Rent and Rent Reviews
By Amy O'Donnell28 Mar 2018
From the perspective of both the landlord and the tenant - one of the most important functions of the Lease is to set out what is to be paid and by whom.
Generally the rent payable under the lease is paid calendar monthly in advance on the first day of each month, and reviewed annually.
The motel industry has developed its own formulas over time and here seems to be an industry accepted calculation for rent – when the lease is first entered into. The issue is maintaining this over time.
During the 1980s it was common for all commercial leases, including motel leases, to have a ratchet clause for rent increases. A ratchet clause increased rent by the higher of either the increase in CPI or a minimum annual increase. A minimum increase can cause some concern over such a long term lease as it often results in the rent becoming too high – and has a compounding effect.
The concept of market reviews is often debated in the motel industry. The issue from a tenant's perspective is that they do not want the rent to be tied to the value of their business – they understandably ask the question why should the rent increase because of their hard work in developing and maintaining a successful business?
The other difficulty with a market review is establishing the market. Market reviews in leases for commercial tenancies generally look at the supply and demand for a leased premises in the particular area. This appears inappropriate for a motel.
As a result most motel leases provide for CPI increases only.
In our view there are a lot of motel leases that would benefit from a true market review – that is one where the rent can go up or down. This would enable the tenant to have some relief in the event that the business was not performing well or general industry conditions had changed since the lease was first entered into. Unfortunately it is difficult to set an formula which will be 100% right for 100% of cases.
In our experience the most successful motels arise out of circumstances when common sense prevails on the part of the landlord and the tenant and there is some degree of working together to achieve a common outcome – which is a successful passive investment by the landlord (i.e. rent that is always paid) and for the tenant, a successful motel business.
I suspect that you all know when and how your rent is reviewed, but if you do not, or do not understand how the CPI actually works, we are always more than happy to run our eyes over your Lease and let you know.