Commercial Lease Rent Review Mechanisms in New Zealand: Insights on Rent Reviews and Ratchets | NZ Legal

Rent review provisions are among the most commercially significant clauses in any commercial lease. For a tenant signing a five or ten year lease, the review mechanism determines not just the rent they will pay in year one, but how their occupancy cost will evolve over the entire term. For landlords, rent reviews directly affect the investment return and value of the property.

New Zealand’s commercial leasing market — largely governed by the ADLS/REINZ Deed of Lease Sixth Edition 2012 — offers three primary rent review mechanisms: market review, CPI review, and fixed review. Leases frequently combine these. This article explains how each mechanism works, what the ratchet clause is and why it has fallen out of favour, how the review and arbitration process unfolds under the ADLS Sixth Edition, and what landlords and tenants should negotiate before they sign.

The ADLS Sixth Edition Framework

Almost all commercial leases in New Zealand use the ADLS/REINZ Deed of Lease Sixth Edition (2012) as the base document. The rent review mechanism, dates, and type are set out in the Agreement to Lease schedule — but the procedure for conducting reviews (valuer appointments, timeframes, arbitration) is governed by the clauses in the deed itself.

The Sixth Edition made two important changes to rent review practice: it removed the automatic ratchet provision that had appeared in earlier editions, and it streamlined the arbitration process. Understanding which edition your lease uses matters — older leases on the Fifth Edition may have different ratchet and arbitration provisions.

Types of Rent Review

Market rent review

The most common review type in New Zealand commercial leases, and the most contested. At the review date, the rent is reassessed at the prevailing market rent for comparable premises — that is, the rent a willing lessor and willing lessee would agree on an arm’s length basis, taking into account:

• Location, floor area, and configuration of the premises
• Condition and quality of the building
• Current market conditions
• Comparable leases for similar properties in the area

Each party typically appoints their own registered valuer. The valuers exchange assessments. If they agree (or are close enough), the parties accept the review. If they cannot agree, the ADLS Sixth Edition triggers a structured arbitration process.

The subjectivity problem: “Comparable properties” is rarely straightforward, particularly in specialist or thin markets (industrial in a provincial town, a large-format retail space). Valuers can reach significantly different conclusions from the same market data. This is why market reviews generate the most disputes.

CPI rent review

The rent is adjusted by the percentage change in the Consumer Price Index as published by Statistics New Zealand. A typical formula: new rent = current rent × (new CPI / base CPI), subject to a floor (e.g., no decrease) and sometimes a cap (e.g., maximum 4% increase).

CPI reviews are popular because they are formula-driven — there is no valuer assessment, no room for dispute about comparables, and the outcome is known as soon as Statistics NZ publishes the relevant CPI figure. They protect the real value of rent against inflation but do not allow the landlord to capture above-inflation growth in property values.

In periods of low inflation, CPI reviews produced small increases. In the post-2021 inflationary environment, CPI increases were substantial, which highlighted the risk for tenants who signed long leases with uncapped CPI clauses.

Fixed rent review

The simplest mechanism: rent increases by an agreed percentage or dollar amount at specified intervals. For example, “2.5% on every anniversary of the commencement date” or “rent increases by $5,000 per annum on the second and fourth anniversaries.”

Fixed reviews offer maximum certainty for both parties — the tenant can model their occupancy cost precisely for the entire lease term, and the landlord receives a predictable income stream. The trade-off is that neither party can benefit from (or be exposed to) market movements. In a rising market, a landlord locked into a fixed review may significantly underperform market rent by year five.

The Ratchet Clause

A ratchet clause provides that rent cannot decrease below the rental set at the previous review, regardless of what a market review would otherwise produce. Under a hard ratchet, once rent has been set at any level, it can only move upward from that point.

Why ratchets existed

Ratchet clauses were historically attractive to lenders and investors as they provided a guaranteed minimum income stream. If property values fell or market rents softened, the landlord was protected from a rental decrease.

