Rent is the lifeblood of a commercial lease. For landlords, it preserves the value of the property and ensures a return on investment. For tenants, it is one of the largest ongoing expenses of running a business. How rent is adjusted over time - through rent review clauses - can significantly affect the financial balance of a lease.
Commercial leases in New South Wales are largely governed by contract law. That means the parties are bound by the wording of the lease, subject to general principles of certainty and enforceability. Courts have consistently required rent review mechanisms to be clear and workable. When they are not, disputes arise.
Common Methods of Rent Review
Three approaches dominate commercial leasing:
Fixed increases – Rent increases by a set percentage each year (for example, 3% annually). This offers predictability for both parties.
CPI-linked increases – Rent moves in line with the Australian Bureau of Statistics’ Consumer Price Index. This ties rent to inflation but can be unpredictable in volatile economic conditions.
Market rent reviews – Rent is reassessed to reflect current market conditions, often every three to five years.
Each method has advantages and drawbacks. Fixed increases provide stability. CPI reviews protect landlords against inflation but can rise sharply in high-inflation periods. Market reviews track the true rental value but are the most likely to cause disputes.
Market Rent Reviews in Practice
Market rent reviews require the rent to be reset to what a willing landlord and tenant would agree in an open market transaction. The challenge lies in agreeing what that figure is.
Well-drafted leases usually include a procedure for resolving disagreement, such as appointment of an independent valuer. Without this, the clause risks being unenforceable for uncertainty. In Meehan v Jones (1982) 149 CLR 571, the High Court emphasised that contracts must be sufficiently certain to be binding, a principle applied frequently to rent review provisions.
Disputes often arise around:
Whether incentives (such as rent-free periods) should be considered.
The relevance of comparable properties with different lease terms.
Whether rent can decrease, or whether the lease sets a “ratchet clause” preventing reductions.
Timing and Frequency of Reviews
Commercial leases usually provide for reviews annually (fixed or CPI) and every three to five years for market rent reviews. Courts will not enforce multiple reviews in a single year unless the lease wording is explicit.
Tenants need to pay close attention to timing. Missing a deadline to object to a market rent determination can lock in an unfavourable figure. Landlords, meanwhile, must ensure the review mechanism is triggered correctly under the lease.
Practical Guidance
For tenants:
Understand how rent will be reviewed before signing - what seems affordable now may not be in five years.
Seek clarity on market rent mechanisms, including how valuers will be appointed.
Watch for “ratchet clauses” that prevent rent decreasing in a down market.
For landlords:
Draft rent review clauses with precision to avoid unenforceability.
Ensure procedures for dispute resolution are workable and commercially realistic.
Consider the balance between fixed returns and flexibility to track market conditions.
Conclusion
Rent review clauses may seem like technical detail, but they have a profound effect on the long-term economics of a lease. Fixed increases and CPI reviews provide predictability, while market reviews ensure rent reflects the property’s current value - but at the risk of dispute.
The law demands clarity. A rent review clause that is vague or incomplete may be struck down, leaving parties in limbo. For both landlords and tenants, the safest course is to ensure the mechanism is drafted with precision and reviewed carefully before signing.
Understanding the mechanism of rent reviews is a crucial step in managing a commercial lease. To gain deeper insight into how this fits within the broader leasing framework, you may also wish to explore our related guides:
Together, these resources offer a rounded view of the many components that influence how rent evolves over the term of a commercial lease — from review mechanisms, to exit obligations, renewals, and risk.
Specialist property lawyers can help with your rent review
At Thornton + King our Law Society Accredited Specialist Property Lawyers have decades of experience advising clients in relation to rent review mechanisms. To speak to a specialist commercial leasing lawyer in relation to your property lease, give us a call or submit an enquiry now.
