI1E
Lease terms-basis of review bull Example 2 (Cap and Collar)
bull On the commencement of Year 4of the Lease the face rent (disregarding any incentives) will be reviewed to the then open market and can be reduced up to amaximum of 10 or increased up to amaximum of 10 of the previous years Annual Rent
- Example 3 (Effective)
- The Valuer will be required to determine the effective market rental value of the Premises being the rental that has not been inflated or distorted by the provision ofany leasing incentive to the Tenant
Example 4 (Selective options)
bull The rent review clause provides for the reviewed rental to be the higher of
bull 1 CPI increase
bull 2 25 of sub-lease rents
bull 3 Fair Market Rental
Market review criteria Avoiding traps
bull Adherence to lease terms-basis of review
bull Assumption and disregards
bull Avoid ambiguity and contradictions
bull Seek valuation input for interpretation
bull Dont constrain the valuer
bull Preclude 2nd incentive in review process
Unusual Premises
bull Hotels restaurants caryards airports schools hospitals sporting facilities cinemas amp quarries
bull Different rental basis
bull Rental assessment is difficult
bull Preferable to have an agreed basis of review
bull Disclosure of information
(11 JONES LANG WI) LASALLpound 10
Summary
bull Market review clauses have become more difficult and often require legal guidance
bull Owners and tenants are far more informed
bull Common commercial review clause not possible
bull More industry collaboration required
bull Preferable to have an agreed basis of review for special properties
bull Market review criteria often restrictive on valuer J
11
JONES LANG((0)) LASALLE
Disclaimer TIlisdocument is confideotlal t0the recipient of he documeAt No reference 10 he document or any part Ihereof may be published stated or circulated in any communication with third parties without prior written approval from Jones Lang laSalle TIlis document has been produced solely as ageneral guide and does not constitute advice WhHstlhe document has been prepared in good failh and willi due care no representation is made for Ihe accuracy of Ihe whole or any part of Ihe document Jones Lang laSalle accepts no liability for damages suffered by any party resulting from thQir use of his document
JONES LANG LASALLE
Page 17
ITYPICAL OFFICE REVIEW CLAUSE ~~ l
In determining the market Rent the Valuer must act as an expert and not as an arbitrator ~
and his determination shall be final and binding on the parties (except for manifest error) shy9
The assessment must be made on a GST -exclusive basis S~
tfl-~The annual market rent of the Premises as at the subject review date must be determined on
the basis of the following
(1) Rents as at the review date of any comparable premises
(2) The Permitted use I-p~ A_
(3) The period of time until the next Review Date ~-
(4) The Valuer must disregard as evidence for determining the market rent of the Premises
leases ofcomparable premises of less than a whole floor
(5) The length of the Term
(6) That any deleterious condition of the Premises is deemed not to have occurred if it has
been caused by the Tenant or the Tenants predecessors
(7) That if the Premises or any other part of the Building have been destroyed damaged
rendered inaccessible or are being refurbished they are deemed to have been fully
repaired and restored
(8) That no account must be taken of
(A) The value of any goodwill attached to the Premises due to the Tenants business
(B) The value of the Tenants Property
(C) Rents in respect of any sub-letting or licensing of the Premises or any
comparable premises
(9) That the Valuer should disregard any reduction in the Rent of any comparable
premises or in the annual market rent of the Premises to take account of any
abatement concession inducement or reduction paid payable granted or allowed to a
new tenant or any other person or to retain a potentially outgoing tenant in respect of
the Premises or this lease or any comparable premises or any lease of any comparable
premises that this lease is between a willing but not anxious Landlord and a willing but
not anxious Tenant and the Premises are ready for immediate use and occupation
(10) Any other criteria that may in the opinion of the person making the determination be
relevant to his determination of the annual market rent of the Premises as at the
JONES LANG((( LASAlLE
Page 18
subject review date (except for criteria that are not consistent with the criteria listed in
paragraphs (1) to (9)
Or
Example 2 (Cap and Collar)
On the commencement of Year 4 of the Lease the face rent (disregarding any incentives)
will be reviewed to the then open market and can be reduced up to a maximum of 10 or
increased up to a maximum of 10 of the previous years Annual Rent
Example 3 (Effective) bvl-- ea ( 0MA( ~ ~ t~ ~
The Valuer will be required to determine the effectie market rental value of the pre~t_(~~ being the rental that has not been inflated or distorted by the provision of any leasing bull V~
llt--t ~incentive to the Tenant c
Example 4 (Selective options)
The rent review clause provides for the reviewed rental to be the higher of
1 CPI increase
2 25 of sub-lease rents
3 Fair Market Rental
JONES LANG( LASA1LE p g e 19
[MARKET RENT REVIEW CRITERIAAVOIDING TRAPS
The market rent review criteria is that drawn from the lease
Quite simply the valuer is required to comply with what the lease dictates to be done We
saw a few examples earlier where the valuer was directed to consider or disregard certain
matters in the determination process There are countless examples of such matters Clarity
in such examples is highly desirable although Im sure that the difficulty associated with the
construction of rent review clauses is not lost on the legal profession
The review criteria is often referred to as assumptions and disregards Such directions
can be in direct conflict with normal industry convention and for this reason there is a
compelling case to simplify the wording for the benefit of clarity
It becomes frustrating when there is ambiguity or perceived contradictions
It can be extremely beneficial to seek real estate input as to interpretations of potential
clauses and to simplify the content and procedure I dont think there is enough of this
connectivity
The concept of determining rent based on certain criteria is to assess the relevant rent for the
subject premises as at a date is considered objective The objectivity will therefore depend
on what can and what cannot be taken into account Dont overly constrain the valuer
Ive said earlier that an incentive generally is agreed between landlord and tenant on the
basis of a discount of a certain amount for taking a long term lease It is more often than not
an initial rent free with subsequent reviews to pre agreed amounts I have seen leases where
the subsequent reviews permit having regard for incentives hence subsequent incentives
have occurred Clearly this is trap for double dipping on incentives
Note silence on incentives does not preclude them being considered in a rent review
JONES LANG((C LASALLE P g e 110
~NUSUAL_P_R_EM_I_S_E_S___________
There are a number of industry sectors that have a need for specialised buildings or
operations a sample of which is listed hereunder
bull hotels
bull restaurants
caryardsbull bull airports
bull schools J bull hospitals
bull sporting facilities and
bull cinemas
bull quarries
The general industry rentals for these buildings vary and include basic rates per square
metre percentages of turnover or net profit percentage of trading volumes or throughput
dollars per head and rentals per seat per week Understandably there tends to be specialist
operators or groups unique to those related industries that tenant these properties
As a consequence the valuer would need considerable information from these industry
sectors to assess an appropriate market based rental Scarcity of data only heightens the
difficulty of his task J It would be preferable to have an agreed basis of review for these sectors based on
~ agreement between operator (tenant) and landlord Equally the availability of related
( information to be provided by the operator would be of assistance
~tr$ ~r
~ ~ V9v~ frr ~~1
~ iUJ~ v ~ iv ampts(~9lt ~~~~
JONES LANG LASALLE
age 111
Market rent review clauses within lease documents have become more detailed over recent
years as both landlord and tenant and their lawyers strive to optimise their positions as at
rent review date The extent of review criteria can run for pages and deal with numerous
issues Equally the performance of commercial property for the institutional funds is
monitored very closely and this includes a strong focus on income and growth
The review mechanism can be pivotal to this performance
I have had the need on several occasions to seek legal advice on clause definition
Awareness of prevailing market conditions by tenants has grown considerably in the past few
decades particularly with in house expertise or tenant advocate input This enables them to
be savvy to circumstances revolving around rent review criteria when negotiating lease terms
Given the above comments and concerted input from both landlord and tenant from opposing
viewpoints it is highly unlikely that we will ever have a generic rent review clause for
commercial office space Equally the commercial acumen of informed tenants would
probably preclude any industry reform akin to what has happened to the retail sector since
the mid 1980s
I still believe that lawyers and leasingvaluation operatives can work more closely for their
mutual clientele There is a need for owners to secure a positive commercial and valuation
flavour from a lease document but equally the legal structure of the lease should work in the
commercial world
Unusual properties can provide some difficulty in relation to basis of rental structure and
indeed review of rent The divergence of revenue structures and unique operational
peculiarities from hotels through to hospitals and airports creates a challenge for the
commercial drafting of leases and review mechanisms Ideally an agreement between
landlord and tenant up front would alleviate much of this difficulty and the provision of
relevant information on operational aspects would be of assistance
On a closing note I would say market rent review criteria with so many dos and donts
generally is a touch restrictive on the valuation profession The courts have repeatedly said
JONES LANG(((1 LASALLE Page 112
they do not want to trespass on the valuers territory so the direction we are given to
undertake our brief is critical
Copyright copy These materials are subject to copyright which is retained by the author No part may be reproduced adapted or communicated without consent except as permitted under applicable copyright law
Disclaimer This seminar paper is intended only to provide a summary of the subject matter covered It does not purport to be comprehensive or to render legal advice Readers should not act on the basis of any matter contained in this seminar paper without first obtaining their own professional advice
(f JONES LANGWJJ LASALLE
A Valuation Perspective on Market Rent Review clauses
Graham director
Valuations and Consulting September 2011
Contents
bull What does rent mean
bull What valuation principles apply
bull Market rent review criteria
bull Avoiding traps in market rent review
bull Unusual premises
bull Summary
What does rent mean
bull Rent
bull Gross rent
bull Semi-gross rent