Why they fell out of favour

The ADLS Sixth Edition deliberately removed the automatic ratchet. The market’s view — endorsed by the Law Society — was that a mechanism preventing rent from ever falling, even when market conditions clearly supported a reduction, was fundamentally unfair to tenants. Major tenants, particularly retail chains and large corporates, began refusing to sign leases with hard ratchets, making them increasingly rare in new leases.

Ratchets still appear in:

• Older leases executed under the Fifth Edition or earlier
• Some individually negotiated leases where landlords have strong bargaining power
• Renewal terms where the previous term’s rent becomes the floor for the renewal market review

If you are reviewing a lease with a ratchet clause, confirm whether it is a hard or soft ratchet, and at what level the floor is set.

The Market Rent Review Process

Under the ADLS Sixth Edition, the market rent review process follows a structured timeline:

1. Step 1

   Review date approaches

   The party wishing to initiate the review (usually the landlord) gives written notice. The ADLS Sixth Edition sets out timeframes — review them carefully, as missing the initiation window can affect when the new rent takes effect.

2. Step 2

   Valuers appointed

   Each party appoints their own registered valuer. Valuers are required to be independent and to assess the rent on the assumptions specified in the lease (e.g., a new lease at the review date, the property in a defined state, the tenant having met all obligations).

3. Step 3

   Valuations exchanged

   Each valuer provides their written assessment. The parties review the assessments and attempt to reach agreement. If the valuations are close, commercial settlement is usually straightforward.

4. Step 4

   Negotiation period

   If the valuations differ materially, the parties negotiate (with their valuers and lawyers) to try to narrow the gap. Many market review disputes are resolved at this stage without arbitration.

5. Step 5

   Arbitration

   If the parties cannot agree, either party may refer the review to arbitration under the Arbitration Act 1996. Under the ADLS Sixth Edition, the parties typically agree on a single independent valuer or arbitrator; if they cannot agree, the President of the Property Institute of New Zealand (PINZ) is asked to appoint one. The arbitrator’s determination is binding.

Costs of arbitration

Arbitration is significantly cheaper than litigation, but it is not free. A contested market review arbitration will typically involve each party’s registered valuer, each party’s lawyer, and the arbitrator’s fees. Costs can run into the tens of thousands of dollars for a complex matter. For smaller tenancies, the commercial reality is that the arbitration cost may exceed the financial benefit of the dispute — which creates a negotiating dynamic in favour of the party with more to gain.

Challenges in the Current NZ Market

Post-pandemic market dislocation: The Auckland commercial market in particular saw significant rent adjustments post-2020. Market review valuations became more contested as vacancy rates shifted and “comparable” leases from the pre-pandemic period were of questionable relevance.

Valuer subjectivity: Different valuers can reach materially different conclusions from the same market data, particularly for specialist properties, large floor plates, or properties with unusual lease incentives baked into the original rent. Always engage a valuer with genuine local market knowledge, not just a national firm with a local office.

Timing of disputes: Rent under the ADLS Sixth Edition continues at the current rate until the review is resolved — whether by agreement or arbitration. This means the review outcome is often applied retrospectively. A market review that takes 12 months to resolve through arbitration will result in a backdated adjustment and potential interest. For tenants, this creates uncertainty in cash flow planning.

What Landlords and Tenants Should Negotiate

Common Mistakes

Not understanding the review type before signing. A market review in year three of a strong rising market can produce a very different outcome to the fixed 2% you expected. Read the schedule carefully.

Ignoring the initiation notice requirements. Missing the window to initiate a review can delay when the increased rent takes effect (for landlords) or give tenants a windfall period at the old rate. Both parties should diarise review dates.

Not engaging your own valuer for a market review. The landlord’s valuer is appointed to achieve the best outcome for the landlord. A tenant who simply accepts the landlord’s assessment without challenge leaves money on the table.

Assuming arbitration is quick or cheap. For smaller tenancies, the cost-benefit analysis of a contested arbitration often favours settlement. Understand the economics before triggering the formal process.

This article is general information about commercial lease rent review mechanisms under New Zealand law as at May 2026. It is not legal advice. Get advice on your specific situation.

Get in touch with NZ Legal if you need help navigating a rent review or commercial lease dispute.