The Motel Lease – Rent and Rent Reviews

By David Burrough

One of the most important functions of the Lease is to set out what is to be paid to whom, and in particular the amount of the rent and how it is to be paid.  There are industry formulae for the calculation of rent and it is essential that anyone considering purchasing a motel lease has experienced consultants to consider the rent compared with industry standards.  This is important when assessing whether there is any room for improvement in the profitability of the business and whether the business is readily saleable.

Generally the rent payable under the lease is paid calendar monthly in advance on the first day of each month.  Usually there is provision in most new lease documents for an increase in rent pursuant to the Consumer Price Index on an annual basis.

During the 1980’s it was common for all commercial leases, including motel leases, to have a ratchet clause for rent increases.  A ratchet clause increased rent by the higher of either the increase in CPI or a minimum annual increase.  Leases were entered into which provided for rental increases of not less than 7.5% to 10%.  Obviously the recession we had to have changed this scenario dramatically.

Fortunately, in a lot of cases, landlords have recognised the tenant’s position and have varied leases so that rent goes up by the CPI increase only.  Most new leases provide for CPI increases only.

The concept of market reviews is often debated in the Motel Industry.  The issue from a tenant’s perspective is that most market review clauses carry a proviso that the rent shall not be less than the year before.  Tenant’s understandably ask the question why should the rent increase because the tenant runs the Motel Business successfully.  Market reviews in Leases for commercial tenancies generally look at the supply and demand for Lease premises in the particular area.  This appears inappropriate in a Motel.  Tenants would more readily accept a market review if the clause allowed for rents to reduce if the business is not performing well.

For these reasons most Motel Leases do not include market reviews of rent although this is not a hard and fast rule.

The other costs that a tenant is responsible for under the Lease are the outgoings.  Generally the outgoings will include any costs incurred by the Landlord in owning the motel.  For example: rates, taxes, charges and other levies payable to any competent authority and all insurance premiums and other charges in connection with insurance cover.  However in Queensland the outgoings can not include land tax (for Leases entered into after 1992).

Usually the Lease will require the Tenant to pay these outgoings directly to the assessing authority on or before their due date and to provide evidence of payment to the Landlord.