CPI vs Fixed Percentage vs Market Rent Review: Which Rent Review Method is Right for You?
When negotiating a commercial lease, one of the most crucial factors to consider is how rent will be adjusted over time. Most lease agreements include annual rent increases, typically determined by one of three methods: Consumer Price Index (CPI) increases, Fixed Percentage increases, or Market Rent Reviews. Selecting the right approach ensures rental income remains competitive and fair throughout the lease term.
What is a Consumer Price Index (CPI) Increase?
The Consumer Price Index (CPI) is a measure of inflation, reflecting the average price change of a fixed basket of goods and services over time.
When a lease includes a CPI rent increase, the annual rent adjustment aligns with inflation, ensuring rental income maintains its real value over time. This method is commonly used when landlords and tenants want rent increases to be tied to broader economic conditions.
Learn more about how CPI is calculated: ABS Consumer Price Index FAQs
What is a Fixed Percentage Increase?
A Fixed Percentage Increase is a predetermined percentage that both parties agree upon for annual rent adjustments. This is the most predictable and straightforward rent review method, offering certainty for budgeting and financial planning.
However, a fixed percentage may not always align with inflation or market changes, potentially resulting in overpaying or underpaying relative to market conditions.
What is a Market Rent Review?
A Market Rent Review adjusts rent based on current market conditions. These reviews often occur at lease renewal or option periods but can also be included mid-term, depending on the lease agreement. The process typically involves a property valuation or assessment of comparable leases in the area, ensuring rent remains competitive with similar properties. It can work in favour of landlords in a rising market, however can lead to disputes if tenants disagree - potentially requiring independent valuation or mediation.
Which rent review method is best for you?
Key + Stone Property are experts in assessing and determining the most suitable rent reviews for Adelaide commercial property landlords. With a deep understanding of the market and individual client needs, we ensure that each rent review is aligned with your goals, whether you're seeking to maximise returns or secure favourable terms. Our expertise enables us to deliver great outcomes, providing a customised approach that takes into account all relevant factors to benefit both landlords and tenants alike.
Contact us today to discuss the best rent review approach for your commercial lease.
Readers should seek independent legal advice tailored to their specific circumstances. Key and Stone Property Pty Ltd do not accept any liability for the accuracy or applicability of the information provided herein.