Commercial Lease Rent Reviews: How Market Rent Works

If you lease a shop, office, warehouse or studio, your rent is probably one of your biggest ongoing costs. So it makes sense that the words “rent review” can feel like a turning point in your lease - either a manageable adjustment you planned for, or a sudden hit to your cashflow.

Rent reviews are common in Australia, and they’re not automatically “bad”. The key is understanding what type of rent review applies, when it happens, and how it will be calculated under your lease.

In this guide, we’ll walk you through how a rent review works in a commercial lease, how a market rent review is usually run (including valuation-style approaches), and what you can do to protect your business before and during the review process.

What Is A Rent Review In A Commercial Lease?

A rent review is a clause in your lease that allows the rent to be adjusted at certain times during the lease term. This is usually set out clearly in the lease schedule and the rent review clause.

In practice, the rent review clause answers questions like:

• When will rent be reviewed? (e.g. annually, at option exercise, or at set dates)
• How will rent be reviewed? (e.g. CPI, fixed percentage, market rent review)
• What happens if you disagree? (e.g. negotiation period, valuation by an independent valuer)
• Are there limits? (e.g. cap and collar, “ratchet” clauses, or minimum increases)

It’s worth noting that “commercial lease” can cover both retail and non-retail arrangements, and different rules may apply depending on your state and whether the lease is regulated as a retail lease. Even when legislation provides certain protections (particularly for retail tenants), the lease drafting still matters - because it sets the mechanics of the review process.

If you’re unsure what your lease says, getting a Commercial Lease Review early can make a big difference, especially before you commit to a term (or exercise an option) that triggers a market rent review.

Common Types Of Rent Reviews

Not all rent reviews are “market” reviews. The most common types you’ll see are:

• CPI rent reviews: rent increases in line with the Consumer Price Index (CPI). This is often viewed as a “steady” approach, but it can still rise quickly in high-inflation periods.
• Fixed percentage increases: rent increases by a set percentage (e.g. 3% each year). This can be easier to forecast but may not reflect market conditions.
• Market rent review: rent is reset to the market rent at the review date, usually based on comparable leases and valuation methodology.
• Turnover rent (less common): rent is linked to your turnover (often seen in shopping centres), sometimes combined with base rent.

This article focuses mainly on market rent reviews, because they’re often the most complex and can create the biggest surprises if you’re not prepared.

How Does A Market Rent Review Work?

A market rent review is designed to reset the rent to what the premises would reasonably lease for on the open market at the review date, assuming a willing landlord and tenant (and on the assumptions set out in your lease and any applicable retail leasing laws).

The lease should spell out the process. While details vary, market reviews often follow a pattern like this:

1. Trigger Date And Notice

The lease will specify the review date (for example, on each anniversary of the commencement date, or when you exercise an option period). Whether the landlord must give you written notice (and what happens if they don’t) depends on the lease wording and, for retail leases, the relevant state or territory legislation.

If your rent review ties into an option period, timing is critical. If you miss the option notice window, you may lose the right to renew - even if you were relying on the business location. This is why it’s worth tracking your key lease dates (and in some cases checking your state-based notice expectations, like lease renewal notice periods).

2. Landlord Proposes A Market Rent

Often, the landlord will propose a new rent figure (either because the lease requires it, or as a practical starting point for discussions). This may be supported by:

• recent comparable leases in the building or area
• an agent’s opinion
• a valuation report (sometimes)

This is usually a negotiation starting point - not necessarily the final rent.

3. Negotiation Period

Most leases include a window where you and the landlord can negotiate the market rent (for example, 14 to 30 days). Whether there is an obligation to negotiate “in good faith” depends on the lease wording and the legal framework in your state/territory, but in practice it’s normal for tenants to request evidence supporting the proposed rent.

From a business perspective, this is also the time to step back and ask: does the space still work for you operationally and financially? If it doesn’t, you might also be looking at renegotiating other lease terms (like incentives, fitout contributions, or even rent-free periods), not just the headline rent.

