Summary

It shouldn’t come as a surprise that leasing activity has been significantly impacted by the COVID-19 pandemic despite the National Mandatory Code of Conduct and the subsequent legislation enacted by the States and Territories.

With face rents on the decline and vacancy rates, incentives and sublease stock on the rise, the pandemic is only one of the minefields that landlords, tenants and valuers alike are facing. We are joined by API Accredited Specialist Retail Valuer Steve Simpson of Simpson Corporate to discuss the interplay between COVID-19, its repercussion and market rent valuations and what we are likely to see in the coming years as a result.

We discuss:

  • Determining current market rent
  • How COVID-19 is impacting valuers when considering market valuations
  • The effect of the National Mandatory Code of Conduct and the State-specific COVID-19 legislation on calling for rent reviews
  • The impact of increased incentives and vacancy rates on determining market rent
  • Are tenants double dipping by receiving the benefit of a low market rent and reduced rent under the legislative framework
  • How valuers are treating market rent determinations where the parties were in the midst of the determination process pre-March
  • The challenges of a determining the market in the second half of 2020 and the possibility of a free and open market
  • The effect of sublease stock on market rents
  • Early market rent reviews under the Retail Leases Amendment Act
  • Will tenants circumvent the market rent review process and instead enter into new lease agreements
  • Trends for valuers, landlords and tenants

 

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Transcription

Nicola  0:47: It shouldn’t come as a surprise that leasing activity has been significantly impacted by the COVID-19 pandemic despite the National Mandatory Code of Conduct and the subsequent legislation enacted by the States and Territories.

With face rents on the decline and vacancy rates, incentives and sublease stock on the rise, the pandemic is only one of the mine-fields that landlords, tenants and valuers alike are facing.

I am Nicola Carnevale and today I am joined by Rohan Ingleton, Partner at Madgwicks Lawyers, and Steve Simpson of Simpson Corporate.

Steve has lead a distinguished career as an API Accredited Specialist Retail Valuer and consultant. Steve is a Fellow of the API and a former President of the API’s Victorian Division and Chairman of their Victorian Training and Education Board.

Steve has also worked for LJ Hooker, and what is now JLL and Coles Group. From 1989, Steve has been a director of his own practice as a go-to valuer for major retail and commercial properties. Steve has also acted as a consultant and tenant representative for many household names and luxury retailers. Steve is also sought after in the supermarket space as well as a regularly appointed expert both privately and presidential by the API, REIV and VSBC.

Needless to say, Steve is one of the most knowledgeable Victorian valuers and consultants

Rohan  2:12: Yeah, I've known Steve for 20 plus years now. I’ve always gone to Steve with any valuer questions and any problems with valuation advice I give and we sort of help each other out a little bit from time to time.

Nicola  2:28: So Steve, thank you so much for joining us.

Steve: 2:31: You're welcome.

Nicola 2:32: I guess we'll start with you first, Rohan. Before we get into the current market minefield in Victoria market read reviews for non retail leases, so commercial rate leases follow the terms of the lease between the parties. However, the large majority of leases in Victoria are retail leases and are governed by the retail leases act. Section 37 of the Act outlines the basis on which the current market rent is to be determined. Can you talk us through these factors?

Rohan 3:04: Yeah, sure. 37(2) is the main one valuers will know. I’ll just repeat it quickly. The current market rent is technically the rent obtainable at the time of the review in a free and open market between a willing landlord and a willing tenant.  In a transaction in regard to various factors. They are, there’s four of them. The provisions of the lease. So you look at the lease, make sure you determine the rent as per the lease. The rent that a tenant would pay for the premises, if they are unoccupied and offered for lease for same use. So you can look at the lease, see what the use is and determine rent based on that. The landlord's outgoing to the extent to which the tenant is liable to contribute to those outgoings, so that’s straightforward.  Then rent concessions and other benefits offered to prospective tenants of an unoccupied retail premises. And the rent does not take into account the value of goodwill created by the tenant’s occupation, or the value of the tenant’s, fixtures and fittings which has caused numerous issues over the years that I have advised on. But they're the main things that valuers will look at and be very familiar with.

