RES exam question on Tenancy, Torts & Mortgage: A commercial property is let under a 5-year lease at $9,000 per month (the "passing…
A commercial property is let under a 5-year lease at $9,000 per month (the "passing rent" or "contract rent"). An independent valuer assesses the current open-market rent at $12,500 per month. The $3,500 difference between market rent and passing rent is known as the:
- ARack rent owed to the landlord
- BProfit rent in favour of the tenant
- COver-rented premium owed by the tenant
- DReversionary uplift due to the landlord
Show answer & explanation
Answer
B. Profit rent in favour of the tenant
Explanation
A "profit rent" (or "positive rental differential") arises in favour of the tenant when the passing (contracted) rent is below the current open-market rent. In this case, the tenant is paying $9,000 per month for premises that would cost $12,500 per month at market rates, so the tenant enjoys a $3,500/month benefit. If the lease were assignable or subletable (with consent), the tenant could potentially sublet at market rent and capture this profit. "Rack rent" means the full open-market rent: the $12,500 is the rack rent. "Over-rented" describes the opposite case, where passing rent exceeds market rent. "Reversionary uplift" refers to the increase in rental value expected on lease renewal or expiry.
Study the concept behind this question: Landlord & Tenant Law: Covenants, Quiet Enjoyment & Forfeiture
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