bull Net rent
bull Face rent
bull Effective rent
bull Base rent plus increases in outgoings
bull Reasonable rent
bull Best rent
bull Open market rental vOpen market rental value
~ JONES 1ANGWJ LASALLE
Valuation Principles 2 A licensed valuer shall notshy26 adopt the role of advocate in a matter whereshybull Adherence to lease terms-basis of review (a) their duty is to exercise independence and impartiality~bull What basis of rent is apDIicttbre
bull Impartiality
bull Comparability of premises
bull Spencer concep~
bull Analysis of rental evidence
Mar1ltet rent is the estimated amount for which a property or space within a property should lease on the date of valuation between awilling lessor and awilling lessee on appropriate terms in an arms length transaction after proper mar1lteling wherein the parties had each acted knowledgeably prudently and without compulsion
laquo0)) JONES LANe LASAIU 4
Retai 1 lease
Section 11 (2)(a) Rent Review of the Commercial Tenancy (Retail Shops) Agreements act 1985 states the following definition for Market Rent
The market rent shall for that purposes be taken to be the rent obtainable at the time ofthat review in a free and open market as if all the relevant factors matters or variables used in proper land valuation practice having been taken into account that retail shop were vacant and to let on similar terms as are contained in the current retail shop lease
First halfof review clause
bull In determining the market Rent the Valuer must act as an expert and not as an arbitrator and his determination shall be final and binding on the parties (except for manifest error) The assessment must be made on a GST-exclusive basis
bull The annual market rent of the Premises as at the subject review date must be determined on the basis of the following
bull Rents as at the review date ofany comparable premises
bull The Permitted use
bull The period of time until the next Review Date
The Valuer must disregard as evidence for determining the market rent of the Premises Jeases of comparable premises of less than a whole floor
bull The length of the Term
That any deleterious condition of the Premises is deemed not to have occurred if it has been caused by the Tenant or the Tenants predecessors
bull That if the Premises or any other part of the Building have been destroyed damaged rendered inaccassible or are being refurbished they are deemed to have been fully repaired and restored
Second half of review clause
-That no account must be taken of
-The value of any goodwill attached to the Premises due to the Tenants business
-The value of the Tenants Property
-Rents in respect of any sub-letting or licensing of the Premises or any comparable premises
-That the Valuer should disregard any reduction in the Rent ofany comparable premises or in the annual market rent of the Premises to take account of any abatement concession inducement or reduction paid payable granted or allowed to anew tenant or any other person or to retain apotentially outgoing tenant in respect of the Premises or this lease or any comparable premises or any lease of any comparable premises that this lease is between a willing but not anxious Landlord and awilling but not anxious Tenant and the Premises are ready for immediate use and occupation
-Any other criteria that may in the opinion of the person making the determination be relevant to his determination of the annual market rent of the Premises as at the subject review date (except for criteria that are not consistent with the criteria listed in DaraaraDhs ftl to (9)
11amp) JONES LANG YJ) lASAI1E
Lease terms-basis of review bull Example 2 (Cap and Collar)
bull On the commencement of Year 4of the Lease the face rent (disregarding any incentives) will be reviewed to the then open market and can be reduced up to amaximum of 10 or increased up to amaximum of 10 of the previous years Annual Rent
- Example 3 (Effective)
- The Valuer will be required to determine the effective market rental value of the Premises being the rental that has not been inflated or distorted by the provision ofany leasing incentive to the Tenant
Example 4 (Selective options)
bull The rent review clause provides for the reviewed rental to be the higher of
bull 1 CPI increase
bull 2 25 of sub-lease rents
bull 3 Fair Market Rental
Market review criteria Avoiding traps
bull Adherence to lease terms-basis of review
bull Assumption and disregards
bull Avoid ambiguity and contradictions
bull Seek valuation input for interpretation
bull Dont constrain the valuer
bull Preclude 2nd incentive in review process
Unusual Premises
bull Hotels restaurants caryards airports schools hospitals sporting facilities cinemas amp quarries
bull Different rental basis
bull Rental assessment is difficult
bull Preferable to have an agreed basis of review
bull Disclosure of information
(11 JONES LANG WI) LASALLpound 10
Summary
bull Market review clauses have become more difficult and often require legal guidance
bull Owners and tenants are far more informed
bull Common commercial review clause not possible
bull More industry collaboration required
bull Preferable to have an agreed basis of review for special properties
bull Market review criteria often restrictive on valuer J
11
JONES LANG((0)) LASALLE
Disclaimer TIlisdocument is confideotlal t0the recipient of he documeAt No reference 10 he document or any part Ihereof may be published stated or circulated in any communication with third parties without prior written approval from Jones Lang laSalle TIlis document has been produced solely as ageneral guide and does not constitute advice WhHstlhe document has been prepared in good failh and willi due care no representation is made for Ihe accuracy of Ihe whole or any part of Ihe document Jones Lang laSalle accepts no liability for damages suffered by any party resulting from thQir use of his document
JONES LANG((( LASAlLE
Page 18
subject review date (except for criteria that are not consistent with the criteria listed in
paragraphs (1) to (9)
Or
Example 2 (Cap and Collar)
On the commencement of Year 4 of the Lease the face rent (disregarding any incentives)
will be reviewed to the then open market and can be reduced up to a maximum of 10 or
increased up to a maximum of 10 of the previous years Annual Rent
Example 3 (Effective) bvl-- ea ( 0MA( ~ ~ t~ ~
The Valuer will be required to determine the effectie market rental value of the pre~t_(~~ being the rental that has not been inflated or distorted by the provision of any leasing bull V~
llt--t ~incentive to the Tenant c
Example 4 (Selective options)
The rent review clause provides for the reviewed rental to be the higher of
1 CPI increase
2 25 of sub-lease rents
3 Fair Market Rental
JONES LANG( LASA1LE p g e 19
[MARKET RENT REVIEW CRITERIAAVOIDING TRAPS
The market rent review criteria is that drawn from the lease
Quite simply the valuer is required to comply with what the lease dictates to be done We
saw a few examples earlier where the valuer was directed to consider or disregard certain
matters in the determination process There are countless examples of such matters Clarity
in such examples is highly desirable although Im sure that the difficulty associated with the
construction of rent review clauses is not lost on the legal profession
The review criteria is often referred to as assumptions and disregards Such directions
can be in direct conflict with normal industry convention and for this reason there is a
compelling case to simplify the wording for the benefit of clarity
It becomes frustrating when there is ambiguity or perceived contradictions
It can be extremely beneficial to seek real estate input as to interpretations of potential
clauses and to simplify the content and procedure I dont think there is enough of this
connectivity
The concept of determining rent based on certain criteria is to assess the relevant rent for the
subject premises as at a date is considered objective The objectivity will therefore depend
on what can and what cannot be taken into account Dont overly constrain the valuer
Ive said earlier that an incentive generally is agreed between landlord and tenant on the
basis of a discount of a certain amount for taking a long term lease It is more often than not
an initial rent free with subsequent reviews to pre agreed amounts I have seen leases where
the subsequent reviews permit having regard for incentives hence subsequent incentives
have occurred Clearly this is trap for double dipping on incentives
Note silence on incentives does not preclude them being considered in a rent review
JONES LANG((C LASALLE P g e 110
~NUSUAL_P_R_EM_I_S_E_S___________
There are a number of industry sectors that have a need for specialised buildings or
operations a sample of which is listed hereunder
bull hotels
bull restaurants
caryardsbull bull airports
bull schools J bull hospitals
bull sporting facilities and
bull cinemas
bull quarries
The general industry rentals for these buildings vary and include basic rates per square
metre percentages of turnover or net profit percentage of trading volumes or throughput
dollars per head and rentals per seat per week Understandably there tends to be specialist
operators or groups unique to those related industries that tenant these properties
As a consequence the valuer would need considerable information from these industry
sectors to assess an appropriate market based rental Scarcity of data only heightens the
difficulty of his task J It would be preferable to have an agreed basis of review for these sectors based on
~ agreement between operator (tenant) and landlord Equally the availability of related
( information to be provided by the operator would be of assistance
~tr$ ~r
~ ~ V9v~ frr ~~1
~ iUJ~ v ~ iv ampts(~9lt ~~~~
JONES LANG LASALLE
age 111
Market rent review clauses within lease documents have become more detailed over recent
years as both landlord and tenant and their lawyers strive to optimise their positions as at
rent review date The extent of review criteria can run for pages and deal with numerous
issues Equally the performance of commercial property for the institutional funds is
monitored very closely and this includes a strong focus on income and growth
The review mechanism can be pivotal to this performance
I have had the need on several occasions to seek legal advice on clause definition
Awareness of prevailing market conditions by tenants has grown considerably in the past few
decades particularly with in house expertise or tenant advocate input This enables them to
be savvy to circumstances revolving around rent review criteria when negotiating lease terms
Given the above comments and concerted input from both landlord and tenant from opposing
viewpoints it is highly unlikely that we will ever have a generic rent review clause for
commercial office space Equally the commercial acumen of informed tenants would
probably preclude any industry reform akin to what has happened to the retail sector since
the mid 1980s
I still believe that lawyers and leasingvaluation operatives can work more closely for their
mutual clientele There is a need for owners to secure a positive commercial and valuation
flavour from a lease document but equally the legal structure of the lease should work in the
commercial world
Unusual properties can provide some difficulty in relation to basis of rental structure and
indeed review of rent The divergence of revenue structures and unique operational
peculiarities from hotels through to hospitals and airports creates a challenge for the