Steve 4:16: That's the framework under which all valuer involved in market reviews and in particular rental determinations need to focus on. one of the issues that I find interesting is the issue relating to having regard or taking into account the permitted use or the substantially similar permitted use or similar use. I was involved many years ago when the Act was brought into being back in 2001/2002 on the state government’s working party for the act, and it was quite clear that that particular clause was really meant to be for shopping centers, where you've got some control over the over the tenancy mix within a shopping center. I've always advocated that notwithstanding the use in a strip location such as Burke Road Campbell, for example, that one must also have regard to the level of rent being paid in any given area. Now, I suppose in one seems a silly example, but it emphasizes where I'm coming from. If a pet shop wanted to take the best spot in Burke Road Camberwell, the pet shop is not necessarily going to get a rent the pet shop would like.  It has to meet the market. So whilst we are not saying we're gonna give lip service to the permitted use clause, but when you get out into the strip locations, there is a real need to understand the level of value because Burke Road is different is different to Bridge Road is different to Centre Road Bentleigh or Church St Brighton as the case may be. So that's a sort of caveat I'd put on onto it.

Nicola 5:42  So, turning to the year that was. For the better part of this year, COVID-19 restrictions have meant that where possible, office workers are working from home and this has significantly affected major cities meant (in large part Melbourne). With corporate Australia moving towards flexible working arrangements and navigating the economic decline, how do valuers take into account the impact of COVID-19 when considering market valuations for this year?

Steve 6:08: There's no question. I mean, there's that many different reports and articles that have come out over the last well say six months, you know, people hypothesizing about this and about that. But the reality is there is a real shift towards more flexible working hours, we're seeing it every day of the week. It's quite possible that the CBD will in terms of demand for their space, I'm absolutely convinced it's going to decline further. I read an article the other day that suburban office areas are now becoming far more interesting from a tenant perspective. Having said that, we've got an oversupply in terms of the sub leasing market in Melbourne at the moment, my advice is that upwards of 70% or 80%, greater than has been historically. And if you just look at basic supply and demand, it's going to have an impact on rental levels. So rental levels drop off and or incentives increase as the case may be. So the difficult part here is the attitude of the actual employees that want to work. And I think it was yesterday I heard on radio or read it somewhere that on a survey undertaken, I'm not sure by who, but nevertheless, that something like 80% of employees now would like to work some of their time at home. Now only about 9% want to go back full time into the city for their office. So that's got to wash through. How that's gonna play out in the long run. I don't know. But clearly, there's an awful lot of space out there. It's available in subleasing market. So whilst existing tenants may have to subsidize those rents into what the owner receives, probably, but I can see when leases come up for renewal, it's going to be a real shift and a real shift in the market. Whether it's 1,2,3 years away, that's a function of leases expiring.

Nicola 7:48: The National Mandatory Code of Conduct and the State-specific COVID-19 legislation have prevented landlords from increasing rents, have you seen this prevent parties hesitate to call for a market rent review?

Steve  8:01: I haven't actually, I'm not aware of any that way that's happened. I've been involved with a major client I've had now for about eight or nine years. It's one of the larger charities where they have opportunity, op shops. And they've got about 140 or 50 stores in Victoria. Where we've had to do market rent reviews, in our case, we've, depending what the circumstances are, we have got them down, say the rent down or we've accepted the existing rent, and leaving that alone for say the first two years and being fixed at that current rate. I am not aware of anybody hesitating to actually call for a market review, because under the Act, either party can call for it. So that's pretty obvious that a tenant if they think the market has dropped is going to exercise that right, notwithstanding that the tenant can't do anything about that under the current legislation for 90 days after the review date. It's a topic we'll probably discuss a little bit later, but I do see an argument to defer rent reviews but then maybe we can come back to that.

Nicola 8:55: I mean by rights, rents aren't going to go up in a market rent review. So the COVID, that section of the COVID 19 regulations, won't affect tenants or landlords, I guess as much.

Steve  9:07: Well rents under the COVID legislation are not allowed to go up full stop whether it be market review or a fixed increase of CPI of 3%, or whatever the case may be. The question then remains is at what point can those, I don’t think the the COVID legislation touches on this, but at what point can that increase, if it's a predetermined increase, go through? Rohan may have a view on this. But I would imagine the earliest possible date will be once the COVID legislation expires and as we all know, that's been extended in the last 24 hours or so until March. So that's an interesting space to watch. I’m certainly not aware of any landlord that has tried to circumvent that type of scenario that rents haven't gone up full stop.

