Rent Reviews in Commercial Property: CPI, Fixed & Market

Every commercial lease sets a starting rent. The rent review clause decides what happens to that rent for the rest of the term. The review schedule drives the growth of the income stream, feeds directly into the valuation, and shapes how a lender reads the deal. Two assets with the same passing rent and similar tenants can be worth meaningfully different amounts because one lease reviews annually to the greater of CPI or a fixed minimum while the other holds flat and then resets to market at year five.

This guide explains how each of the common review mechanisms works in Australian commercial leases, what ratchet clauses do, what a buyer should model before signing a contract, and how to work through the lease schedule during due diligence.

Where Rent Reviews Sit in the Lease

The review mechanism lives in the lease document, usually summarised in a reference schedule that lists each review date and the method that applies on that date. A ten year lease might carry fixed increases on every anniversary with a market review at the midpoint, or CPI reviews throughout with a market reset only when the tenant exercises an option. The pattern varies by asset class. Long leases in specialist sectors such as childcare, medical and service stations often run fixed or CPI reviews for the whole term, while shorter office and retail leases lean more heavily on market reviews at renewal.

Three mechanisms cover most Australian commercial leases: fixed percentage increases, CPI linked reviews, and market reviews. Hybrids are common, including greater-of formulations and market reviews bounded by caps and collars. The review clause also sits alongside the structure of the lease itself, so it helps to be clear on gross, net and semi-gross arrangements first. Our guide to commercial lease types covers that ground.

Fixed Percentage Reviews

A fixed review increases the rent by a stated percentage on each review date, typically a modest annual uplift in the low single digits. The mechanism is simple to administer and lets a buyer project the rent line to the day for the remainder of the term.

The certainty cuts both ways. If inflation runs above the fixed rate, the real value of the rent erodes even though the nominal number keeps rising. If inflation runs below the fixed rate for several years, the compounding carries the passing rent above the market rent for equivalent space.

What compounding does over a full term

Fixed increases compound. Across a ten year lease the gap between a fixed rent line and a flat market widens with each anniversary. Valuers describe this as an over-rented position. The contracted income is real while the lease runs, but the reversion at expiry or at the next market event will pull the rent back toward market. A buyer capitalising the passing rent of an over-rented asset is paying for income that will step down, and the price should reflect it.

CPI Reviews

A CPI review adjusts the rent in line with movement in the Consumer Price Index published by the Australian Bureau of Statistics. The lease should specify which index applies (All Groups CPI for a named capital city or the weighted average of the eight capital cities), which quarters are compared, and how a negative movement in the index is treated.

Common CPI variants

• CPI only. The rent moves with the index, in both directions unless the lease says otherwise.
• CPI plus a margin. The index movement plus a stated increment, which builds real growth into the rent line.
• Greater of CPI or a fixed minimum. The rent rises by whichever is higher, giving the landlord a floor in low inflation years and full indexation when inflation runs high. This structure became common in leases written after the inflation spike of the early 2020s.
• CPI with a cap and collar. The movement is bounded on both sides, which trades upside for predictability.

CPI reviews keep the rent roughly aligned with the general price level, which is one reason indexed leases are central to the case for commercial property as an inflation hedge. The drafting detail matters. A CPI review with a low cap behaves like a fixed review in a high inflation year, and a greater-of clause behaves like a fixed review in a low inflation year. Read the actual formula in the lease before assuming the income is indexed.

Market Reviews

A market review resets the rent to the current market rent for the premises at the review date. The lease sets out the process. Typically the landlord serves a notice proposing a new rent, the tenant has a defined period to dispute it, and if the parties cannot agree the question goes to an independent valuer acting as an expert. The lease prescribes the assumptions the valuer must make and the matters the valuer must disregard, such as the value of the tenant's fit-out and any goodwill attached to the tenant's business.

Market reviews usually appear at the exercise of an option, at the midpoint of a long lease, or on renewal. They are the only mechanism that can move the rent down as well as up, subject to any ratchet or collar in the clause.

Caps, collars and the shape of the outcome

A cap limits how far the rent can rise at a market review and a collar limits how far it can fall. A market review with a tight cap and collar operates much like a fixed review with extra paperwork. A pure market review on an over-rented tenancy is a genuine downside event, and a buyer should price it as one.