commercial drafting of leases and review mechanisms Ideally an agreement between
landlord and tenant up front would alleviate much of this difficulty and the provision of
relevant information on operational aspects would be of assistance
On a closing note I would say market rent review criteria with so many dos and donts
generally is a touch restrictive on the valuation profession The courts have repeatedly said
JONES LANG(((1 LASALLE Page 112
they do not want to trespass on the valuers territory so the direction we are given to
undertake our brief is critical
Copyright copy These materials are subject to copyright which is retained by the author No part may be reproduced adapted or communicated without consent except as permitted under applicable copyright law
Disclaimer This seminar paper is intended only to provide a summary of the subject matter covered It does not purport to be comprehensive or to render legal advice Readers should not act on the basis of any matter contained in this seminar paper without first obtaining their own professional advice
(f JONES LANGWJJ LASALLE
A Valuation Perspective on Market Rent Review clauses
Graham director
Valuations and Consulting September 2011
Contents
bull What does rent mean
bull What valuation principles apply
bull Market rent review criteria
bull Avoiding traps in market rent review
bull Unusual premises
bull Summary
What does rent mean
bull Rent
bull Gross rent
bull Semi-gross rent
bull Net rent
bull Face rent
bull Effective rent
bull Base rent plus increases in outgoings
bull Reasonable rent
bull Best rent
bull Open market rental vOpen market rental value
~ JONES 1ANGWJ LASALLE
Valuation Principles 2 A licensed valuer shall notshy26 adopt the role of advocate in a matter whereshybull Adherence to lease terms-basis of review (a) their duty is to exercise independence and impartiality~bull What basis of rent is apDIicttbre
bull Impartiality
bull Comparability of premises
bull Spencer concep~
bull Analysis of rental evidence
Mar1ltet rent is the estimated amount for which a property or space within a property should lease on the date of valuation between awilling lessor and awilling lessee on appropriate terms in an arms length transaction after proper mar1lteling wherein the parties had each acted knowledgeably prudently and without compulsion
laquo0)) JONES LANe LASAIU 4
Retai 1 lease
Section 11 (2)(a) Rent Review of the Commercial Tenancy (Retail Shops) Agreements act 1985 states the following definition for Market Rent
The market rent shall for that purposes be taken to be the rent obtainable at the time ofthat review in a free and open market as if all the relevant factors matters or variables used in proper land valuation practice having been taken into account that retail shop were vacant and to let on similar terms as are contained in the current retail shop lease
First halfof review clause
bull In determining the market Rent the Valuer must act as an expert and not as an arbitrator and his determination shall be final and binding on the parties (except for manifest error) The assessment must be made on a GST-exclusive basis
bull The annual market rent of the Premises as at the subject review date must be determined on the basis of the following
bull Rents as at the review date ofany comparable premises
bull The Permitted use
bull The period of time until the next Review Date
The Valuer must disregard as evidence for determining the market rent of the Premises Jeases of comparable premises of less than a whole floor
bull The length of the Term
That any deleterious condition of the Premises is deemed not to have occurred if it has been caused by the Tenant or the Tenants predecessors
bull That if the Premises or any other part of the Building have been destroyed damaged rendered inaccassible or are being refurbished they are deemed to have been fully repaired and restored
Second half of review clause
-That no account must be taken of
-The value of any goodwill attached to the Premises due to the Tenants business
-The value of the Tenants Property
-Rents in respect of any sub-letting or licensing of the Premises or any comparable premises
-That the Valuer should disregard any reduction in the Rent ofany comparable premises or in the annual market rent of the Premises to take account of any abatement concession inducement or reduction paid payable granted or allowed to anew tenant or any other person or to retain apotentially outgoing tenant in respect of the Premises or this lease or any comparable premises or any lease of any comparable premises that this lease is between a willing but not anxious Landlord and awilling but not anxious Tenant and the Premises are ready for immediate use and occupation
-Any other criteria that may in the opinion of the person making the determination be relevant to his determination of the annual market rent of the Premises as at the subject review date (except for criteria that are not consistent with the criteria listed in DaraaraDhs ftl to (9)
11amp) JONES LANG YJ) lASAI1E
Lease terms-basis of review bull Example 2 (Cap and Collar)
bull On the commencement of Year 4of the Lease the face rent (disregarding any incentives) will be reviewed to the then open market and can be reduced up to amaximum of 10 or increased up to amaximum of 10 of the previous years Annual Rent
- Example 3 (Effective)
- The Valuer will be required to determine the effective market rental value of the Premises being the rental that has not been inflated or distorted by the provision ofany leasing incentive to the Tenant
Example 4 (Selective options)
bull The rent review clause provides for the reviewed rental to be the higher of
bull 1 CPI increase
bull 2 25 of sub-lease rents
bull 3 Fair Market Rental
Market review criteria Avoiding traps
bull Adherence to lease terms-basis of review
bull Assumption and disregards
bull Avoid ambiguity and contradictions
bull Seek valuation input for interpretation
bull Dont constrain the valuer
bull Preclude 2nd incentive in review process
Unusual Premises
bull Hotels restaurants caryards airports schools hospitals sporting facilities cinemas amp quarries
bull Different rental basis
bull Rental assessment is difficult
bull Preferable to have an agreed basis of review
bull Disclosure of information
(11 JONES LANG WI) LASALLpound 10
Summary
bull Market review clauses have become more difficult and often require legal guidance
bull Owners and tenants are far more informed
bull Common commercial review clause not possible
bull More industry collaboration required
bull Preferable to have an agreed basis of review for special properties
bull Market review criteria often restrictive on valuer J
11
JONES LANG((0)) LASALLE
Disclaimer TIlisdocument is confideotlal t0the recipient of he documeAt No reference 10 he document or any part Ihereof may be published stated or circulated in any communication with third parties without prior written approval from Jones Lang laSalle TIlis document has been produced solely as ageneral guide and does not constitute advice WhHstlhe document has been prepared in good failh and willi due care no representation is made for Ihe accuracy of Ihe whole or any part of Ihe document Jones Lang laSalle accepts no liability for damages suffered by any party resulting from thQir use of his document
JONES LANG( LASA1LE p g e 19
[MARKET RENT REVIEW CRITERIAAVOIDING TRAPS
The market rent review criteria is that drawn from the lease
Quite simply the valuer is required to comply with what the lease dictates to be done We
saw a few examples earlier where the valuer was directed to consider or disregard certain
matters in the determination process There are countless examples of such matters Clarity
in such examples is highly desirable although Im sure that the difficulty associated with the
construction of rent review clauses is not lost on the legal profession
The review criteria is often referred to as assumptions and disregards Such directions
can be in direct conflict with normal industry convention and for this reason there is a
compelling case to simplify the wording for the benefit of clarity
It becomes frustrating when there is ambiguity or perceived contradictions
It can be extremely beneficial to seek real estate input as to interpretations of potential
clauses and to simplify the content and procedure I dont think there is enough of this
connectivity
The concept of determining rent based on certain criteria is to assess the relevant rent for the
subject premises as at a date is considered objective The objectivity will therefore depend
on what can and what cannot be taken into account Dont overly constrain the valuer
Ive said earlier that an incentive generally is agreed between landlord and tenant on the
basis of a discount of a certain amount for taking a long term lease It is more often than not
an initial rent free with subsequent reviews to pre agreed amounts I have seen leases where
the subsequent reviews permit having regard for incentives hence subsequent incentives
have occurred Clearly this is trap for double dipping on incentives
Note silence on incentives does not preclude them being considered in a rent review
JONES LANG((C LASALLE P g e 110
~NUSUAL_P_R_EM_I_S_E_S___________
There are a number of industry sectors that have a need for specialised buildings or
operations a sample of which is listed hereunder
bull hotels
bull restaurants
caryardsbull bull airports
bull schools J bull hospitals
bull sporting facilities and
bull cinemas
bull quarries
The general industry rentals for these buildings vary and include basic rates per square
metre percentages of turnover or net profit percentage of trading volumes or throughput
dollars per head and rentals per seat per week Understandably there tends to be specialist
operators or groups unique to those related industries that tenant these properties
As a consequence the valuer would need considerable information from these industry
sectors to assess an appropriate market based rental Scarcity of data only heightens the
difficulty of his task J It would be preferable to have an agreed basis of review for these sectors based on
~ agreement between operator (tenant) and landlord Equally the availability of related
( information to be provided by the operator would be of assistance
~tr$ ~r
~ ~ V9v~ frr ~~1
~ iUJ~ v ~ iv ampts(~9lt ~~~~
JONES LANG LASALLE
age 111
Market rent review clauses within lease documents have become more detailed over recent
years as both landlord and tenant and their lawyers strive to optimise their positions as at
rent review date The extent of review criteria can run for pages and deal with numerous
issues Equally the performance of commercial property for the institutional funds is
monitored very closely and this includes a strong focus on income and growth
The review mechanism can be pivotal to this performance
I have had the need on several occasions to seek legal advice on clause definition
Awareness of prevailing market conditions by tenants has grown considerably in the past few
decades particularly with in house expertise or tenant advocate input This enables them to
be savvy to circumstances revolving around rent review criteria when negotiating lease terms
Given the above comments and concerted input from both landlord and tenant from opposing
viewpoints it is highly unlikely that we will ever have a generic rent review clause for
commercial office space Equally the commercial acumen of informed tenants would
