By Tony Joyce
November 25, 2015
Generally, commercial leases comprise an initial lease term and subsequent options for renewal. Rent can be subject to review annually, commonly by CPI increases, and subject to a market review at intervals, which generally coincide with the exercise of an option. When a market review takes place, parties are required to agree on a new rental figure; failing that, an independent valuer can be engaged to determine what the rent should be. This is a cost which is shared by both parties, and the valuers’ determination is final, expect in circumstances in which they fail to comply with the terms of the lease, or the overarching obligations for rent reviews provided for under sections 35-38 of the Retail Leases Act (RLA).
Under section 94 of the RLA, a provision of a lease will be deemed void to the extent that it is inconsistent with the Act.
In industries such as Hospitality, the length remaining on a lease provides the Lessee with a saleable asset. For this reason, the tenure remaining and the rental figure play a key role in the determination of the value of a business such as a hotel, bar, or restaurant.
There are four typical types of rent review:
A method commonly used by valuers in the Hospitality Industry is the profits Method, which involves the following three steps:
This method recognises that properties in an industry such as Hospitality can be unique making it difficult to find suitable comparisons in the market when factoring in variables such as gaming licences and accommodation.
In this recent case, the Court of Appeal dismissed an appeal from the Victorian Supreme Court regarding the use of the profits method to determine rent in the hotel industry.
The matter began at VCAT when the tenant rejected a rent review on the basis that the valuer had improperly used the profits method to calculate the rent. The valuer had included the tenant’s gaming machines and entitlements in the valuation which had significantly increased the rent.
VCAT found for the tenant holding that s 37(2) of the Retail Leases Act 2003 (Vic) did not permit the use of the profits method and that the valuer had failed to follow the steps required under the Act.
This was overturned in the Victorian Supreme Court which held that it was permissible under the Retail Leases Act to use the profits method in determining the rent. The Court of Appeal upheld this decision and dismissed the appeal from the tenant.