Future proofing rent reviews for commercial and retail leases

The recent fluctuations in the Consumer Price Index (CPI) over the past three years presents a challenge for commercial agents and lessors to gauge the marketplace and ensure future rent reviews keep pace.

Since the March 2020 quarter, there have been some notable fluctuations in CPI.

After dropping to -0.3% in the June 20 quarter, CPI has climbed between 4% to 7.8% since June 21 quarter and presently sits around 6%[1].

Brisbane’s CPI increased 1.0% in June quarter 2023, resulting in a 6.3% increase.  In annual terms, Brisbane recorded the third-largest increase for all capital cities in Australia.

The rapid fluctuation presents a challenge for owners of commercial premises and their agents when negotiating new leases for premises. 

The REIQ Commercial and Industrial Chapter Committee provides their insight:

What are the current trends you are seeing with new leases?

With the high CPI, we're now seeing a lot of new leases leaning towards mid-term market reviews because the market itself has been moving at such a pace that there seems to be a concern between both agents and owners that we're not catching up with the marketplace or not getting a decent feel for the marketplace.

For example, if you run a lease at four per cent annually for the next five years, the reality is that if you have another year of up to eight per cent CPI increase, the risk is that you’ve potentially missed the market.

Rent review options for retail shop leases

The Retail Shop Leases Act 1994 (Qld) (RSLA) sets out requirements that apply to rent reviews for retail shop leases. 

Under s27 of the RSLA, if a retail shop lease provides for a rent review during the term of the lease, or under an option to renew or extend the lease, the lease must state the timing of the reviews and the basis on which each review is to be made.

The rent may be reviewed using different bases during the term of the lease, but each review must be made using only one basis. In some commercial leases it may be common to include options for the rent review calculation. The amount may equal ‘the greater of’ two or more calculation options. 

For a retail shop lease, the basis for a rent review must be a single basis consisting of one of the following —

1. the current market rent of the leased shop;
2. an independently published index of prices, costs or wages;
3. a fixed percentage of the base rent;
4. a fixed actual amount;
5. if the rent is determined as a base rent plus an amount equal to a percentage of the turnover of the lessee’s business — the average rental paid over the previous year, or the stated number of previous years, of the lease;
6. another basis prescribed by regulation; or
7. a single basis formed by a combination of 2 or more bases mentioned in paragraphs (b) to (f).

As the real estate professional, it is essential to be aware of these requirements to ensure that a rent review basis negotiated and agreed to between the parties is valid.

Read more about property management: Varying a Sales or Rental Price.

Or browse our suite of property management articles.