probably preclude any industry reform akin to what has happened to the retail sector since
the mid 1980s
I still believe that lawyers and leasingvaluation operatives can work more closely for their
mutual clientele There is a need for owners to secure a positive commercial and valuation
flavour from a lease document but equally the legal structure of the lease should work in the
commercial world
Unusual properties can provide some difficulty in relation to basis of rental structure and
indeed review of rent The divergence of revenue structures and unique operational
peculiarities from hotels through to hospitals and airports creates a challenge for the
commercial drafting of leases and review mechanisms Ideally an agreement between
landlord and tenant up front would alleviate much of this difficulty and the provision of
relevant information on operational aspects would be of assistance
On a closing note I would say market rent review criteria with so many dos and donts
generally is a touch restrictive on the valuation profession The courts have repeatedly said
JONES LANG(((1 LASALLE Page 112
they do not want to trespass on the valuers territory so the direction we are given to
undertake our brief is critical
Copyright copy These materials are subject to copyright which is retained by the author No part may be reproduced adapted or communicated without consent except as permitted under applicable copyright law
Disclaimer This seminar paper is intended only to provide a summary of the subject matter covered It does not purport to be comprehensive or to render legal advice Readers should not act on the basis of any matter contained in this seminar paper without first obtaining their own professional advice
(f JONES LANGWJJ LASALLE
A Valuation Perspective on Market Rent Review clauses
Graham director
Valuations and Consulting September 2011
Contents
bull What does rent mean
bull What valuation principles apply
bull Market rent review criteria
bull Avoiding traps in market rent review
bull Unusual premises
bull Summary
What does rent mean
bull Rent
bull Gross rent
bull Semi-gross rent
bull Net rent
bull Face rent
bull Effective rent
bull Base rent plus increases in outgoings
bull Reasonable rent
bull Best rent
bull Open market rental vOpen market rental value
~ JONES 1ANGWJ LASALLE
Valuation Principles 2 A licensed valuer shall notshy26 adopt the role of advocate in a matter whereshybull Adherence to lease terms-basis of review (a) their duty is to exercise independence and impartiality~bull What basis of rent is apDIicttbre
bull Impartiality
bull Comparability of premises
bull Spencer concep~
bull Analysis of rental evidence
Mar1ltet rent is the estimated amount for which a property or space within a property should lease on the date of valuation between awilling lessor and awilling lessee on appropriate terms in an arms length transaction after proper mar1lteling wherein the parties had each acted knowledgeably prudently and without compulsion
laquo0)) JONES LANe LASAIU 4
Retai 1 lease
Section 11 (2)(a) Rent Review of the Commercial Tenancy (Retail Shops) Agreements act 1985 states the following definition for Market Rent
The market rent shall for that purposes be taken to be the rent obtainable at the time ofthat review in a free and open market as if all the relevant factors matters or variables used in proper land valuation practice having been taken into account that retail shop were vacant and to let on similar terms as are contained in the current retail shop lease
First halfof review clause
bull In determining the market Rent the Valuer must act as an expert and not as an arbitrator and his determination shall be final and binding on the parties (except for manifest error) The assessment must be made on a GST-exclusive basis
bull The annual market rent of the Premises as at the subject review date must be determined on the basis of the following
bull Rents as at the review date ofany comparable premises
bull The Permitted use
bull The period of time until the next Review Date
The Valuer must disregard as evidence for determining the market rent of the Premises Jeases of comparable premises of less than a whole floor
bull The length of the Term
That any deleterious condition of the Premises is deemed not to have occurred if it has been caused by the Tenant or the Tenants predecessors
bull That if the Premises or any other part of the Building have been destroyed damaged rendered inaccassible or are being refurbished they are deemed to have been fully repaired and restored
Second half of review clause
-That no account must be taken of
-The value of any goodwill attached to the Premises due to the Tenants business
-The value of the Tenants Property
-Rents in respect of any sub-letting or licensing of the Premises or any comparable premises
-That the Valuer should disregard any reduction in the Rent ofany comparable premises or in the annual market rent of the Premises to take account of any abatement concession inducement or reduction paid payable granted or allowed to anew tenant or any other person or to retain apotentially outgoing tenant in respect of the Premises or this lease or any comparable premises or any lease of any comparable premises that this lease is between a willing but not anxious Landlord and awilling but not anxious Tenant and the Premises are ready for immediate use and occupation
-Any other criteria that may in the opinion of the person making the determination be relevant to his determination of the annual market rent of the Premises as at the subject review date (except for criteria that are not consistent with the criteria listed in DaraaraDhs ftl to (9)
11amp) JONES LANG YJ) lASAI1E
Lease terms-basis of review bull Example 2 (Cap and Collar)
bull On the commencement of Year 4of the Lease the face rent (disregarding any incentives) will be reviewed to the then open market and can be reduced up to amaximum of 10 or increased up to amaximum of 10 of the previous years Annual Rent
- Example 3 (Effective)
- The Valuer will be required to determine the effective market rental value of the Premises being the rental that has not been inflated or distorted by the provision ofany leasing incentive to the Tenant
Example 4 (Selective options)
bull The rent review clause provides for the reviewed rental to be the higher of
bull 1 CPI increase
bull 2 25 of sub-lease rents
bull 3 Fair Market Rental
Market review criteria Avoiding traps
bull Adherence to lease terms-basis of review
bull Assumption and disregards
bull Avoid ambiguity and contradictions
bull Seek valuation input for interpretation
bull Dont constrain the valuer
bull Preclude 2nd incentive in review process
Unusual Premises
bull Hotels restaurants caryards airports schools hospitals sporting facilities cinemas amp quarries
bull Different rental basis
bull Rental assessment is difficult
bull Preferable to have an agreed basis of review
bull Disclosure of information
(11 JONES LANG WI) LASALLpound 10
Summary
bull Market review clauses have become more difficult and often require legal guidance
bull Owners and tenants are far more informed
bull Common commercial review clause not possible
bull More industry collaboration required
bull Preferable to have an agreed basis of review for special properties
bull Market review criteria often restrictive on valuer J
11
JONES LANG((0)) LASALLE
Disclaimer TIlisdocument is confideotlal t0the recipient of he documeAt No reference 10 he document or any part Ihereof may be published stated or circulated in any communication with third parties without prior written approval from Jones Lang laSalle TIlis document has been produced solely as ageneral guide and does not constitute advice WhHstlhe document has been prepared in good failh and willi due care no representation is made for Ihe accuracy of Ihe whole or any part of Ihe document Jones Lang laSalle accepts no liability for damages suffered by any party resulting from thQir use of his document
JONES LANG((C LASALLE P g e 110
~NUSUAL_P_R_EM_I_S_E_S___________
There are a number of industry sectors that have a need for specialised buildings or
operations a sample of which is listed hereunder
bull hotels
bull restaurants
caryardsbull bull airports
bull schools J bull hospitals
bull sporting facilities and
bull cinemas
bull quarries
The general industry rentals for these buildings vary and include basic rates per square
metre percentages of turnover or net profit percentage of trading volumes or throughput
dollars per head and rentals per seat per week Understandably there tends to be specialist
operators or groups unique to those related industries that tenant these properties
As a consequence the valuer would need considerable information from these industry
sectors to assess an appropriate market based rental Scarcity of data only heightens the
difficulty of his task J It would be preferable to have an agreed basis of review for these sectors based on
~ agreement between operator (tenant) and landlord Equally the availability of related
( information to be provided by the operator would be of assistance
~tr$ ~r
~ ~ V9v~ frr ~~1
~ iUJ~ v ~ iv ampts(~9lt ~~~~
JONES LANG LASALLE
age 111
Market rent review clauses within lease documents have become more detailed over recent
years as both landlord and tenant and their lawyers strive to optimise their positions as at
rent review date The extent of review criteria can run for pages and deal with numerous
issues Equally the performance of commercial property for the institutional funds is
monitored very closely and this includes a strong focus on income and growth
The review mechanism can be pivotal to this performance
I have had the need on several occasions to seek legal advice on clause definition
Awareness of prevailing market conditions by tenants has grown considerably in the past few
decades particularly with in house expertise or tenant advocate input This enables them to
be savvy to circumstances revolving around rent review criteria when negotiating lease terms
Given the above comments and concerted input from both landlord and tenant from opposing
viewpoints it is highly unlikely that we will ever have a generic rent review clause for
commercial office space Equally the commercial acumen of informed tenants would
probably preclude any industry reform akin to what has happened to the retail sector since
the mid 1980s
I still believe that lawyers and leasingvaluation operatives can work more closely for their
mutual clientele There is a need for owners to secure a positive commercial and valuation
flavour from a lease document but equally the legal structure of the lease should work in the
commercial world
Unusual properties can provide some difficulty in relation to basis of rental structure and
indeed review of rent The divergence of revenue structures and unique operational
peculiarities from hotels through to hospitals and airports creates a challenge for the
commercial drafting of leases and review mechanisms Ideally an agreement between
landlord and tenant up front would alleviate much of this difficulty and the provision of
relevant information on operational aspects would be of assistance
On a closing note I would say market rent review criteria with so many dos and donts
generally is a touch restrictive on the valuation profession The courts have repeatedly said
JONES LANG(((1 LASALLE Page 112
they do not want to trespass on the valuers territory so the direction we are given to
