The cost of renting your premises can be one of the biggest overheads in your business, and can put the pressure on you when a rental increase is looming. Learn about market rent reviews and what you can do if you’re a tenant facing rising rental costs.
The costs of being in business are rising because of inflation, interest rate rises and other economic factors. If you rent your business premises, you might find your lease includes details of annual rent increases. Rental increases are often calculated using a formula such as the consumer price index (CPI) plus two per cent, or what’s known as a market review (MR).
Here's your guide to understanding market reviews and how these can impact your rent and therefore, your bottom line in business.
What is a market review?
A market review is a formal process conducted by someone who is licensed under the Land Valuers Licensing Act 1978. Just as homes and commercial properties are valued for sale, a licenced land valuer will take the property value and a number of other market factors into account, to work out what kind of rent could be payable at the time of the review, in a free and open market.
What is an informal market review?
Some landlords or managing agents (real estate agents) conduct their own informal market reviews. They might base their reviews on local factors and conditions to come up with what they see as a relevant value. Here’s how that might happen:
- The managing agent might either assume the inflation rate (from the daily media) or access research from the Australian Bureau of Statistics website.
- They then apply this CPI inflation figure to the rent.
- Their tenant is then informed of a rent increase, which is usually based on a percentage increase to their current rent.
Case study
Our SBDC advisory team was contacted by a commercial tenant whose managing agent calculated an 88 per cent increase in their annual rent. This kind of rental increase may be designed to test the tenant’s level of resistance. If they agreed to pay this much extra, it could create a new level of property value, which could easily lead to further rental increases in future.
When the tenant challenged this rent rise, the managing agent stated that a legal opinion supported the calculation. Sometimes, if tenants challenge the informal market review, the landlord might not have any evidence except for examples from other properties in the area. Tenants who question the rental increase are sometimes met with a breach notice and intimidation tactics.
In this scenario, the tenant can:
- Request the managing agent provide evidence* to support the legal opinion of the calculation.
- If no scientific evidence is provided, the tenant can undertake their own research on local values and use this information as part of negotiations.
- If there is no resolution following the steps above, contact our commercial tenancy advisers for further advice.
*The rent obtainable in a free and open market if the property was vacant and being let on similar terms as contained in the current lease, but excluding any fittings or fixtures in the property that are not owned by the landlord or structural improvements paid for by the tenant.
What to do if you’re facing an unfair rent increase
If your business is facing a rent increase and you think it may have been calculated using an informal market review system, you might like to:
- Check your lease documents to understand how any price increases are calculated, according to what you have agreed in your contract.
- Ask your accountant for an independent calculation of the rent increase.
- Once your accountant has calculated a new figure, ask them to write a letter to your managing agent setting out the correct figure. They can include how this has been calculated fairly and correctly in line with your lease documents.
By engaging your accountant to calculate and communicate a fair rental increase to your managing agent, you can take more control of the situation and might be able to avoid any intimidation tactics from your landlord or managing agent.
At the Small Business Development Corporation, we’ve found an increase in the number of small business owners getting in touch about the rising cost of rent. We have between five and ten enquiries on these kinds of issues every week .
Even if your rent increase is fair, you still have options
Your rent could be increasing after a formal market review conducted by a licensed professional and in line with your contract or lease. If this has been calculated properly, you may not be able to challenge your new rent, but you still have options within your business.
Here are some tips which could help you manage an increase to your rental costs.
Consider your business model
Look at your long-term plans for your business operations. If you don’t see the value in paying more for your current premises, you might be able to find other premises or explore other options such as an online model.
Check your supply contracts
Make sure you understand the terms and the risks of any unexpected price increases from your suppliers.
Look at your costs
Review your annual leasing costs, employment costs and other expenses to calculate at what point you might encounter financial issues. Calculating this as your benchmark can help you be better prepared and make informed decisions.
Consider your pricing
If your pricing needs to be reviewed and raised, take steps to put this in place and give your customers some advance notice. Try not to leave a price increase until you’re already facing financial pressures.
With a rent rise looming, the sooner you act, the more options you might have. Your business might not suffer any financial stress when your rent is first raised, but you might find that other costs rise at the same time.
It can take six to eight months before your profits feel the impact of your rental increase, so the sooner you can address rising costs, the more financial pain you might be able to avoid.
If you are facing concerns with your lease, or if you want to know what issues to look out for before signing a contact, you can contact our free commercial tenancy advisory service for support and advice.
Contact us for the support you need
- Learn what to do if you are struggling to pay rent for your business.
- If you need to increase your prices to cover increased costs of doing business, learn how to tell your customers about your price rise.
- You can get commercial tenancy advice or support to face rising costs through our free business advisory service. Call 133 140 or complete the form on our business advisory page to request a call from an adviser.
- You might also like to explore the business premises section of our website for more information on leasing commercial premises.
