Does a lease have to have a rental escalation written in?
Hi, I am busy with a two-year lease where the tenant doesn’t want an escalation written in. He says would prefer it be written in that it will be negotiated after the first year.
Can one do that in a two-year lease? It seems risky: If a landlord is tied into two years to then try to negotiate halfway through, what if they don’t agree?
Is there wording we can use so that the landlord isn’t compromised. Or is it basically just a stupid idea?
Or should there at least be a minimum escalation, like to be negotiated but no less than CPI + 0.5%? – John
Hi John, it is possible to provide for an escalation to be negotiated, but as you correctly point out, it is risky for the landlord, as it allows the tenant to stubbornly refuse to agree to anything more than he wants to pay.
One option is certainly to say that the increase percentage will be negotiated, but it will not be less than a certain amount. In that case, the lease should state that should the parties be unable to agree by a certain date, the minimum agreed increase will apply.
Given the tenant’s attitude, however, it is doubtful that this would be agreed to, because it effectively removes any obligation on the landlord’s part to negotiate, because what reason would the landlord have to agree to a lesser amount than the indicated minimum?
Another option is to build a comprehensive clause into the lease indicating by when the percentage must be agreed upon and if it cannot be agreed by a stipulated time, referring it to a valuator to decide upon a market-related increase.
The benefit of this formulation is that neither party has any guarantees as to what would be considered market-related (so it could go against either party) and this would make them both more inclined to negotiate with each other in good faith.
I would be more than happy to formulate a clause to this effect should you so wish?
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Who is Marlon Shevelew?
Marlon Shevelew is the director of Marlon Shevelew and Associates Inc. a law firm specialising in rental property, contractual, consumer and company law.