undertake our brief is critical
Copyright copy These materials are subject to copyright which is retained by the author No part may be reproduced adapted or communicated without consent except as permitted under applicable copyright law
Disclaimer This seminar paper is intended only to provide a summary of the subject matter covered It does not purport to be comprehensive or to render legal advice Readers should not act on the basis of any matter contained in this seminar paper without first obtaining their own professional advice
(f JONES LANGWJJ LASALLE
A Valuation Perspective on Market Rent Review clauses
Graham director
Valuations and Consulting September 2011
Contents
bull What does rent mean
bull What valuation principles apply
bull Market rent review criteria
bull Avoiding traps in market rent review
bull Unusual premises
bull Summary
What does rent mean
bull Rent
bull Gross rent
bull Semi-gross rent
bull Net rent
bull Face rent
bull Effective rent
bull Base rent plus increases in outgoings
bull Reasonable rent
bull Best rent
bull Open market rental vOpen market rental value
~ JONES 1ANGWJ LASALLE
Valuation Principles 2 A licensed valuer shall notshy26 adopt the role of advocate in a matter whereshybull Adherence to lease terms-basis of review (a) their duty is to exercise independence and impartiality~bull What basis of rent is apDIicttbre
bull Impartiality
bull Comparability of premises
bull Spencer concep~
bull Analysis of rental evidence
Mar1ltet rent is the estimated amount for which a property or space within a property should lease on the date of valuation between awilling lessor and awilling lessee on appropriate terms in an arms length transaction after proper mar1lteling wherein the parties had each acted knowledgeably prudently and without compulsion
laquo0)) JONES LANe LASAIU 4
Retai 1 lease
Section 11 (2)(a) Rent Review of the Commercial Tenancy (Retail Shops) Agreements act 1985 states the following definition for Market Rent
The market rent shall for that purposes be taken to be the rent obtainable at the time ofthat review in a free and open market as if all the relevant factors matters or variables used in proper land valuation practice having been taken into account that retail shop were vacant and to let on similar terms as are contained in the current retail shop lease
First halfof review clause
bull In determining the market Rent the Valuer must act as an expert and not as an arbitrator and his determination shall be final and binding on the parties (except for manifest error) The assessment must be made on a GST-exclusive basis
bull The annual market rent of the Premises as at the subject review date must be determined on the basis of the following
bull Rents as at the review date ofany comparable premises
bull The Permitted use
bull The period of time until the next Review Date
The Valuer must disregard as evidence for determining the market rent of the Premises Jeases of comparable premises of less than a whole floor
bull The length of the Term
That any deleterious condition of the Premises is deemed not to have occurred if it has been caused by the Tenant or the Tenants predecessors
bull That if the Premises or any other part of the Building have been destroyed damaged rendered inaccassible or are being refurbished they are deemed to have been fully repaired and restored
Second half of review clause
-That no account must be taken of
-The value of any goodwill attached to the Premises due to the Tenants business
-The value of the Tenants Property
-Rents in respect of any sub-letting or licensing of the Premises or any comparable premises
-That the Valuer should disregard any reduction in the Rent ofany comparable premises or in the annual market rent of the Premises to take account of any abatement concession inducement or reduction paid payable granted or allowed to anew tenant or any other person or to retain apotentially outgoing tenant in respect of the Premises or this lease or any comparable premises or any lease of any comparable premises that this lease is between a willing but not anxious Landlord and awilling but not anxious Tenant and the Premises are ready for immediate use and occupation
-Any other criteria that may in the opinion of the person making the determination be relevant to his determination of the annual market rent of the Premises as at the subject review date (except for criteria that are not consistent with the criteria listed in DaraaraDhs ftl to (9)
11amp) JONES LANG YJ) lASAI1E
Lease terms-basis of review bull Example 2 (Cap and Collar)
bull On the commencement of Year 4of the Lease the face rent (disregarding any incentives) will be reviewed to the then open market and can be reduced up to amaximum of 10 or increased up to amaximum of 10 of the previous years Annual Rent
- Example 3 (Effective)
- The Valuer will be required to determine the effective market rental value of the Premises being the rental that has not been inflated or distorted by the provision ofany leasing incentive to the Tenant
Example 4 (Selective options)
bull The rent review clause provides for the reviewed rental to be the higher of
bull 1 CPI increase
bull 2 25 of sub-lease rents
bull 3 Fair Market Rental
Market review criteria Avoiding traps
bull Adherence to lease terms-basis of review
bull Assumption and disregards
bull Avoid ambiguity and contradictions
bull Seek valuation input for interpretation
bull Dont constrain the valuer
bull Preclude 2nd incentive in review process
Unusual Premises
bull Hotels restaurants caryards airports schools hospitals sporting facilities cinemas amp quarries
bull Different rental basis
bull Rental assessment is difficult
bull Preferable to have an agreed basis of review
bull Disclosure of information
(11 JONES LANG WI) LASALLpound 10
Summary
bull Market review clauses have become more difficult and often require legal guidance
bull Owners and tenants are far more informed
bull Common commercial review clause not possible
bull More industry collaboration required
bull Preferable to have an agreed basis of review for special properties
bull Market review criteria often restrictive on valuer J
11
JONES LANG((0)) LASALLE
Disclaimer TIlisdocument is confideotlal t0the recipient of he documeAt No reference 10 he document or any part Ihereof may be published stated or circulated in any communication with third parties without prior written approval from Jones Lang laSalle TIlis document has been produced solely as ageneral guide and does not constitute advice WhHstlhe document has been prepared in good failh and willi due care no representation is made for Ihe accuracy of Ihe whole or any part of Ihe document Jones Lang laSalle accepts no liability for damages suffered by any party resulting from thQir use of his document
JONES LANG LASALLE
age 111
Market rent review clauses within lease documents have become more detailed over recent
years as both landlord and tenant and their lawyers strive to optimise their positions as at
rent review date The extent of review criteria can run for pages and deal with numerous
issues Equally the performance of commercial property for the institutional funds is
monitored very closely and this includes a strong focus on income and growth
The review mechanism can be pivotal to this performance
I have had the need on several occasions to seek legal advice on clause definition
Awareness of prevailing market conditions by tenants has grown considerably in the past few
decades particularly with in house expertise or tenant advocate input This enables them to
be savvy to circumstances revolving around rent review criteria when negotiating lease terms
Given the above comments and concerted input from both landlord and tenant from opposing
viewpoints it is highly unlikely that we will ever have a generic rent review clause for
commercial office space Equally the commercial acumen of informed tenants would
probably preclude any industry reform akin to what has happened to the retail sector since
the mid 1980s
I still believe that lawyers and leasingvaluation operatives can work more closely for their
mutual clientele There is a need for owners to secure a positive commercial and valuation
flavour from a lease document but equally the legal structure of the lease should work in the
commercial world
Unusual properties can provide some difficulty in relation to basis of rental structure and
indeed review of rent The divergence of revenue structures and unique operational
peculiarities from hotels through to hospitals and airports creates a challenge for the
commercial drafting of leases and review mechanisms Ideally an agreement between
landlord and tenant up front would alleviate much of this difficulty and the provision of
relevant information on operational aspects would be of assistance
On a closing note I would say market rent review criteria with so many dos and donts
generally is a touch restrictive on the valuation profession The courts have repeatedly said
JONES LANG(((1 LASALLE Page 112
they do not want to trespass on the valuers territory so the direction we are given to
undertake our brief is critical
Copyright copy These materials are subject to copyright which is retained by the author No part may be reproduced adapted or communicated without consent except as permitted under applicable copyright law
Disclaimer This seminar paper is intended only to provide a summary of the subject matter covered It does not purport to be comprehensive or to render legal advice Readers should not act on the basis of any matter contained in this seminar paper without first obtaining their own professional advice
(f JONES LANGWJJ LASALLE
A Valuation Perspective on Market Rent Review clauses
Graham director
Valuations and Consulting September 2011
Contents
bull What does rent mean
bull What valuation principles apply
bull Market rent review criteria
bull Avoiding traps in market rent review
bull Unusual premises
bull Summary
What does rent mean
bull Rent
bull Gross rent
bull Semi-gross rent
bull Net rent
bull Face rent
bull Effective rent
bull Base rent plus increases in outgoings
bull Reasonable rent
bull Best rent
bull Open market rental vOpen market rental value
~ JONES 1ANGWJ LASALLE
Valuation Principles 2 A licensed valuer shall notshy26 adopt the role of advocate in a matter whereshybull Adherence to lease terms-basis of review (a) their duty is to exercise independence and impartiality~bull What basis of rent is apDIicttbre
bull Impartiality
bull Comparability of premises
bull Spencer concep~
bull Analysis of rental evidence
Mar1ltet rent is the estimated amount for which a property or space within a property should lease on the date of valuation between awilling lessor and awilling lessee on appropriate terms in an arms length transaction after proper mar1lteling wherein the parties had each acted knowledgeably prudently and without compulsion
laquo0)) JONES LANe LASAIU 4
Retai 1 lease
Section 11 (2)(a) Rent Review of the Commercial Tenancy (Retail Shops) Agreements act 1985 states the following definition for Market Rent
The market rent shall for that purposes be taken to be the rent obtainable at the time ofthat review in a free and open market as if all the relevant factors matters or variables used in proper land valuation practice having been taken into account that retail shop were vacant and to let on similar terms as are contained in the current retail shop lease
First halfof review clause