4. If You Can’t Agree: Independent Valuation Or Determination

If you can’t agree, many leases require the market rent to be determined by an independent valuer (or sometimes an expert). This is where a commercial rent review valuation process may apply.

The lease should specify:

• how the valuer is appointed (by agreement, by a professional body, or via a default mechanism)
• what material the valuer can consider
• whether the valuer must provide reasons (some clauses require this, others don’t)
• who pays the valuation costs (often split, but not always)

Once the valuation is issued, the rent is usually set to that determined amount for the relevant period, subject to any lease-specific constraints (and, for retail leases, any applicable legislative requirements).

5. Backdating And Catch-Up Payments

A detail that catches businesses out: some leases provide that once the new market rent is determined, it applies from the review date - even if the valuation process took months.

That can mean a “catch-up” payment is due, or your ongoing payments are adjusted to account for under/overpayments since the review date.

Planning for this possibility (by keeping a buffer) can prevent a nasty surprise.

How Is “Market Rent” Actually Assessed?

“Market rent” sounds straightforward, but it’s not just a vibe - it’s usually assessed using valuation-style reasoning and comparable evidence. The precise definition is often written into your lease, and that definition matters.

A well-drafted market rent review clause will usually describe market rent by reference to:

• rent for comparable premises in the area
• the permitted use under the lease
• the lease terms (length, options, outgoings structure, make good obligations)
• the condition of the premises at the review date

Depending on the lease wording, a valuer may also consider incentives in comparable deals (like rent-free periods) to work out the “effective rent”.

Comparable Leases: The Backbone Of A Market Review Of Rent

In most cases, market rent is heavily influenced by comparable leasing evidence, such as:

• similar size and layout
• similar building quality and location
• similar permitted use (e.g. retail vs office vs medical)
• similar lease terms (especially length and options)

If the landlord’s figure is based on “headline rents” that ignore incentives or unusually favourable deals in the area, it may not reflect true market conditions.

Outgoings, Incentives And Hidden Costs

When you’re comparing rent figures, make sure you’re comparing like with like. In commercial leasing, the “rent” is only one part of what you pay.

Depending on your lease, you might also be paying:

• outgoings (e.g. rates, building insurance, common area maintenance)
• utility and service charges
• marketing levies (more common in retail centres)
• maintenance responsibilities you didn’t expect

Even if the rent number looks acceptable, the overall occupancy cost might not be.

Ratchets And “Upward-Only” Market Reviews

Some leases include clauses that prevent rent from decreasing even if market conditions drop. You might hear these called “ratchets” or “upward-only” rent review provisions.

Whether these clauses are permitted (or restricted) can depend on the type of premises and the applicable state or territory retail leasing regime, as well as the exact drafting. Either way, you don’t want to discover this for the first time when the market softens but your rent still climbs.

What Should You Check Before You Sign (Or Renew) A Lease With A Rent Review Clause?

The best time to protect yourself in a rent review is before you sign the lease - or before you exercise an option and lock in the next term.

Here are the key points to check.

Is It A Market Rent Review Or A Fixed/CPI Review?

This sounds basic, but it’s the number one cause of confusion. Some leases have:

• annual CPI or fixed increases during the term; and
• a market rent review at the start of an option period (or at year 3/5, etc).

Make sure you know exactly when a market review applies, and what the other increases are in between.

How Is The Market Rent Review Process Drafted?

Look for detail on:

• the timeframe for negotiation
• the valuation appointment process if you disagree
• what evidence can be used
• whether rent can go down as well as up

If the process is vague, it often leads to delay, cost, and disputes - which is bad for both cashflow and your landlord relationship.

Does The Review Happen At The Same Time As Other Big Obligations?

Some leases line up major events: option exercise, rent review, and refurb or make good obligations can all land around the same time.

That can create a “perfect storm” for a small business. If possible, negotiate timing or clarity upfront so you can budget properly.

What Happens If You Need To Exit Early?

Even if your business is doing well, circumstances change - and commercial leases are often less flexible than people expect.

