When an investor buys a tenanted commercial property, they are not really buying the bricks. They are buying an income stream, and the document that defines it is the lease. Within the lease, the clause that quietly shapes ten, fifteen or twenty years of cash flow is the rent review mechanism. It dictates how the rent moves each year, whether income keeps pace with inflation, and what happens when the lease eventually resets to the open market.
Two near-identical buildings on the same street, leased to the same calibre of tenant, can be worth materially different amounts purely because one has a 3.5 per cent fixed annual review and the other is tied to CPI in a low-inflation environment. A buyer who reads the headline yield but never models the review profile across the remaining term is guessing.
This guide walks through the common review types used in Australian commercial leases, how each shapes income growth and risk, where the law restricts certain clauses, and the specific things a buyer should test before they exchange. It is general information, not legal or financial advice; review structures interact with state legislation and should always be checked by a qualified solicitor against the actual lease.
The headline yield tells you what the property earns today. The rent review mechanism tells you what it will earn for the next decade and whether that income is real growth or just an illusion against inflation.
What a rent review actually does
A rent review is a contractual mechanism that adjusts the rent payable at defined intervals, usually annually, with a larger reset at each lease option or renewed term. The purpose is to protect the landlord against inflation and rising market rents over a long lease, while giving the tenant some certainty about future occupancy costs.
The structure of these reviews is the difference between an asset whose income compounds reliably and one whose income stalls. It also drives valuation directly: most commercial valuations capitalise the net income, so the trajectory and credibility of future reviews feed straight into the capital value. Understanding how the review interacts with the capitalisation rate and the resulting yield is fundamental to underwriting any tenanted asset.
1 Fixed percentage reviews
A fixed percentage review increases the rent by a set amount each year, commonly expressed as a number such as 3 per cent or 4 per cent per annum. It is the most predictable structure available and, for that reason, the one most prized by passive investors and lenders.
Why buyers like fixed reviews
- Predictability: the income profile can be modelled to the dollar across the whole term, which makes finance, valuation and cash-flow planning straightforward.
- Compounding growth: a 3.5 per cent annual increase compounds meaningfully over a long lease, lifting income well above the starting rent by the time the term ends.
- No dispute risk mid-term: there is nothing to negotiate or determine, so the landlord is not exposed to valuer disputes between resets.
The catch
A fixed review only adds value if the agreed rate is sustainable. If a vendor has set a high fixed escalation, say 4 to 5 per cent, the passing rent can drift above what the market would actually pay. This is over-renting, and it becomes a real problem at the next market review or lease expiry when the rent can reset downwards. The number that flatters the income on day one can be the same number that creates a cliff later.
2 CPI and CPI-plus reviews
A CPI review ties the rent increase to movements in the Consumer Price Index, the inflation measure published quarterly by the Australian Bureau of Statistics. The lease will specify which CPI series applies (typically the weighted average of eight capital cities, All Groups) and the reference quarters used to calculate the percentage change.
CPI reviews are common in institutional leases and government tenancies because they are seen as a fair, externally referenced way to keep rent aligned with inflation. The attraction for investors is that property tied to CPI can behave as an inflation-linked income stream, which is part of why the asset class is often described as a partial hedge.
The weakness of pure CPI
In a low-inflation environment, a pure CPI review can deliver very modest increases, sometimes well below the rate at which a fixed-review property would grow. CPI is also volatile: it can spike and then fall back sharply. A buyer relying on CPI growth is, in effect, taking a view on future inflation.
CPI-plus and collar-and-cap structures
To address this, leases often use CPI-plus (for example, CPI plus 1 per cent) or a hybrid that takes the greater of CPI or a fixed percentage. Some also impose a collar and cap, setting minimum and maximum increases so the rent cannot fall below, or rise above, agreed bounds. These hybrids are increasingly the norm because they give the landlord inflation protection without leaving income entirely at the mercy of the index.
3 Market rent reviews
A market review resets the rent to the current open-market rental value of the premises, usually at a lease option or at the start of a renewed term, and sometimes at a fixed mid-term point. Unlike fixed or CPI reviews, the outcome is not known in advance; it depends on rental conditions at the review date.
How the process works
The lease sets out a procedure. The landlord typically proposes a new rent; if the tenant disputes it, the parties attempt to agree, and failing agreement the matter goes to an independent valuer determination. The valuer, usually a registered valuer appointed by agreement or by the relevant professional body, assesses market rent having regard to comparable lettings, the lease terms, and any disregards specified in the lease (such as ignoring the value of the tenant's own fit-out). How a determining valuer thinks is closely related to the broader topic of commercial property valuation methods.
The two-sided risk
Market reviews cut both ways. In a rising market they can deliver a substantial uplift. In a soft market, or where the passing rent has been pushed high by years of fixed escalations, the review can confirm that the property is over-rented, exposing the buyer to a downward reset and a hit to both income and value. This reversion risk is one of the most underappreciated dangers in commercial buying: a high yield supported by an inflated rent that is due to revert is not a high yield at all.
4 Ratchet clauses and where they are restricted
A ratchet clause prevents the rent from ever decreasing at a review. Most commonly it appears on market reviews, where it provides that the reviewed rent will be the greater of the current passing rent or the assessed market rent, so the rent can go up or stay the same but never down.