bull In determining the market Rent the Valuer must act as an expert and not as an arbitrator and his determination shall be final and binding on the parties (except for manifest error) The assessment must be made on a GST-exclusive basis
bull The annual market rent of the Premises as at the subject review date must be determined on the basis of the following
bull Rents as at the review date ofany comparable premises
bull The Permitted use
bull The period of time until the next Review Date
The Valuer must disregard as evidence for determining the market rent of the Premises Jeases of comparable premises of less than a whole floor
bull The length of the Term
That any deleterious condition of the Premises is deemed not to have occurred if it has been caused by the Tenant or the Tenants predecessors
bull That if the Premises or any other part of the Building have been destroyed damaged rendered inaccassible or are being refurbished they are deemed to have been fully repaired and restored
Second half of review clause
-That no account must be taken of
-The value of any goodwill attached to the Premises due to the Tenants business
-The value of the Tenants Property
-Rents in respect of any sub-letting or licensing of the Premises or any comparable premises
-That the Valuer should disregard any reduction in the Rent ofany comparable premises or in the annual market rent of the Premises to take account of any abatement concession inducement or reduction paid payable granted or allowed to anew tenant or any other person or to retain apotentially outgoing tenant in respect of the Premises or this lease or any comparable premises or any lease of any comparable premises that this lease is between a willing but not anxious Landlord and awilling but not anxious Tenant and the Premises are ready for immediate use and occupation
-Any other criteria that may in the opinion of the person making the determination be relevant to his determination of the annual market rent of the Premises as at the subject review date (except for criteria that are not consistent with the criteria listed in DaraaraDhs ftl to (9)
11amp) JONES LANG YJ) lASAI1E
Lease terms-basis of review bull Example 2 (Cap and Collar)
bull On the commencement of Year 4of the Lease the face rent (disregarding any incentives) will be reviewed to the then open market and can be reduced up to amaximum of 10 or increased up to amaximum of 10 of the previous years Annual Rent
- Example 3 (Effective)
- The Valuer will be required to determine the effective market rental value of the Premises being the rental that has not been inflated or distorted by the provision ofany leasing incentive to the Tenant
Example 4 (Selective options)
bull The rent review clause provides for the reviewed rental to be the higher of
bull 1 CPI increase
bull 2 25 of sub-lease rents
bull 3 Fair Market Rental
Market review criteria Avoiding traps
bull Adherence to lease terms-basis of review
bull Assumption and disregards
bull Avoid ambiguity and contradictions
bull Seek valuation input for interpretation
bull Dont constrain the valuer
bull Preclude 2nd incentive in review process
Unusual Premises
bull Hotels restaurants caryards airports schools hospitals sporting facilities cinemas amp quarries
bull Different rental basis
bull Rental assessment is difficult
bull Preferable to have an agreed basis of review
bull Disclosure of information
(11 JONES LANG WI) LASALLpound 10
Summary
bull Market review clauses have become more difficult and often require legal guidance
bull Owners and tenants are far more informed
bull Common commercial review clause not possible
bull More industry collaboration required
bull Preferable to have an agreed basis of review for special properties
bull Market review criteria often restrictive on valuer J
11
JONES LANG((0)) LASALLE
Disclaimer TIlisdocument is confideotlal t0the recipient of he documeAt No reference 10 he document or any part Ihereof may be published stated or circulated in any communication with third parties without prior written approval from Jones Lang laSalle TIlis document has been produced solely as ageneral guide and does not constitute advice WhHstlhe document has been prepared in good failh and willi due care no representation is made for Ihe accuracy of Ihe whole or any part of Ihe document Jones Lang laSalle accepts no liability for damages suffered by any party resulting from thQir use of his document
JONES LANG(((1 LASALLE Page 112
they do not want to trespass on the valuers territory so the direction we are given to
undertake our brief is critical
Copyright copy These materials are subject to copyright which is retained by the author No part may be reproduced adapted or communicated without consent except as permitted under applicable copyright law
Disclaimer This seminar paper is intended only to provide a summary of the subject matter covered It does not purport to be comprehensive or to render legal advice Readers should not act on the basis of any matter contained in this seminar paper without first obtaining their own professional advice
(f JONES LANGWJJ LASALLE
A Valuation Perspective on Market Rent Review clauses
Graham director
Valuations and Consulting September 2011
Contents
bull What does rent mean
bull What valuation principles apply
bull Market rent review criteria
bull Avoiding traps in market rent review
bull Unusual premises
bull Summary
What does rent mean
bull Rent
bull Gross rent
bull Semi-gross rent
bull Net rent
bull Face rent
bull Effective rent
bull Base rent plus increases in outgoings
bull Reasonable rent
bull Best rent
bull Open market rental vOpen market rental value
~ JONES 1ANGWJ LASALLE
Valuation Principles 2 A licensed valuer shall notshy26 adopt the role of advocate in a matter whereshybull Adherence to lease terms-basis of review (a) their duty is to exercise independence and impartiality~bull What basis of rent is apDIicttbre
bull Impartiality
bull Comparability of premises
bull Spencer concep~
bull Analysis of rental evidence
Mar1ltet rent is the estimated amount for which a property or space within a property should lease on the date of valuation between awilling lessor and awilling lessee on appropriate terms in an arms length transaction after proper mar1lteling wherein the parties had each acted knowledgeably prudently and without compulsion
laquo0)) JONES LANe LASAIU 4
Retai 1 lease
Section 11 (2)(a) Rent Review of the Commercial Tenancy (Retail Shops) Agreements act 1985 states the following definition for Market Rent
The market rent shall for that purposes be taken to be the rent obtainable at the time ofthat review in a free and open market as if all the relevant factors matters or variables used in proper land valuation practice having been taken into account that retail shop were vacant and to let on similar terms as are contained in the current retail shop lease
First halfof review clause
bull In determining the market Rent the Valuer must act as an expert and not as an arbitrator and his determination shall be final and binding on the parties (except for manifest error) The assessment must be made on a GST-exclusive basis
bull The annual market rent of the Premises as at the subject review date must be determined on the basis of the following
bull Rents as at the review date ofany comparable premises
bull The Permitted use
bull The period of time until the next Review Date
The Valuer must disregard as evidence for determining the market rent of the Premises Jeases of comparable premises of less than a whole floor
bull The length of the Term
That any deleterious condition of the Premises is deemed not to have occurred if it has been caused by the Tenant or the Tenants predecessors
bull That if the Premises or any other part of the Building have been destroyed damaged rendered inaccassible or are being refurbished they are deemed to have been fully repaired and restored
Second half of review clause
-That no account must be taken of
-The value of any goodwill attached to the Premises due to the Tenants business
-The value of the Tenants Property
-Rents in respect of any sub-letting or licensing of the Premises or any comparable premises
-That the Valuer should disregard any reduction in the Rent ofany comparable premises or in the annual market rent of the Premises to take account of any abatement concession inducement or reduction paid payable granted or allowed to anew tenant or any other person or to retain apotentially outgoing tenant in respect of the Premises or this lease or any comparable premises or any lease of any comparable premises that this lease is between a willing but not anxious Landlord and awilling but not anxious Tenant and the Premises are ready for immediate use and occupation
-Any other criteria that may in the opinion of the person making the determination be relevant to his determination of the annual market rent of the Premises as at the subject review date (except for criteria that are not consistent with the criteria listed in DaraaraDhs ftl to (9)
11amp) JONES LANG YJ) lASAI1E
Lease terms-basis of review bull Example 2 (Cap and Collar)
bull On the commencement of Year 4of the Lease the face rent (disregarding any incentives) will be reviewed to the then open market and can be reduced up to amaximum of 10 or increased up to amaximum of 10 of the previous years Annual Rent
- Example 3 (Effective)
- The Valuer will be required to determine the effective market rental value of the Premises being the rental that has not been inflated or distorted by the provision ofany leasing incentive to the Tenant
Example 4 (Selective options)
bull The rent review clause provides for the reviewed rental to be the higher of
bull 1 CPI increase
bull 2 25 of sub-lease rents
bull 3 Fair Market Rental
Market review criteria Avoiding traps
bull Adherence to lease terms-basis of review
bull Assumption and disregards
bull Avoid ambiguity and contradictions
bull Seek valuation input for interpretation
bull Dont constrain the valuer
bull Preclude 2nd incentive in review process
Unusual Premises
bull Hotels restaurants caryards airports schools hospitals sporting facilities cinemas amp quarries
bull Different rental basis
bull Rental assessment is difficult
bull Preferable to have an agreed basis of review
bull Disclosure of information
(11 JONES LANG WI) LASALLpound 10
Summary
bull Market review clauses have become more difficult and often require legal guidance
bull Owners and tenants are far more informed
bull Common commercial review clause not possible
bull More industry collaboration required
bull Preferable to have an agreed basis of review for special properties
bull Market review criteria often restrictive on valuer J
11
JONES LANG((0)) LASALLE
Disclaimer TIlisdocument is confideotlal t0the recipient of he documeAt No reference 10 he document or any part Ihereof may be published stated or circulated in any communication with third parties without prior written approval from Jones Lang laSalle TIlis document has been produced solely as ageneral guide and does not constitute advice WhHstlhe document has been prepared in good failh and willi due care no representation is made for Ihe accuracy of Ihe whole or any part of Ihe document Jones Lang laSalle accepts no liability for damages suffered by any party resulting from thQir use of his document
(f JONES LANGWJJ LASALLE
A Valuation Perspective on Market Rent Review clauses
Graham director
Valuations and Consulting September 2011
Contents
bull What does rent mean