Rohan  9:47: But I think that's right, Steve. I mean, we've seen the regs now, we haven't seen the documentation yet, don’t think they’ve legislated it but it's going through to 28 March with the rent relief on offer.  So we've going to look at leases to see if rent reviews can be deferred out to that date. Even if they do the actual review date won’t change. So the valuer would still need to do a rent review, if it's 1 June, that's when the rent review would be unless they agree to vary the lease and have a review date form 1 April for example.

Nicola  10:20: Is it business as usual? Or are valuers taking note of the fact that incentives are on the rise and vacancy rates are also up (in Melbourne that’s 5.7% now compared with 2% last year)?

Steve 10:37

It's a really hard, it's a really hard one. Is it business as usual? Look wherever possible, clearly it has to be.  Is a valuer going to take note of the rising incentives and the rise in vacancy rates. Yeah, of course, they have to as part of the process of determining what what the market is doing. I mean, one of the, not so much problems, but one of the issues valuers consistently have to deal with is, as a matter of fact, valuers are always looking backwards, because that's where they look for their rental evidence. So in this market, the problem we've got is the transactions or the number of transactions that have been carried out this year, and I'm talking specifically in the retail market, are few and far between. They really are. I mean, I, I make a living out of acting for some retailers involved with rent reviews and lease renewals and everything else. I haven't seen anything. And I'll put this, it’s going to change the way we do these things. But there are issues to take into account, which again, is an issue we will perhaps talk about with some other questions. But look, the supply and demand are simple. It is what it is, you know, like rents are going to be affected and they’re going to be affected by a number of things. And again, we'll talk about how COVID impacts that at some point as well.

Nicola 11:44: In Victoria specifically, tenants are being treated to over 9 months of rent relief, and now  a further 3 months (as was recently announced on the Minister for Small Business’ Facebook page of all places). Are tenants double-dipping – that is getting the benefit of a low market rent and reduced rent under the legislative framework?

Steve 12:12: Okay look, so I’m going to answer your question, but I'd like to put a little background behind it. I guess, in the simple answer on the actual question of double dipping, it's possible. Okay. There's no question about that. There's two, there are two views that I have. One is that wherever possible, if you're acting for one of the parties, I think you'd be wanting to try and recommend to the parties is that they defer the market rate review. And what I mean by that is just push it back to say, let's say it was in August, push it back to August next year, if need be, the landlord would agree hopefully to extend the lease by that one year period. So the landlord's not necessarily disadvantaged. The reason for that is that they will have some transactions that have gone through during COVID. Again, as I said earlier, not many. What I’d be looking for is to try and have some information about the market rent post COVID. Because once COVID is finished, we're going to really see transactions pick up again, hopefully, and they will reflect a post-COVID market. That's the first thing. The other thing is that we have this COVID legislation, which is really meant to deal with COVID in its own right. And if I haven't undertaken a determination, on a COVID lease, if I can call it that. I have done a couple prior to COVID. But if I was doing one now, one of the things I'd like to do now, notwithstanding what I talked about earlier about deferring it, I'd like to be able to do that revenue determination on the basis that COVID is not taken into account in the context that there's COVID legislations meant to deal with that, push it out to the side. Whether they're still gonna find rental evidence to back up what you're doing or not doing is another issue, which we talked about already. So it's a hard one. It really is. I think double dipping is unlikely at the end of the day. But my concern is that valuers will if they're not careful, they'll end up guessing certain issues which is not good.

Rohan 14:01: I think that's right, Steve. One thing we try to do is, if there is a market review and a valuer, to determine the rent, we try to ensure tenants and landlords agree about the relief being provided so as a market rent, whether or not you might take into account COVID or if it does, but we try to get them to agree that they've sought the relief, it's been provided that's the rent that's there. So there's no issue about double dipping. I know it can be a big issue as we try to deal with that with the parties upfront in the in the appointment of the valuer. So it's one thing to try to.

Nicola 14:34: This year has seen certain matters that were on foot grind to a halt to deal with COVID rent relief. How are valuers treating market rent determinations where the parties were in the midst of the determination process pre-March?