Timing, notices and missed reviews

Market review clauses often carry strict notice requirements. Some make time of the essence, so a review that is not initiated within the window is lost. Others allow a late review to be triggered at any point before the next review date. During due diligence, check whether past market reviews were actually conducted and documented. An unactioned review can mean the passing rent is stale, and an open, undetermined review at settlement raises the question of who receives the benefit of the eventual determination. The contract of sale should deal with that expressly.

Ratchet Clauses

A ratchet clause prevents the rent from falling at a review. A hard ratchet holds the rent at its current level even if a market determination comes in lower. A softer version limits the size of any fall instead of blocking it entirely, which operates in practice like a collar.

Two things about ratchets matter to a buyer. The first is enforceability. Retail leases legislation in most Australian states and territories voids or restricts ratchet provisions in the leases that legislation covers, so a ratchet printed in a retail shop lease may have no effect. Office and industrial leases generally sit outside those regimes, and ratchets in them are usually effective as drafted. Whether a particular lease is caught by a state retail leases act is a legal question for your solicitor, and the answer changes how the review schedule actually operates.

The second is what a ratchet does to risk. A ratchet protects the contracted income line while the lease runs. It does nothing to the underlying market rent. An asset holding above market rent behind a ratchet still carries reversion risk, because the tenant can decline the option, renegotiate at expiry, or fail altogether. The ratchet defers the adjustment to a later event instead of removing it.

What Buyers Should Model Before Purchase

The review schedule turns a rent roll into a cash flow forecast. Before contracting, model the income tenancy by tenancy on the actual review dates and mechanisms in each lease. A single blended growth rate across the whole rent roll hides the shape of the income and can flatter the asset or understate it.

1. Build the contracted rent line. Apply each fixed and CPI review on its date. For CPI reviews, run at least a low and a high inflation case so you can see how sensitive the income is to the index.
2. Compare passing rent to market rent for every tenancy. Leasing evidence for comparable space tells you whether the asset is over-rented or under-rented, which determines whether the market reviews and expiries ahead of you are upside or downside events.
3. Map the market events. List every market review, option exercise and expiry across your intended hold period and attach a rent assumption to each. This is where the review schedule meets WALE, because the length of the lease tail determines how soon those events arrive.
4. Model the option renewal rents. The rent mechanism at option exercise, whether market, CPI or fixed, sets the income for the option term and influences whether a rational tenant will exercise at all.
5. Test the financing. Lenders assess serviceability on the contracted income. A market review with genuine downside inside the loan term can affect covenant headroom, while a firmly indexed lease supports a more stable position as conditions move.

The output of this work is a defensible view of the income over your hold period. It is also the material a valuer will interrogate, since capitalisation approaches treat over-renting and under-renting explicitly rather than averaging them away.

Reviewing the Lease Schedule During Due Diligence

The tenancy schedule in an information memorandum is a summary prepared on the vendor's side. Due diligence means verifying it against the source documents. Work through the following for every tenancy.

• Obtain the full executed lease together with every variation, renewal deed, incentive deed and side letter. Review terms are sometimes amended in documents that never reach the marketing material.
• Check that the review table in the schedule matches the lease text, date by date and mechanism by mechanism. Transcription errors are common and they compound through the cash flow.
• Verify that past reviews were actioned. Ask for the notices and calculations behind recent CPI and fixed adjustments, and the determinations behind any completed market reviews.
• Identify any open or disputed reviews and confirm the contract of sale allocates the outcome.
• Quantify incentives. Rent-free periods, fit-out contributions and abatements can sit in side deeds and hold the face rent well above the effective rent the tenancy actually generates.
• Read the option clauses for the renewal rent mechanism, the notice window and any conditions on exercise.

This work sits inside the broader legal and financial workstream covered in our commercial property due diligence guide, and it pairs with covenant analysis of the tenants, since the review schedule only produces income while the tenant remains able to pay it.

A Practical Way to Approach It

Treat the review schedule as part of the price. Read every lease in full before you commit, build the table of review dates and mechanisms yourself, and model the income on those contractual terms with sensible inflation and market assumptions. Ask for the documentation behind past reviews and treat gaps as a pricing issue. Where a lease is over-rented, price the reversion into your offer. Where the schedule is genuinely indexed and the tenant is strong, recognise that the certainty has value. A buyers agent and an experienced property solicitor will run this analysis as a standard part of acquisition due diligence, and the cost of doing it properly is small against the cost of buying an income line that steps down after settlement.