If you’re worried about being locked in after a rent increase, it helps to understand what “exit routes” you may have, including assignment, subleasing, or negotiated termination. This is also why it’s worth understanding the risks in breaking a commercial lease agreement before you commit to a long term.

If you’re already in a lease and need strategic advice about ending it, Lease Termination Advice can help you map out your options and reduce the risk of costly disputes.

Do You Have Flexibility If The Space Stops Working?

Sometimes the rent itself isn’t the only issue. Your space might no longer suit your operations due to:

• reduced foot traffic
• changed customer behaviour
• loss of neighbouring anchor tenants
• business model changes (e.g. moving more sales online)

In some situations, a rent reduction or temporary relief may be negotiated, particularly if trading conditions or access issues are affecting the premises. Where appropriate, a Rent Abatement Agreement may help document that arrangement clearly so both sides know what’s happening and when normal rent resumes.

Practical Tips For Handling A Rent Review (Without Losing Momentum In Your Business)

A rent review can be time-consuming. But with a bit of structure, you can approach it like any other business negotiation - with evidence, timelines, and a clear plan.

Get Clear On Your Numbers Early

Before you respond to the landlord’s proposed rent, make sure you understand:

• your current occupancy cost (rent + outgoings + other charges)
• what level of increase you can sustainably afford
• what your “walk away” position is (and what relocating would cost)

If you know your limits, you’re less likely to accept an increase that creates longer-term stress.

Ask For Evidence And Compare Apples With Apples

If the landlord says “the market rent is $X”, it’s reasonable to ask what that is based on.

When comparing rent evidence, check:

• is it the same type of premises?
• does it include incentives?
• are outgoings included or separate?
• is it a brand-new lease (often with incentives) versus a sitting tenant renewal?

Don’t Forget The Rest Of The Lease Terms

Rent is only one lever. If the landlord won’t move much on rent, you may be able to negotiate:

• a rent-free period
• staged increases (instead of a sudden jump)
• fitout contribution
• changes to outgoings arrangements
• clarity around repairs and maintenance responsibilities

Small drafting changes can have a big practical impact over the term.

Plan For The “If We Can’t Agree” Scenario

If your lease requires independent valuation, don’t wait until the last day to think about it.

Check the clause for:

• strict deadlines for appointing a valuer
• who can appoint the valuer if parties don’t agree
• whether you can provide submissions/material to the valuer (if the clause allows)

Missing a deadline can take control out of your hands.

Keep Future Flexibility In Mind

When rent rises, many businesses start considering a move - but relocation can be expensive and disruptive.

Also, if you’re thinking about exiting or relocating, you may need to give notice (or respond to landlord notices) in a particular way. If you’re ever in the position of needing to formally end a tenancy, it helps to understand concepts like a notice to vacate and the timing requirements that can apply.

Where negotiations become complex, speaking with a Commercial Lease Lawyer can help you understand your leverage, your risks, and the cleanest way to document any agreed outcomes.

Key Takeaways

• A rent review is a planned mechanism in your lease to adjust rent at set times, and it may be based on CPI, fixed increases, or a market rent review.
• A market rent review often involves a landlord proposal, a negotiation period, and (if you can’t agree) an independent valuation process that sets the rent (depending on the lease and any applicable retail leasing laws).
• “Market rent” is typically assessed by reference to comparable leases and lease conditions - so evidence, incentives, outgoings and lease terms all matter.
• Before you sign or renew a lease, check the rent review clause carefully, including whether rent can go down, whether there’s an upward-only “ratchet”, and how disputes are handled.
• During a rent review, you can often negotiate more than just rent - staged increases, incentives, and other lease terms can make a big difference to affordability.
• Good lease drafting upfront (and clear documentation of any changes) can reduce disputes and help you protect cashflow as your business grows.

If you’d like help reviewing your rent review clause or negotiating your commercial lease, you can reach us at 1800 730 617 or team@sprintlaw.com.au for a free, no-obligations chat.