Incentives in Market Rent Reviews: What Happens When the Lease is Silent?

In commercial leasing, a recurring issue arises when a lease calls for a market rent review but says nothing about the treatment of incentives. With rent-free periods, fit-out contributions, and cash incentives now commonplace, the absence of express wording can create disputes about how a determining valuer should approach the review.

Effective Rent is the Benchmark

Where incentives are not mentioned in the lease, courts have clarified that the review must be conducted on an effective rent basis. In Levy v Victoria Towers Pty Ltd [2003] QCA 204, the Queensland Court of Appeal confirmed that ignoring incentives produces an artificial outcome inconsistent with what a willing but not anxious landlord and tenant would agree in an open market.

Supporting Authorities

Several other decisions reinforce this principle:

– CML Assurance v Tasal Services (1992) — Incentives cannot be excluded from consideration; a market rent determination that ignores them is invalid.
– Edmund Barton Chambers v MLC (1986) — The court confirmed that all relevant market evidence is admissible, not just rent-review outcomes, meaning incentive-affected deals are part of the evidence base.
– Re ANZ Executors & Trustees Co Ltd (1991) — Incentive payments were held to be relevant; their effect depends on how the valuer adjusts comparables.

Practical Application for Valuers

When the lease is silent on incentives, the valuer should:

1. Identify comparable evidence — including transactions with incentives.
2. Normalise to effective rent — adjust comparables so face rent plus or minus incentives is expressed as an equivalent annual rent over the term.
3. Document the adjustments — explain clearly how rent-free periods or fit-out contributions were treated.
4. Respect protective clauses — if the lease includes a “no decrease” provision, ensure the determination is not set below passing rent, even after adjustment.

Why It Matters

The consistent message from the courts is that market rent reviews must reflect the true economic value of comparable deals, not simply headline rents. For landlords and tenants alike, this ensures outcomes are aligned with the reality of market conditions rather than distorted by the absence of drafting clarity.

✅ Key takeaway: If a lease is silent on incentives, the review is effective — incentive-affected transactions are admissible, adjustments are required, and the valuer’s role is to transparently reconcile face rent with real market value.