April 14 2015

Rent Reviews

Changes to the standard form of the Auckland District Law Society (ADLS) Deed of Lease now make it possible for landlords to review the annual rent payable by either a market rent review or a Consumer Price Index (CPI) rent review. Changes to the ADLS Lease mean that a landlord can now elect to have both CPI rent reviews and market reviews throughout the term of the lease.

Market rent is determined by a market assessment for the property where comparison is made with the rent charged for other properties of a similar type, size and location. There’s generally not much room for negotiation when it comes to determining market rent. If there’s a dispute over the proposed rent which can’t be resolved, the rent will need to be determined by arbitration – an often time-consuming and expensive process.

Landlords will often prefer a CPI rent review over a market rent review because it provides certainty as to annual rent increases. CPI reviews also reduce the cost of the process as a valuation isn’t required. A CPI rent review is less likely to result in a dispute as the figures are published quarterly by Statistics New Zealand and the rent is determined from a simple calculation.

However, the risk with CPI rent reviews is that they don’t take in to account any increase in property values in the current market. This means that the adjusted CPI rent could be less than what a landlord could achieve if they had undertaken a market rent review.

Landlords will often insist a hard ratchet clause is included in the lease. This means that the rent can never be less than the rent at the commencement date of the then current term of the lease.

There are pros and cons with each rent review process. Whether you are the tenant or the landlord, do talk with us before entering into a new lease as we will be able to help you to negotiate terms which best suit your needs.