This section applies to leases that do not have a pre-agreed fixed rate rental review mechanism in place (eg CPI adjustment or stipulated percentage increase). Where such a mechanism is in place, it must be adhered to as set out in the lease.
Before agreeing to any rental variation proposed by the landlord (whether it be an increase or decrease in the annual rental), agencies must obtain an independent rental market valuation from a registered valuer. The valuation report should be compliant with the New Zealand Institute of Valuers Valuation Standards and include the following:
- Market rental
- Evidence of comparable rents and analysis and reconciliation of the evidence to the market rent for the premises (and car parks if any)
- Copies of any specialist technical advice (such as engineering reports) referred to during the valuation process in relation to the premises and the building (including building services)
- What improvements are included or excluded in the determination of the market rental.
Agencies should contact the Government Property Group (GPG) if they have any queries regarding rental valuations as GPG may be able to provide information from other recent valuations undertaken by agencies in the same or a similar type of space in the same area.
If the evidence indicates a falling market, a landlord may decide not to instigate a rental review to avoid a decrease in the annual rental in cases where there is no ratchet clause and the provisions of the lease allow the landlord to do so. In such situations, agencies should obtain a valuation report and if a decrease in the annual rental is noted, agencies should instigate the rental review.
Where existing leases have a ratchet clause, it is important to understand whether it is a hard or soft ratchet clause. A soft ratchet clause ensures the rental figure will never drop to less than the original sum agreed between the landlord and the tenant. A hard ratchet clause ensures the rental figure will never drop to less than the last rental figure agreed at the previous rental review.
Agencies should ensure any clauses subject to ‘time being of the essence’ are fully understood and adhered to.