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What is the legal meaning of ‘fair’ rent'?

 

As the economy changes, so to does the rise and fall of rents that are payable. Then when rental amounts start to head south, it is common for disputes to arise between landlord and tenant, and landlord and the appointed representative acting for them on what a fair rent would be for a specific property under review. 

 

The question commonly raised in disputes between parties, is what is the meaning of a ‘fair rent’ in a changing economy. There are various terms which express the meaning of rental value and some include: ‘market rent’, ‘open market rent’, ‘current market rent’, ‘reasonable rent’, ‘yearly rent’, ‘rack rent’ and ‘fair rent’. 

 

Let’s have a look at a few of these terms: 

 

The term ‘market rent’ is used to obtain the highest rent possible after the premises has been placed on the open market for rent. In the case of Corppco No 23 Pty Ltd v JS Hemingway Investments Pty Ltd [2003] the court held that ‘market rent’ was where there was a willing lessor and a willing lessee in an arm’s length transaction ‘acting’ without compulsion. 

 

The term ‘open market rent’ may be explained by the case of IRC v Gray [1994] where the court held: 

 

It cannot be too strongly emphasised that although the sale is hypothetical about the open market in which it is suppose to have taken place. The concept of the open market involves assuming that the whole world was free to bid, and then forming a view about what in this circumstances would in real life have been in the best price reasonably obtainable. 

 

The English case of Sterling Land Office Developments Ltd v Lloyds Bank plc [1984] provided a distinction between ‘market rent’ and ‘open market rent’ where the court held:

 

I do not believe there its any difference between an ‘open market rent’ and a ‘market rent'. I am convinced that the words ‘market rent’ are not by themselves apt to refer to a rent within closed or circumscribed market to which only certain bidders are admitted. 

 

The meaning of ‘current market rent’ was defined in the court case of Spencer v Commonwealth (1907), and confirmed in Holman’s Case (1992), which explained the term as: 

 

The market rent able to be obtained for such premises in the marketplace, on terms substantially similar to those of the leases in question, the market including (but not exclusively) the market for premises not currently occupied. His honour of the court remarked in the Holman’s Case, that the mandate [given to valuers] assumes the existence of a market, and that is precisely the concept. 

 

There have been various attempts throughout the court’s history to explain what is a ‘fair rent’, and determining the ‘fair rent’ position is not just important for a tenant, but also to create a reasonable balanced rental market on the economic conditions at that time.   

 

The courts have held that there is a difference between the concept of a ‘fair rent’ and ‘market rent,’ and the case of Mutual Provident Society v Overseas Telecommunication Commission [1972] provides a proposition on this difference: 

 

The expression ‘fair annual market rental’ was to be interpreted, in the circumstances, as the rent which could reasonably be obtained from a tenant whom a responsible landlord would accept for a term which was reasonable and on covenants and conditions which were reasonable for the kind of structure in its particular location. 

 

Then in the case of Compton Group Ltd v Estates Ltd (1977) the court held ‘fair’ suggest the upshot of free negotiation between the parties negotiating the rental amount. There have been various court judgements were ‘fair and reasonable’ have been used to define what a rental amount will be at a particular time, with both these words being interchangeable in their meanings and use.

 

In the case of Ricciardello v Caltex Oil (Australia) Pty Ltd [1991] the court provided the distinction between ‘market rent’ and ‘fair rent’: 

 

In the former case the [market] rent is determined on the basis of the rent the premises would bring on the open market having regard to the rents paid for comparable premises in the same or a comparable area. The test is objective. In the latter case the [fair] rent is determined on the basis of the rent which it would be fair for the particular landlord and the particular tenant to have regard under the lease in question having regard to all the circumstances relevant to any negotiations between them of a new rent from the review date. The test being largely subjective. 

 

Then in the case of Homebase Pty Ltd v City of Subiaco [2013], the court defined the ‘fair market rent’ as: 

 

…the rent which the Leased Premises would reasonably command at the Review Date in a free open market taking into account all relevant facts, matters or variables used in proper land valuation practice on the basis that the leased premises were vacant and available to be let on the same terms and conditions as are contained in [the lease]. 

 

The legal meaning of ‘fair rent’ should be a straight forward answer, however, it is not, as there are various considerations that need to be taken in to account at that specific time when the term ‘fair rent’ is used. 

 

In changing economic conditions, disputes can occur based on the use of passed historical rental  information, where there is an attempt to maintain a lease value, which does not match the ‘fair rental’ at the time in question. When such disagreements occur and resolution attempts have failed between the parties, the end result in most cases is the lettable premises becomes vacant, or remains on the market available for lease. 

 

There are various legislative Acts that control the leasing process, and a prudent landlord and tenant before they sign an agreement for a lease, should get that legal advice to protect their legal rights and interests. 

 

The comments in the aforementioned do not constitute legal advice and are general in nature, and if legal advice is required please contact: John Melis at Legal AU Pty Ltd (03) 9999 7799 www.legalau.com 

 

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