For a landlord, a ratchet is valuable downside protection. For a tenant in a falling market, it can lock in an above-market rent indefinitely. Because of that imbalance, ratchet clauses are restricted or prohibited in many circumstances under the state retail leases legislation. Each state and territory has its own statute, including the Retail Leases Act 1994 (NSW), the Retail Leases Act 2003 (Vic) and the Retail Shop Leases Act 1994 (Qld), and several of these void or limit ratchet provisions on market reviews where the lease is a retail lease.
The critical point for a buyer is that enforceability can depend on whether the tenancy falls within the retail leases legislation, which turns on the use, the location and sometimes the lessee. The same clause can be valid in a non-retail commercial lease and unenforceable in a retail one. This is exactly the kind of issue to confirm during tenant and lease due diligence rather than assume from the way the clause reads.
5 Comparing the review types
The table below summarises how the main mechanisms behave. Real leases frequently combine them, for example fixed annual increases between options with a market review at each option.
| Review type | Income predictability | Inflation protection | Key buyer risk |
|---|---|---|---|
| Fixed percentage | High | Only if the rate exceeds inflation | Over-renting if the rate is set too high |
| CPI | Low to moderate | Direct, but only as strong as inflation | Weak growth in low-inflation periods |
| CPI-plus / hybrid | Moderate to high | Strong | Complexity; check the exact formula |
| Market review | Low | Indirect, tracks the rental market | Reversion risk and determination disputes |
| Market with ratchet | Moderate | Indirect, with a floor | May be unenforceable under retail legislation |
6 How reviews interact with WALE and yield
Rent reviews do not operate in isolation. They sit inside a lease that has a remaining term, and they feed an income stream that is capitalised into a value. Two relationships matter most.
Reviews and WALE
The weighted average lease expiry, or WALE, tells a buyer how long the income is contracted for. A long WALE with strong fixed reviews is genuinely defensive: income is both secure and growing. A long WALE with weak CPI reviews locks the buyer into modest growth, and one built on an over-rented passing rent simply defers the day the rent reverts. WALE without a reading of the review profile is only half the picture.
Reviews and yield
Because value is income divided by the capitalisation rate, the credibility of future reviews affects what a buyer should pay. A property with sustainable, market-aligned reviews deserves a tighter yield because the income is reliable. One whose income is propped up by aggressive escalations or due for a downward reset should be priced more cautiously, often at a wider yield, to reflect the reversion risk. This interplay connects directly to how commercial yields are set across asset classes.
7 What a buyer should test before exchange
Reviews are a due-diligence discipline as much as a financial one. Before committing, a buyer should work through the lease and the supporting documents methodically.
- Read the actual review clause, not the summary. The information memorandum paraphrases; the lease controls. Confirm the exact mechanism, the rate or formula, the timing, and any caps, collars or ratchets.
- Model the income across the remaining term. Build out the passing rent year by year, including the next market review or expiry. This reveals whether the income compounds, stalls, or faces a reversion.
- Benchmark passing rent against market rent. Obtain comparable rental evidence to test whether the rent is at, above or below market. Over-renting is the most common trap and is best diagnosed before, not after, purchase.
- Check the legislative overlay. Establish whether the tenancy is a retail lease in the relevant state, because that determines whether ratchet and other provisions are enforceable.
- Examine the review history. Missed or unactioned past reviews can mean the passing rent is lower than the lease entitles, which can be an opportunity or a sign of a passive landlord.
This analysis is where an independent buyer's advocate earns their fee, because it requires reading the lease adversarially rather than accepting the selling agent's framing. It sits alongside understanding the lease type and structuring the acquisition correctly, whether held in a company, a trust or an SMSF using a limited recourse borrowing arrangement.
Frequently Asked Questions
What is the most common rent review structure in Australian commercial leases?
Fixed percentage annual reviews, often around 3 to 4 per cent, are the most common in non-retail commercial leases because they give predictable income. Many leases combine fixed annual increases with a market review at each lease option, and CPI-linked or hybrid CPI-plus reviews are also widely used, particularly in institutional and government tenancies.
Are ratchet clauses legal in Australia?
It depends on whether the lease is a retail lease under the relevant state or territory legislation. Several state retail leases Acts void or restrict ratchet clauses that prevent rent from falling at a market review, so a ratchet may be enforceable in an ordinary commercial lease but unenforceable in a retail one. Because this turns on the use and location of the premises, it should always be confirmed by a solicitor against the specific lease.
What is over-renting and why does it matter to a buyer?
Over-renting is when the passing rent is higher than the rent the premises would achieve on the open market, often because years of fixed escalations have pushed it above market levels. It matters because at the next market review or lease expiry the rent can reset downwards, cutting both income and capital value. A high yield supported by an over-rented passing rent can be a warning sign rather than a bargain.
How do rent reviews affect the value of a commercial property?
Most commercial valuations capitalise the net income, so the trajectory and credibility of future reviews feed directly into the capital value. Sustainable, market-aligned reviews support a tighter yield and a higher value, while aggressive escalations or an impending downward reversion warrant a more cautious price. Modelling the full income profile under the review structure is essential to understanding what the asset is actually worth.