annual rental value

It is interesting to see that much of the latest litigation on market value has come about through disputes on rental determinations or trying to decide what is market rent or annual market value.

This raises another important and fundamental valuation question of how do courts see annual rental value? Is it fundamentally different from lump sum value? The answer is no.

The long and established methods of valuation as dictated by the courts over all these years apply equally as well to the determination of rental value. There is a lot of woolly thinking at the moment about rental values but the legal rules and guidelines applicable to lump sum valuations apply equally as well to annual rental values. There is little in the current rental market which cannot be handled by long established rules of value starting with Spencer.


This concept derived from Spencer is the starting point of all rental values and applying modified Spencer it is that lease agreed to between the two parties after a typical period of promotion and negotiation between the landlord and a number of potential tenants. Since the law follows lump sum values I am a little dubious about reading too much into some the lower court judgments as I am sure many would have been lost on appeal.


The valuer determining annual values can work safely within the guidelines well established by the courts over 80 years of disputes. Similarly, all the problems being expressed by a number of writers about determining market rents have been evident in lump sum valuations and their solution is the same. This applies to incentive determinations. The only difference is that the valuer could be working under a rental value defined in the lease agreement which can be different from annual value in general law. As has been said on a number of occasions the lease is a contract and the parties are bound by that contract (plea here for "plain English" leases).


The rent review clause seeked to exclude from the "current open market value" "any incentives and allowances including but not limited to rent free periods of occupancy and contributions towards costs incurred in fitting out leased premises".

Held that despite the apparent intention of the clause, effective rental should be taken into account. In my view this is a legal interpretation of the lease document as a whole wherein express or otherwise, the whole purpose of the rent determination is the determination of market rent. That is, there is ambiguity in the lease document and as a result the above exclusions can be severed from the contract.


This lease provided for 2 yearly rent reviews to "current open market rental value" but silent on the method of determination. This is how the clause should be expressed leaving the process to the valuer. Held that the rental must be determined by reference to the market and therefore, takes into account lease incentives.

The judge stated that market rent and annual rent both mean face rent. This is clearly wrong but otherwise a correct decision.


What is market rental value? Using modified Spencer:

That rent agreed to between the lessor and lessee over the subject premises which has been exposed and promoted in the market place in the normal way.

This definition implies that the resulting agreement will be in a typical lease document and subject to "normal terms and conditions" for the subject premises. The meaning of "normal terms and conditions" has been tested in a number of court cases including Goobang Shire Objections and Brewarrina. For example, sales can be adjusted to equivalent cash price (ECP) if the interest rate paid by the purchaser is higher or lower than normal rates.

In lease analysis it is accepted that an agreed to rent can be adjusted to equivalent annual rents under normal terms and conditions if the lease agreement contains any unusual payments. For example, the payment of a premium or fine. The courts have generally allowed the valuer discretion in deciding what are normal terms and conditions (eg Holmans case) but do not forget that although the valuer's decision is generally, binding despite a mistake, there is no reason why one of the parties cannot sue the valuer acting as an expert for any damages suffered by their mistake (Horwitz-Grahame case).

If a typical or common CBD rental scheme consists of a 5 year lease with the first 2 years rent free and the final 3 years at $200/psm/pa then that lease is the market rent for comparable CBD properties. That is, the valuer can state that the market rental for a comparable CBD property is $200/psm/pa subject to the normal terms and conditions which include the first 2 years being rent free. If all other lease agreements are similar and the proposed lease for the subject property has the same terms and conditions, then there is no need to analyse or comment any further. This is the datum rent for comparison purposes. The analysis of other lease agreements is only necessary if the terms and conditions are different.


Bradley KF, August 1993, Leases - trends in the 1990s, The Valuer, 490.

See annual rental equivalent