The market review process: it does work by Don E Gilbert
Donald E Gilbert
Australian Lease & Property Consultants Pty Ltd
B Com/B Econ; Dip Prop Val; Cert Med & Arbit.
CPV; MRICS (RICS accredited valuer expert and arbitrator)
Specialist Retail Valuer & Arbitrator
We value leases across Australia
Firm Regulated by RICS
AUSTRALIAN LEASE & PROPERTY CONSULTANTS Pty Ltd © Copyright Donald Evan Gilbert 2012
Don Gilbert is a Specialist Retail Valuer (“SRV”), a 3D Economist and arbitrator. He provides independent impartial advice to landlords, prospective investors and tenants.
My last article in this series was It is market rent or vacant. I outlined two scenarios, in two regional areas: in one, astute lawyers had built 3-yearly reviews to market rent. The market is operating quite well; albeit a depressed market. In the other, buildings are vacant with landlord, tenant and finance capital on the pavement.
This article contrasts three scenarios, demonstrating how important market review can be as “pressure release” up or down. Market review clauses can:
Force parties (landlord and tenant) to examine market, obtain evidence, consider positions and negotiate outcome; and
Refer failed negotiation to determining valuer. Valuer must follow S 19 and 29 NSW and Queensland Acts respectively. And if so, by definition the outcome must be the reasonable rent.
Case study 1 – market review as backdrop to negotiated outcome IGA Supastore
Market review is built into a supermarket lease structure.
Tenant had access to evidence of 66 Queensland supermarket leases and another 300 country-wide. Tenant pays $475,000 per annum or $250.00 per square metre. The landlord believed current market rent is $635,600 or $337.00 per square metre.
Analysed back (basic format), comparable evidence was $195.00 to $280.00 per square metre i.e. “pick a number” method. Rent per square metre be “tested” evidence; it must be relevant.
Rent for one supermarket in better catchment, tenancy mix, recent renewal gross rent fixed 10 years at $500,000 per annum or $213.00 per square metre.
Suggested to landlord no security of tenure (or options), no other tenant would open or start another business. The building would remain vacant. Parties agreed rent will remain same, a beneficial outcome for both parties.
Case study 2 – rent determined by SRV ref. https://www.gilhooleys.com/
Second case tenant paying $610,000 per annum. Research of comparable leases for same permitted use showed, if vacant and available for lease, themed tavern would not pay more than $210,000 to $290,000.
Landlord assisted by a SRV with access to centre performance data, argued while reduction was warranted, centre’s performance showed growth. Current market rent should be $470,000 per annum.
Finally, rent was determined by valuer at $360,000. Landlord still had tenant and business could trade going forwards.
Case study – no rent dispute resolution mechanism https://www.theluckycharm.com.au/ (Toowoomba)
This is appalling situation. I was put into negotiating position tenant paying $275,000 or 83% higher than “average” rent of $150,000 for same business in DDS centres. Landlord wanted $340,000 or 126% more, with minimum 5% increments, trading conditions are down.
Each party’s position subtly canvassed with a major stoush envisaged. Already three corpses with same permitted uses who gave way to franchised tenants with same institutional landlord.
Landlord threatened to Dutch Auction tenant’s site. Gloves came off and ugly fight ensued. Bruising and battering went up to CEO, the ACCC and ASIC.
It is unacceptable that reasonable, responsible persons are forced to fight in the gutter because State Government of Queensland are too gutless to build into our legislation the equivalence of ACT’s end of lease dispute resolution system.
Only with monumental effort and support of Alan Jones have we been able to finalise an outcome with gross commencing rent $200,000 per annum; $25,000 above market rent. At least the business owner still owns his business.
Each permitted use (there are 200) has different set up costs, capacity to amortise, etc. often quite different operating expenses. Reflected in Urbis JHD, FMRC, Maus, LIS benchmarks/rental evidence.
The Act sets out what SRV must consider in making determination; case law makes it mandatory. And it is based on common sense.
Anything in the alternative would prescribe or suggest that a valuer valuing a house, or commercial property use industrial zoned property as “key evidence”! Valuing a highly specific permitted use governed by a lease to determine market rent is no different; the evidence must come from the same or similar permitted uses!
Without prescriptive requirement for parties to negotiate “in good faith” if landlord offers the tenant a new lease, it must be at current market rent, otherwise asset bubbles will continue.
Prospective landlords might buy an investment on 8% return for $5.0 million, to find true value of the leases only produce 4% return; the real purchase price should have been $2.5 million to justify 8% return. Also tenant and franchise capital will be churned and burned.
The ACT rent dispute resolution mechanism must apply if the parties fail to reach agreement. The dysfunctional operation of retail leases (and huge asset bubbles and massive financial losses to stakeholders) is a direct consequence of the recalcitrance of the industry and its inertia to change.