CPI at record low – Impacting on Landlords’ rental income
Whether you are a landlord or a tenant, we are all interested and impacted by rental increases – it just depends on your perspective.
Most non-residential leases (e.g. leases of retail shops, industrial sheds and office buildings) have a mechanism to review the rent each year during
the term of the lease (and any option periods). The most common mechanism is an annual CPI review. The Bureau of Statistics has just published
the CPI for the June 2016 Quarter – being a mere 1.5% increase from the same quarter last year. This is actually the current trend, not an irregularity
– it is over a year since a quarter increased by 2% or more over the same quarter previous year.
Landlords need to consider whether a CPI rent review mechanism is the most suitable method for their next lease. CPI fluctuates up and down and there
are no guarantees around it. There are alternative mechanisms such as fixed percentage increases, where the parties agree to increase the rent
by some fixed percentage, like 2%, or 3% or 4% for example.
If the lease is not a retail shop lease (and so is not subject to the Retail Shop Leases Act 1994 (Qld) – by not being for a defined retail use and
not in a retail shopping centre), then you can actually get the best of both worlds. That is, when such a lease is prepared, a clause can be inserted
that has multiple bases for the rent review (which is known as a “ratchet clause”). For example, rent could be reviewed by way of CPI or 2.5%,
whichever is the higher. This gives the landlord some peace of mind to protect their expected rental income, especially if needed to pay the bank
loan and interest each month. Another example is a CPI review, but where rent cannot be less than the previous years rent – which gives comfort
to landlords worried that the CPI may potentially be a “negative” number in the future, as well as also protecting their expected income. However,
if the lease is a retail shop lease, then the Act actually prohibits ratchet clauses and there are severe consequences if you put a ratchet clause
in a retail lease.
Tenants also need to be considering the rent review mechanism when they are negotiating their leases. It is important that they understand what their
rights and options are, both during the initial term and in any option periods. The adjusted rental upon the tenant exercising an option period
that they have is something that tenants really need to be across. For example, should rent be aligned to market rent by way of a market review
(as per the advice of a valuer, if needed)?
McKays regularly prepares leases and provides legal advice to both landlords and tenants on the terms of leases. If you would like any assistance please contact us.