Steve 14:54: Okay, as I said before, I've completed two rent determinations which were prior to March. One was a determination of a fast food chain in a shopping center. Rent review date was, I think from memory, was 20th of January. In both these food particular determinations, I rationalized why COVID-19 must be ignored. And the cornerstone of that argument said on what the hypothetical landlord and tenant would have known about COVID-19. And, dare I say the unbelievable impact that COVID-19 had on the Australian economy, and is still obviously impacting. And now there's a, there's a court decision out of New South Wales, which is known throughout the valuations here as the Falconer, Falconer Principle, which was enunciated in New South Wales Court of Appeal in the Housing Commission of New South Wales vs. Falconer in 1981. Now, what this basically states is that there are many decisions, including decisions the High Court, in which has been held that the evidence of future events is admissible, not to prove a hindsight, but to confirm a foresight. Now, if you think laterally and simply in January, no one would have known what was going to happen. So you can't bring what's happened in the future back to that date, it’s impossible. That is, it is what it is, and you can't do anything about it. So in that context, I think anybody doing in that period of time, that is, say up until March, early March, or something like that, the valuer needs to put in a reasonable argument as to why they’re not taking into account COVID.

Rohan 16:22:  I think that's right, Steve.  I mean, we give advice to valuers quite regularly that they could look at the review date and what was known in the market and what would affect the rents at that time. So you can't, you can't go back to January with the hindsight of lockdowns from this year and say that was the rent.

Steve 16:38:  If you're not going to take into account COVID pre-March, as we've just discussed, begs the question, what does one do if you've got a determination particularly from advice in that period of time from March until say now for the sake of discussion, it's a really, really difficult issue to deal with. As I said before, you've got a lack of market transactions, you've got COVID legislation, which is giving tenants tenant relief, the ability of a value to find out the COVID relief for individual tendencies is, I'm not going to say it's impossible, but I just don't see how you can actually get it done. And indeed, how do you rationalize that when every tenant is likely to have a different agreement than that which another tenant gets? Now for example, we've had an abatement of rent based on a formula, reflecting turnover, and 50% of that abatement can then be deferred. What if a tenant doesn't get it? What's if the tenant negotiates themselves out of deferment? How do you adjust your information to reflect all these things? That really bothers me, as a valuer, in the sense that if you're not careful, your subjective analysis can be tantamount to guessing, because you just don't know. The other thing, too, that one needs to be careful of is that whatever decision you make one of the unintentional consequences, and I've seen it happen prior to COVID in another matter is where the valuer inadvertently actually varies the lease. Okay. Now, what I mean by that is, it comes down to, this particular instance I'm thinking of was involving incentives, and the valuer is determined the starting rent, were he adjusts for the incentives, that was fine, it's all straightforward. But when it came to the second year rent, he went back to the pre adjusted rent and then increased it by the predetermined increase under the rent. So for example, his rent was determined at 60 for the first year, but prior to adjustment it might’ve been 70, then he took the 70, for the, for the purpose of clarification, and what he did with his determination, he said that the 3% increase went beyond the 60,000, beyond the 70,000. Now, clearly, he's varied the lease, not necessarily intentionally, and I spoke to this guy afterwards, because I was involved in this and when I put it to him that you’ve varied the lease is a huge pregnant pause in this and the subject was changed. So that's just one thing. The other thing is, and this is a current example I'm involved in, it's, it's in that sector of the market, which I think is really been the most damaged, that's the restaurant food and beverage. This is a large restaurant that seats probably 300 people in the tourist precinct of Southbank, and you can appreciate that the south bank of the Yarra River over the last six months has been a ghost town unequivocally, unequivocally. Now, this particular tenancy here has got a bid term market rent view as of April in a 10 year lease. It's been closed since March. And it didn't open during that little bit of a hiatus around May, early June because it was just uneconomical to do so. And that, in fairness, was referred to by numerous governments or government people, including the Premier. Now if you take into account 37(2) of the Retail Leases Act, you got to assume the tenancy is vacant and available for lease, tick. You’ve got to ignore the tenants fit out. Yep, that's fine too. Take into account permitted use etc. To make this even more interesting in this particular exercise, there's a redevelopment clause in the lease. And whilst the landlord hasn't issued any redevelopment notice to break the lease, it has been officially, it's being actually reported in the news that this particular property is going to be redeveloped next year or sometime next year. So you've got, what I refer to, as a perfect storm. Because if you go down and if you get to the point that a valuer should and think about the hypothetical tenant and the hypothetical landlord both about sign a deal. And I'm not taking a tenant’s perspective on this, I'm trying to be pragmatic and commercially realistic. Where would you find a tenant who would sign a lease with only a best case scenario, it's not even five years, it’s six months to six months rolling, because of the development clause, potentially have to refit out a shop or restaurant, say between $2.5-2.75 million and that‘s not a silly number, trust me, it's not at all. And they're going to take this on and pay rent for it. And they can't open. Now facetiously, the rent’s zero, because there’s no one who will take it.  Pragmatically, that's nonsense too.

