The level of rentals in any location is a function of supply and demand specific to the particular location. If there are a shortage of rental properties, rentals are likely to increase and if there are a surplus they will decrease.
The main determinant of residential rent appears to be the number of bedrooms, followed closely by condition. Depending on where the property is located, the availability of secure on-site parking can be important.
Professional residential investors tend to be better off to split their investment between two cheaper properties as opposed to one more expensive property.
These are contractually based and depend on the wording of the deed of lease. Rental reviews and processes are spelled out in the individual lease documents. It is impossible to give a full overview here as there are multiple variations. Each lease document needs to be read in its entirety.
What is Market Rent?
The concept of “current market rent” is as much a statutory concept as it is an economic concept.
Current market rent is defined as “the rent that a hypothetical lessee, who is willing but not anxious to trade and who has full knowledge of the market and the options available, would agree with a hypothetical lessor who is similarly qualified, if the premises were vacant and available for lease on the same terms and conditions as those set out in the lease document”.
The main method of determining current market rent for this type of space is to identify new leasing and reviews of similar space, adjust these rents to an effective rate per square metre (by making allowance for inducements), then relate those rental rates to the subject property by adjustments for such variables as location, size, lease term, space quality, building quality and the provision of various services.
This is a very subjective process that often gives rise to quite divergent opinions on current market rent.
Comparable rents are analysed on the basis of Total Occupancy Cost (TOC), with any lessee outgoings then being deducted from the TOC figure to determine net rent.
Rental Review Process
Most lease documents allow for periodic reviews of the current rental. The process which both lessor and lessee must follow should be spelled out in the lease. The majority of commercial leases use a standard ADLS or BOMA format. The general form is as follows:
From a cost perspective it is usually advisable to avoid this last step, as taking a dispute to arbitration can be relatively expensive. There is also no guarantee that any one party will have a 100% win. Like any litigation process, it is always a bit of a gamble.
Generally both parties must equally share the cost of the umpire as well as meeting the fees of their own individual Valuers. It is therefore important to ascertain whether the value of the amount in dispute exceeds the likely cost of the exercise.
VCL can assist you with rental disputes and any resulting arbitration.
Arbitration is a dispute resolution process where the parties to the disputes submit the facts to a third part called the arbitrator. This person acts like a judge and makes a binding decision. Arbitration is entered into by agreement. In the case of a rental dispute the agreement to submit to arbitration is a contractual one specified in the lease document.
The formal process is governed by the Arbitration Act 1996 and the Arbitration Amendment Act 2007. An arbitrator’s decision is called the “award.” The award is binding on the parties and is enforceable as a judgment by the Court.
The aim of arbitration is to provide a cheaper alternative than litigation. It is quicker and less formal than a court process. It is also private and confidential. The arbitrator or umpire is selected by the two Valuers representing the parties. This person is generally chosen because he or she has a degree of expertise in the matters in dispute.
If the Valuers cannot agree on an arbitrator, the lease document sets down a process by which one is imposed upon them. Some leases specify that the Property Institute selects one, not necessarily another Valuer, but traditionally going down this route a Valuer is usually appointed. Other leases specify that the person is to be selected by the president of the local Law Society, in which case there is a reasonable chance that the arbitrator will have a legal background.
Arbitration is closely related to litigation, although there are some important differences. The parties choose their own judge, the time and place of the hearing and to a certain extent the formal procedures to be followed.
The Formal Process
Each arbitrator may have slightly differing approaches; however all are required to follow the same basic procedure during the arbitration hearing. The arbitrator generally starts by explaining the process and rules to be followed.
Conduct of the hearing: