Contributed By McGuireWoods LLP
Parties are generally free to negotiate the manner in which rent may be changed or increased. A typical approach is to impose a fixed increase (usually expressed as a percentage of the existing rent) on an annual basis, usually effective on each anniversary of the rent commencement date. Another common approach is to calculate the increase based on the increase in CPI (if any) over the prior year. Parties may also wish for the rent to be fixed for several years at a time, but then for rent to be adjusted every three to five years, or at any time an extension option is exercised.
Parties may also require the rent to be adjusted to the “fair market rental value”. The means of determining the FMV can be negotiated, but the most common approach is some variation of a “three-appraiser” method, where each party selects an appraiser to calculate the FMV, and if they cannot agree then the two appraisers select a third appraiser, and the FMV is the average value of the three calculations, or the median value, or the value selected by the third appraiser, or some other variation on the foregoing. Adjustments of base rent for a renewal period are often determined in this manner.