Steve  20:53: But this is likely to go to determining valuer. And I can tell you, I've done my fair share of not easy determinations over my experience and quite frankly, I wouldn’t want to do it. Because there is no right answer to it. And I know that one of the bigger firms have put a figure on it, I have put a figure on it in a pragmatic sense. It's a lot less than what the passing rent is. But is the landlord going to agree? It’s an absent landlord, international, you know, I'm not sure they care. But it's not about it's not just about the restaurant itself. It's about what this COVID things done and is doing. Let alone the ability to get information. I know for a fact within this particular locale there’s about four or five tenancies assigned to short term leases a couple years ago. Can I get that information? No. Can the determining valuer get it? Yes? Do I get the chance to talk about it? No. One person analyses it one way and another analyses it slightly differently. And it's just crazy. So that I'm not saying that case, in every instance, don't. But this is just probably a worst case scenario. I don't know whether Rohan has any views on what I've just talked about. But it's just really, really difficult. And there's no easy answer to it, you just got to work it out the best way you can. But I come back to the point with COVID in particular, if you can push it to one side and do it without bringing it into the equation. I think that's a better scenario. Because as you say, double dipping and so forth. It's not easy.

Rohan  22:15: Yeah, I know the matter Steve, it's a very interesting example. I don't know how… you’re quite right. I don't think a valuer could come up with a value because no tenant would ever want that space on the spot, six months notice ,with the fit outs, I don’t know how you could come up with the right value there. And it's one, you know, it could go to VCAT if you know, the valuer determines or rent that's high.

Steve 22:34: Well, the valuer is realistically, is absolutely and unequivocally in a no win position.

Rohan 22:45: Well, absolutely. And look, the space is worth something no doubt. But what's it worth? I don't know how you would work it out.

Steve 22:49: Well, look, you I suppose at one level, you could do it on a percentage rent type basis. That is, the turnover is X. But even but then you've got the situation that the damn thing is closed. These restaurants open, reopen, they don't get back to doing a, pick a silly number, their 20 grand a week. It's impossible where you’ve got limited numbers allowed to go in there. They're not fully open properly. And then there's a confidence factor of the people actually wanting to go to restaurants, you know small ones maybe, bigger ones? I don't know. Yeah, we're some time away from getting back to anything normal in that in that particular sector of the market. So it's, it's just a really fascinating place to be putting your toe in the water, so to speak, but it's also fraught with a lot of issues.

Rohan 23:31: That's right, and what tenant would want to spend even a million bucks on a sixth month lease?

Steve 23:36: Well, if you're kicked out, it's not gonna happen. That's why I said before facetiously, the market rental value of it right now is probably zero. It's a it's a midterm review. So the tenants there, I mean, they're not going anywhere at this point, unless let's say, the landlord that is, exercises its right to issue a demolition notice, and then you've got the argument is, is what the conversation would be down the track. That's another issue.

Nicola 23:58: In September, there was a 90% surge in Sydney for sublease stock. Does this effect the market rent?

Steve  24:17: It's a good question - subleasing market could be arguably a separate market in its own right. But again, you've got to be a little bit pragmatic about this. And if you say, if you're looking around for deals, if I can call it that, in terms of real evidence, that is, if you've got a raft of sub leasing deals, where people are looking at taking it on, potentially because they're downsizing or whatever the case may be, or if the lease is coming up, they don't want to stay in that 5000 square meters and want to go to 2000 square meters, for example. At some point if there's enough of those sort of deals around that, that does become the market, in my view. Even though, even if they're subsidized by the sitting tenant, in terms of subleasing, the fact is, it is a deal. Whatever that deal may be. It's like arguing about mortgagee sales in the residential market, if you're not mortgagee sales becomes the market. Same sort of principle. I think so yeah, I think I think it's going to have an impact on the market rate, particularly in the office area.

Rohan: 25:10:I 'll just say one thing, a lot of leases will say ignore sublease rents, because of that very point you've raised Steve. So, you know, a lot of leases I see will say, when a valuer does a valuation, you ignore the sublease rent.