bull What valuation principles apply
bull Market rent review criteria
bull Avoiding traps in market rent review
bull Unusual premises
bull Summary
What does rent mean
bull Rent
bull Gross rent
bull Semi-gross rent
bull Net rent
bull Face rent
bull Effective rent
bull Base rent plus increases in outgoings
bull Reasonable rent
bull Best rent
bull Open market rental vOpen market rental value
~ JONES 1ANGWJ LASALLE
Valuation Principles 2 A licensed valuer shall notshy26 adopt the role of advocate in a matter whereshybull Adherence to lease terms-basis of review (a) their duty is to exercise independence and impartiality~bull What basis of rent is apDIicttbre
bull Impartiality
bull Comparability of premises
bull Spencer concep~
bull Analysis of rental evidence
Mar1ltet rent is the estimated amount for which a property or space within a property should lease on the date of valuation between awilling lessor and awilling lessee on appropriate terms in an arms length transaction after proper mar1lteling wherein the parties had each acted knowledgeably prudently and without compulsion
laquo0)) JONES LANe LASAIU 4
Retai 1 lease
Section 11 (2)(a) Rent Review of the Commercial Tenancy (Retail Shops) Agreements act 1985 states the following definition for Market Rent
The market rent shall for that purposes be taken to be the rent obtainable at the time ofthat review in a free and open market as if all the relevant factors matters or variables used in proper land valuation practice having been taken into account that retail shop were vacant and to let on similar terms as are contained in the current retail shop lease
First halfof review clause
bull In determining the market Rent the Valuer must act as an expert and not as an arbitrator and his determination shall be final and binding on the parties (except for manifest error) The assessment must be made on a GST-exclusive basis
bull The annual market rent of the Premises as at the subject review date must be determined on the basis of the following
bull Rents as at the review date ofany comparable premises
bull The Permitted use
bull The period of time until the next Review Date
The Valuer must disregard as evidence for determining the market rent of the Premises Jeases of comparable premises of less than a whole floor
bull The length of the Term
That any deleterious condition of the Premises is deemed not to have occurred if it has been caused by the Tenant or the Tenants predecessors
bull That if the Premises or any other part of the Building have been destroyed damaged rendered inaccassible or are being refurbished they are deemed to have been fully repaired and restored
Second half of review clause
-That no account must be taken of
-The value of any goodwill attached to the Premises due to the Tenants business
-The value of the Tenants Property
-Rents in respect of any sub-letting or licensing of the Premises or any comparable premises
-That the Valuer should disregard any reduction in the Rent ofany comparable premises or in the annual market rent of the Premises to take account of any abatement concession inducement or reduction paid payable granted or allowed to anew tenant or any other person or to retain apotentially outgoing tenant in respect of the Premises or this lease or any comparable premises or any lease of any comparable premises that this lease is between a willing but not anxious Landlord and awilling but not anxious Tenant and the Premises are ready for immediate use and occupation
-Any other criteria that may in the opinion of the person making the determination be relevant to his determination of the annual market rent of the Premises as at the subject review date (except for criteria that are not consistent with the criteria listed in DaraaraDhs ftl to (9)
11amp) JONES LANG YJ) lASAI1E
Lease terms-basis of review bull Example 2 (Cap and Collar)
bull On the commencement of Year 4of the Lease the face rent (disregarding any incentives) will be reviewed to the then open market and can be reduced up to amaximum of 10 or increased up to amaximum of 10 of the previous years Annual Rent
- Example 3 (Effective)
- The Valuer will be required to determine the effective market rental value of the Premises being the rental that has not been inflated or distorted by the provision ofany leasing incentive to the Tenant
Example 4 (Selective options)
bull The rent review clause provides for the reviewed rental to be the higher of
bull 1 CPI increase
bull 2 25 of sub-lease rents
bull 3 Fair Market Rental
Market review criteria Avoiding traps
bull Adherence to lease terms-basis of review
bull Assumption and disregards
bull Avoid ambiguity and contradictions
bull Seek valuation input for interpretation
bull Dont constrain the valuer
bull Preclude 2nd incentive in review process
Unusual Premises
bull Hotels restaurants caryards airports schools hospitals sporting facilities cinemas amp quarries
bull Different rental basis
bull Rental assessment is difficult
bull Preferable to have an agreed basis of review
bull Disclosure of information
(11 JONES LANG WI) LASALLpound 10
Summary
bull Market review clauses have become more difficult and often require legal guidance
bull Owners and tenants are far more informed
bull Common commercial review clause not possible
bull More industry collaboration required
bull Preferable to have an agreed basis of review for special properties
bull Market review criteria often restrictive on valuer J
11
JONES LANG((0)) LASALLE
Disclaimer TIlisdocument is confideotlal t0the recipient of he documeAt No reference 10 he document or any part Ihereof may be published stated or circulated in any communication with third parties without prior written approval from Jones Lang laSalle TIlis document has been produced solely as ageneral guide and does not constitute advice WhHstlhe document has been prepared in good failh and willi due care no representation is made for Ihe accuracy of Ihe whole or any part of Ihe document Jones Lang laSalle accepts no liability for damages suffered by any party resulting from thQir use of his document
What does rent mean
bull Rent
bull Gross rent
bull Semi-gross rent
bull Net rent
bull Face rent
bull Effective rent
bull Base rent plus increases in outgoings
bull Reasonable rent
bull Best rent
bull Open market rental vOpen market rental value
~ JONES 1ANGWJ LASALLE
Valuation Principles 2 A licensed valuer shall notshy26 adopt the role of advocate in a matter whereshybull Adherence to lease terms-basis of review (a) their duty is to exercise independence and impartiality~bull What basis of rent is apDIicttbre
bull Impartiality
bull Comparability of premises
bull Spencer concep~
bull Analysis of rental evidence
Mar1ltet rent is the estimated amount for which a property or space within a property should lease on the date of valuation between awilling lessor and awilling lessee on appropriate terms in an arms length transaction after proper mar1lteling wherein the parties had each acted knowledgeably prudently and without compulsion
laquo0)) JONES LANe LASAIU 4
Retai 1 lease
Section 11 (2)(a) Rent Review of the Commercial Tenancy (Retail Shops) Agreements act 1985 states the following definition for Market Rent
The market rent shall for that purposes be taken to be the rent obtainable at the time ofthat review in a free and open market as if all the relevant factors matters or variables used in proper land valuation practice having been taken into account that retail shop were vacant and to let on similar terms as are contained in the current retail shop lease
First halfof review clause
bull In determining the market Rent the Valuer must act as an expert and not as an arbitrator and his determination shall be final and binding on the parties (except for manifest error) The assessment must be made on a GST-exclusive basis
bull The annual market rent of the Premises as at the subject review date must be determined on the basis of the following
bull Rents as at the review date ofany comparable premises
bull The Permitted use
bull The period of time until the next Review Date
The Valuer must disregard as evidence for determining the market rent of the Premises Jeases of comparable premises of less than a whole floor
bull The length of the Term
That any deleterious condition of the Premises is deemed not to have occurred if it has been caused by the Tenant or the Tenants predecessors
bull That if the Premises or any other part of the Building have been destroyed damaged rendered inaccassible or are being refurbished they are deemed to have been fully repaired and restored
Second half of review clause
-That no account must be taken of
-The value of any goodwill attached to the Premises due to the Tenants business
-The value of the Tenants Property
-Rents in respect of any sub-letting or licensing of the Premises or any comparable premises
-That the Valuer should disregard any reduction in the Rent ofany comparable premises or in the annual market rent of the Premises to take account of any abatement concession inducement or reduction paid payable granted or allowed to anew tenant or any other person or to retain apotentially outgoing tenant in respect of the Premises or this lease or any comparable premises or any lease of any comparable premises that this lease is between a willing but not anxious Landlord and awilling but not anxious Tenant and the Premises are ready for immediate use and occupation
-Any other criteria that may in the opinion of the person making the determination be relevant to his determination of the annual market rent of the Premises as at the subject review date (except for criteria that are not consistent with the criteria listed in DaraaraDhs ftl to (9)
11amp) JONES LANG YJ) lASAI1E
Lease terms-basis of review bull Example 2 (Cap and Collar)
bull On the commencement of Year 4of the Lease the face rent (disregarding any incentives) will be reviewed to the then open market and can be reduced up to amaximum of 10 or increased up to amaximum of 10 of the previous years Annual Rent
- Example 3 (Effective)
- The Valuer will be required to determine the effective market rental value of the Premises being the rental that has not been inflated or distorted by the provision ofany leasing incentive to the Tenant
Example 4 (Selective options)
bull The rent review clause provides for the reviewed rental to be the higher of
bull 1 CPI increase
bull 2 25 of sub-lease rents
bull 3 Fair Market Rental
Market review criteria Avoiding traps
bull Adherence to lease terms-basis of review
bull Assumption and disregards
bull Avoid ambiguity and contradictions
bull Seek valuation input for interpretation
bull Dont constrain the valuer
bull Preclude 2nd incentive in review process
Unusual Premises
bull Hotels restaurants caryards airports schools hospitals sporting facilities cinemas amp quarries
bull Different rental basis
bull Rental assessment is difficult
bull Preferable to have an agreed basis of review
bull Disclosure of information
(11 JONES LANG WI) LASALLpound 10
Summary
bull Market review clauses have become more difficult and often require legal guidance
bull Owners and tenants are far more informed
bull Common commercial review clause not possible
bull More industry collaboration required
bull Preferable to have an agreed basis of review for special properties
bull Market review criteria often restrictive on valuer J
11
JONES LANG((0)) LASALLE