Steve  25:26: I get, I hear that and I, I have to say, I've seen those sort of things as well. But, there is a, you come back this issue of what is rental level as well.  I don't think you could, how do I put this at a higher level, I don't think you can actually ignore it. You certainly wouldn't necessarily base entirely your decision on sub lease rental evidence. But then the flip side of that is, if there's no other rental evidence, what do you do? Again, dare I say the prudent valuer may, whether you get an agreement to this, I don't know. But you may go to the parties and, like I said about COVID relief, get them to agree that you disregard it. If there's no other rental evidence around, and who knows that if prior to doing the determination, would you not go to the parties and say, look, realistically, this is the only evidence that's out there and, notwithstanding what the lease says, I'm seeking your approval to take this into account. Now, landlord probably wouldn't like it, tenant would love it. Is there somewhere in between? I don't know. It's a hard one. I mean, anything at all in a lease that puts cufflinks on a valuer is, I think, is ridiculous. But that's my personal view.

Rohan 26:34: Yeah, a lot of leases can have it. And I think that’s right, the valuer would have to go the parties otherwise the valuation could be set aside. You follow the lease guidance, what the lease clauses say about valuation. So you're quite right.

Steve: 26:49: I mean, I think I mean, just to draw a corollary to that. I mean, if you look at the Retail Leases Act talks about disregarding, these are my words, incentives in the marketplace. And the reason why most valuers would know this, and I think others may or may not, I don't know. But the primary reason for that is, is that a market rent review, if you've got incentives you back them out, so that the sitting tenant who is subject to the market review isn't forced to pay a rent, that includes the benefit, a benefit should say that that tenant has not received. That's mathematically correct, in my view. But when you get into what's going on in the market, if there's only subleases been entered into, I don't see how you can possibly do your job if you weren't, if you were instructed unequivocally not to take those into account. If nothing else is happening. It's illogical.

Nicola 27:38: As if there wasn’t enough going on in the leasing space this year, Parliament passed the Retail Leases Amendment Act which amends the Retail Leases Act. It allows tenants to request an early market rent review if the rent will be reviewed to market at the beginning of the term and the tenant has the luxury of waiting for the market rent to be determined prior to exercising the option.

To avoid empty shops, landlords are incentivised to issue the required notice well before the end of the current term. What challenges will this bring to valuers?

Steve 28:19: Okay, there are two issues I see. And one is what you basically alluded to a moment ago being the valuation being undertaken prior to the review. There's always a problem with, and I've been involved with a few where, for whatever reason, under the terms of the lease a determination had to be done prior to the actual date of review. And when that situation has presented itself, I've always sought an indemnity from the parties. Well, I'm going to say the unlikely event. But in the event that evidence comes to the fore after I've completed the determination before the review date. So that's the problem, the biggest problem for valuers. And somehow, if that was happening, or sorry, I'll rephrase that, that would be a matter that have to be taken into account when drafting your terms of engagement letter. I think I think you can get around that bit without any drama. The other thing that's going to be interesting, will be, notwithstanding under the Retail Leases Act, we have a 45 day timeframe within which to complete the determination from the date you are appointed. And in most cases, the date of appointment is issued once the valuer has got his terms of engagement signed off, been paid in advance for the determination and has received submissions. So you do in fact get the luxury of having the 45 days. It's getting harder and harder and harder to undertake that determination within that 45 day time period. So I know that you can, by agreement, extend these timeframes and everything else, but I think, look I might be wrong, but I doubt it. I think it’s gonna actually put a bit of pressure on valuers to actually complete these things very much within the nominated timeframe under the Act because of the cooling off period and stuff like that. So I think it's a case of watch this space to see how it happens. It’ll only affect, unless I'm wrong, it will affect leases only that commence after the 22nd of September this year. So realistically we're three to five years away from probably doing one of these here.

Rohan: One of the problems I think with it is how do you determine a rent in advance?

Steve: As I said before, you cannot manufacture rental evidence. So if you're doing it today, what are we, the 15th of December, and the review date is the first of February, lots of things can happen between now and then. So from a valuer’s perspective, they just have to protect himself or herself in terms of engagement to make sure that any information that becomes available post the date the determination is handed down will not impact on the determination. Or the valuer gets the right of review but then that just flies in the face of the timeframe within the amendment act. So that's the only way I can think that you can deal with that.

Rohan 30:49: I think’s right, what if you're doing a review in January for a review date in March, no one could have predicted the pandemic.

Steve 30:58: No, definitely.