Disclaimer TIlisdocument is confideotlal t0the recipient of he documeAt No reference 10 he document or any part Ihereof may be published stated or circulated in any communication with third parties without prior written approval from Jones Lang laSalle TIlis document has been produced solely as ageneral guide and does not constitute advice WhHstlhe document has been prepared in good failh and willi due care no representation is made for Ihe accuracy of Ihe whole or any part of Ihe document Jones Lang laSalle accepts no liability for damages suffered by any party resulting from thQir use of his document
Retai 1 lease
Section 11 (2)(a) Rent Review of the Commercial Tenancy (Retail Shops) Agreements act 1985 states the following definition for Market Rent
The market rent shall for that purposes be taken to be the rent obtainable at the time ofthat review in a free and open market as if all the relevant factors matters or variables used in proper land valuation practice having been taken into account that retail shop were vacant and to let on similar terms as are contained in the current retail shop lease
First halfof review clause
bull In determining the market Rent the Valuer must act as an expert and not as an arbitrator and his determination shall be final and binding on the parties (except for manifest error) The assessment must be made on a GST-exclusive basis
bull The annual market rent of the Premises as at the subject review date must be determined on the basis of the following
bull Rents as at the review date ofany comparable premises
bull The Permitted use
bull The period of time until the next Review Date
The Valuer must disregard as evidence for determining the market rent of the Premises Jeases of comparable premises of less than a whole floor
bull The length of the Term
That any deleterious condition of the Premises is deemed not to have occurred if it has been caused by the Tenant or the Tenants predecessors
bull That if the Premises or any other part of the Building have been destroyed damaged rendered inaccassible or are being refurbished they are deemed to have been fully repaired and restored
Second half of review clause
-That no account must be taken of
-The value of any goodwill attached to the Premises due to the Tenants business
-The value of the Tenants Property
-Rents in respect of any sub-letting or licensing of the Premises or any comparable premises
-That the Valuer should disregard any reduction in the Rent ofany comparable premises or in the annual market rent of the Premises to take account of any abatement concession inducement or reduction paid payable granted or allowed to anew tenant or any other person or to retain apotentially outgoing tenant in respect of the Premises or this lease or any comparable premises or any lease of any comparable premises that this lease is between a willing but not anxious Landlord and awilling but not anxious Tenant and the Premises are ready for immediate use and occupation
-Any other criteria that may in the opinion of the person making the determination be relevant to his determination of the annual market rent of the Premises as at the subject review date (except for criteria that are not consistent with the criteria listed in DaraaraDhs ftl to (9)
11amp) JONES LANG YJ) lASAI1E
Lease terms-basis of review bull Example 2 (Cap and Collar)
bull On the commencement of Year 4of the Lease the face rent (disregarding any incentives) will be reviewed to the then open market and can be reduced up to amaximum of 10 or increased up to amaximum of 10 of the previous years Annual Rent
- Example 3 (Effective)
- The Valuer will be required to determine the effective market rental value of the Premises being the rental that has not been inflated or distorted by the provision ofany leasing incentive to the Tenant
Example 4 (Selective options)
bull The rent review clause provides for the reviewed rental to be the higher of
bull 1 CPI increase
bull 2 25 of sub-lease rents
bull 3 Fair Market Rental
Market review criteria Avoiding traps
bull Adherence to lease terms-basis of review
bull Assumption and disregards
bull Avoid ambiguity and contradictions
bull Seek valuation input for interpretation
bull Dont constrain the valuer
bull Preclude 2nd incentive in review process
Unusual Premises
bull Hotels restaurants caryards airports schools hospitals sporting facilities cinemas amp quarries
bull Different rental basis
bull Rental assessment is difficult
bull Preferable to have an agreed basis of review
bull Disclosure of information
(11 JONES LANG WI) LASALLpound 10
Summary
bull Market review clauses have become more difficult and often require legal guidance
bull Owners and tenants are far more informed
bull Common commercial review clause not possible
bull More industry collaboration required
bull Preferable to have an agreed basis of review for special properties
bull Market review criteria often restrictive on valuer J
11
JONES LANG((0)) LASALLE
Disclaimer TIlisdocument is confideotlal t0the recipient of he documeAt No reference 10 he document or any part Ihereof may be published stated or circulated in any communication with third parties without prior written approval from Jones Lang laSalle TIlis document has been produced solely as ageneral guide and does not constitute advice WhHstlhe document has been prepared in good failh and willi due care no representation is made for Ihe accuracy of Ihe whole or any part of Ihe document Jones Lang laSalle accepts no liability for damages suffered by any party resulting from thQir use of his document
Second half of review clause
-That no account must be taken of
-The value of any goodwill attached to the Premises due to the Tenants business
-The value of the Tenants Property
-Rents in respect of any sub-letting or licensing of the Premises or any comparable premises
-That the Valuer should disregard any reduction in the Rent ofany comparable premises or in the annual market rent of the Premises to take account of any abatement concession inducement or reduction paid payable granted or allowed to anew tenant or any other person or to retain apotentially outgoing tenant in respect of the Premises or this lease or any comparable premises or any lease of any comparable premises that this lease is between a willing but not anxious Landlord and awilling but not anxious Tenant and the Premises are ready for immediate use and occupation
-Any other criteria that may in the opinion of the person making the determination be relevant to his determination of the annual market rent of the Premises as at the subject review date (except for criteria that are not consistent with the criteria listed in DaraaraDhs ftl to (9)
11amp) JONES LANG YJ) lASAI1E
Lease terms-basis of review bull Example 2 (Cap and Collar)
bull On the commencement of Year 4of the Lease the face rent (disregarding any incentives) will be reviewed to the then open market and can be reduced up to amaximum of 10 or increased up to amaximum of 10 of the previous years Annual Rent
- Example 3 (Effective)
- The Valuer will be required to determine the effective market rental value of the Premises being the rental that has not been inflated or distorted by the provision ofany leasing incentive to the Tenant
Example 4 (Selective options)
bull The rent review clause provides for the reviewed rental to be the higher of
bull 1 CPI increase
bull 2 25 of sub-lease rents
bull 3 Fair Market Rental
Market review criteria Avoiding traps
bull Adherence to lease terms-basis of review
bull Assumption and disregards
bull Avoid ambiguity and contradictions
bull Seek valuation input for interpretation
bull Dont constrain the valuer
bull Preclude 2nd incentive in review process
Unusual Premises
bull Hotels restaurants caryards airports schools hospitals sporting facilities cinemas amp quarries
bull Different rental basis
bull Rental assessment is difficult
bull Preferable to have an agreed basis of review
bull Disclosure of information
(11 JONES LANG WI) LASALLpound 10
Summary
bull Market review clauses have become more difficult and often require legal guidance
bull Owners and tenants are far more informed
bull Common commercial review clause not possible
bull More industry collaboration required
bull Preferable to have an agreed basis of review for special properties
bull Market review criteria often restrictive on valuer J
11
JONES LANG((0)) LASALLE
Disclaimer TIlisdocument is confideotlal t0the recipient of he documeAt No reference 10 he document or any part Ihereof may be published stated or circulated in any communication with third parties without prior written approval from Jones Lang laSalle TIlis document has been produced solely as ageneral guide and does not constitute advice WhHstlhe document has been prepared in good failh and willi due care no representation is made for Ihe accuracy of Ihe whole or any part of Ihe document Jones Lang laSalle accepts no liability for damages suffered by any party resulting from thQir use of his document
Market review criteria Avoiding traps
bull Adherence to lease terms-basis of review
bull Assumption and disregards
bull Avoid ambiguity and contradictions
bull Seek valuation input for interpretation
bull Dont constrain the valuer
bull Preclude 2nd incentive in review process
Unusual Premises
bull Hotels restaurants caryards airports schools hospitals sporting facilities cinemas amp quarries
bull Different rental basis
bull Rental assessment is difficult
bull Preferable to have an agreed basis of review
bull Disclosure of information
(11 JONES LANG WI) LASALLpound 10
Summary
bull Market review clauses have become more difficult and often require legal guidance
bull Owners and tenants are far more informed
bull Common commercial review clause not possible
bull More industry collaboration required
bull Preferable to have an agreed basis of review for special properties
bull Market review criteria often restrictive on valuer J
11
JONES LANG((0)) LASALLE
Disclaimer TIlisdocument is confideotlal t0the recipient of he documeAt No reference 10 he document or any part Ihereof may be published stated or circulated in any communication with third parties without prior written approval from Jones Lang laSalle TIlis document has been produced solely as ageneral guide and does not constitute advice WhHstlhe document has been prepared in good failh and willi due care no representation is made for Ihe accuracy of Ihe whole or any part of Ihe document Jones Lang laSalle accepts no liability for damages suffered by any party resulting from thQir use of his document
Summary
bull Market review clauses have become more difficult and often require legal guidance
bull Owners and tenants are far more informed
bull Common commercial review clause not possible
bull More industry collaboration required
bull Preferable to have an agreed basis of review for special properties
bull Market review criteria often restrictive on valuer J
11
JONES LANG((0)) LASALLE
Disclaimer TIlisdocument is confideotlal t0the recipient of he documeAt No reference 10 he document or any part Ihereof may be published stated or circulated in any communication with third parties without prior written approval from Jones Lang laSalle TIlis document has been produced solely as ageneral guide and does not constitute advice WhHstlhe document has been prepared in good failh and willi due care no representation is made for Ihe accuracy of Ihe whole or any part of Ihe document Jones Lang laSalle accepts no liability for damages suffered by any party resulting from thQir use of his document