Rohan 31:00: There's no way a valuer could do it.

Steve 31:02: Well, if you want to use, the one I spoke of earlier, that example of the national fast food restaurant chain, I mean, that was done, the review was dated the 20th of January, no one could have predicted what was going to happen.  But I had to take myself back to that date. Same sort of thing, isn't it? I mean, you just don't know. I think it's, it's the same principle. You've just got to talk, you just got to explain what you're doing as required under the Act, and the reasons why you're doing certain things and etc, etc. I just can't see any other way of doing it.

Nicola  31:37:  Do you think that many parties will circumvent the market rent review process and instead enter into new heads of term and lease agreements?

Steve 31:53: Well, yeah, look, I've had discussion with Rohan about this before. And I've also spoken a few other leading leasing guys, particularly in the city. And I think what will happen is, instead of offering a 10, for example, a five year , five plus five lease, I think it's more likely to be a 10 year lease with the break clause available for the tenant. So you avoid the Amendment Act in terms of what goes on at an option. Because clearly, the whole thing's about doing what you do in an option in a midterm market review just comes back to the tried and tested way of doing it.

Rohan: 32:22: Yeah, that's right Steve. I mean, I've spoken to the API and other agents who have said don’t have options, have the break dates. The benefit is you don't, probably talking myself out of work, but we don’t have to do a data renewal of lease, you know, there's a lot of things that tenants will also benefit from. They want to get out of lease, they might give a notice. But if takes it option, I daresay tenants will just forget the date. You know, and there's always issues with the landlord's following up with them to remind them, issues of service that knows a lot of problems like that. So I think it's a good idea just to get rid of them, quite frankly. But we’ll see what the market does.

Steve 33:05: Yes. Well, if its anything like shopping centres, when the Retail Leases Act came into being, it came into being on the first of May 2003, there's no more options in shopping centres. They did not want things to go to market information information got out, and anything else you can come up with and just absolutely quashed.

Nicola 33:23: So Steve, in light of our discussion, are there any other trends that you are seeing in the marketplace? What do you see as the issues facing valuers and in turn landlords and tenants.

Steve 33:35: I think, look, I've made a couple of notes here. The only two I really think are going to be major issues. I think it’s very much a watch this space when it comes to the rent deferrals under the COVID legislation. I think that's a real, a real sleeper. I'll go so far as to say I think a lot of the so called deferrals will never get repaid. And I can see also some, some tenants might drop themselves into liquidation to get out of that sort of thing and reemerge under a different banner. But that's that's the first thing. I think the and we've talked about it a fair bit, particularly the examples I gave you in relation to restaurants. I think the food and beverage restaurant area is a seriously seriously a major challenge, particularly in the CBD. If we see the declining visitations to the CBD dropping, I mean, to say there’s a coffee shop on every second corner is an understatement, I think and that I think is going to be a serious, serious issue. Other trends, I think, I think we're in a bit of a watershed in when it comes to rental levels right across the board. A reason for the major shopping center owners have been significant that now I think the the argument for bricks and mortar shops we've all heard about it for a long time is going to decline. There's other people saying, this will decline with the advent of online shopping. Online shopping, it's to say it's taken off in no mean way at all, just gone berserk and you only need to look at Australia Post and see what they've been doing. In fact, I have a family member with a licensed post office in a country town and for about five or six months on the trot, every week for him has been like a normal Christmas week. The number of parcels and deliveries that are going through both in and out, he says just been horrendous. Now, great for him, he gets, he gets a good fee out of everyone he delivers, etc, etc. But I think people definitely change their habit. And that's half the problem when you go back to, I'm talking shopping centres specifically. I mean, it's a social thing as much as actually buying the goods you go to buy. Having coffee, lunch, or going to the cinema or anything like that. And I think we'll see some interesting developments in in the shopping centers where they look at their mix and what they're offering and how they're going to turn that around with other things that will attract people to the shops. It needs to be seen as not not just the retail experience – it will ahve be a few other things.

Nicola 35:45: Thanks for joining us, Steve, and for shedding some light on market rent trends during the COVID pandemic period, and some examples that have come across your desk. We'll be putting a link to Steve's LinkedIn and his contact details as well as other valuable links in the show notes. Please subscribe to our podcast on your podcast platform of choice and subscribe to the Madgwicks Lawyers website for updates affecting the property industry. Stay tuned for more conversations with industry experts and the next episode will be released in the new year.

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