Revaluation Clause

Definition

A revaluation clause in a lease agreement provides for periodic reassessment and revaluation of the property’s market value, typically followed by adjustments in the rental rate. This clause is most commonly seen in long-term commercial leases, known as reappraisal leases. The aim is to ensure that the rental payments remain in line with the current market value of the property throughout the duration of the lease term.

Examples

Long-Term Commercial Lease: A 10-year lease agreement on a commercial property includes a revaluation clause stipulating that every five years, the property must be appraised by a certified professional. Based on the new valuation, the rent will be adjusted upward or downward to reflect current market conditions.
Ground Lease: In a ground lease, where the tenant rents the land and builds on it, a revaluation clause might dictate that the land value is reassessed every five years. The payment terms will then be adjusted according to the reappraisal.
Retail Lease: A retail store signs a 15-year lease for a store location that includes a revaluation clause. The store’s rent is reviewed every five years based on the property’s appraised value, ensuring the rent reflects market conditions consistently.

Frequently Asked Questions (FAQs)

Q: How often are properties revalued in a lease with a revaluation clause? A: The frequency of revaluation can vary but is typically conducted every 3 to 5 years within the lease term.

Q: Who appraises the property under a revaluation clause? A: Property appraisals are usually conducted by a certified professional appraiser agreed upon by both the landlord and the tenant.

Q: Can a revaluation result in reduced rent? A: Yes, if the market value of the property declines, a revaluation can lead to a decrease in rent, reflecting the current market conditions.

Q: Is it possible to negotiate a revaluation clause in a lease? A: Yes, tenants and landlords can negotiate the terms, frequency, and method of revaluation before finalizing the lease agreement.

Q: Are revaluation clauses common in residential leases? A: Revaluation clauses are more common in commercial leases and less typical in residential lease agreements.

Reappraisal Lease: A lease that includes periodic revaluation clauses for reassessment of rental rates based on current market value.
Market Rent: The average rental rate agreed upon by landlords and tenants for similar properties in a given area, measurable against the current market conditions.
Lease Adjustment: Modifications made to the lease terms, including rent adjustments based on the appraisal of property value.

Online Resources

References

Miller, J. P., & Geltner, D. M. (2006). Real Estate Principles for the New Economy. Cengage Learning.
Fisher, J. D., & Martin, R. F. (2004). Income Property Appraisal. Sixth Edition. Dearborn Real Estate Education.

Suggested Books for Further Studies

Real Estate Finance and Investments by William B. Brueggeman and Jeffrey D. Fisher
The Real Estate Game: The Intelligent Guide To Decisionmaking And Investment by William J. Poorvu and Jeffrey L. Cruikshank
Commercial Real Estate Leases: Selected Issues in Drafting and Negotiating by Mark A. Senn

Real Estate Basics: Revaluation Clause Fundamentals Quiz

### How often can properties typically be revalued under a revaluation clause? - [ ] Every year - [x] Every 3 to 5 years - [ ] Every 10 years - [ ] Only at the start and end of the lease term > **Explanation:** Revaluation clauses usually provide for property revaluation every 3 to 5 years to reflect current market conditions. ### Who typically conducts the property appraisal under a revaluation clause? - [ ] The tenant - [ ] The landlord - [ ] A random third party chosen by the city - [x] A certified professional appraiser > **Explanation:** A revaluation is conducted by a certified professional appraiser agreed upon by both the landlord and tenant. ### In what type of lease is a revaluation clause most commonly found? - [ ] Residential lease - [x] Commercial lease - [ ] Month-to-month lease - [ ] Sublease > **Explanation:** Revaluation clauses are most commonly found in long-term commercial leases to ensure the rent remains in line with market conditions. ### Can a revaluation clause result in reduced rent? - [x] Yes - [ ] No - [ ] Only if both parties agree - [ ] Never > **Explanation:** If the market value of the property declines, a revaluation can lead to reduced rent, reflecting the current lower value. ### What is the purpose of a revaluation clause in a lease agreement? - [ ] To increase property taxes - [ ] To allow for lease termination at any time - [x] To adjust rent to current market conditions - [ ] To ensure annual inspections > **Explanation:** The purpose of a revaluation clause is to adjust rent according to current market conditions based on the property's reappraised value. ### Are revaluation clauses more common in residential or commercial leases? - [ ] Residential leases - [x] Commercial leases - [ ] Short-term leases - [ ] All types of leases equally > **Explanation:** Revaluation clauses are more commonly found in commercial leases, given their longer durations and variable market conditions. ### What drives the necessity for a property revaluation clause? - [x] To maintain rent alignment with market value - [ ] To allow frequent tenant changes - [ ] To increase property maintenance obligations - [ ] To guarantee tenant renewal > **Explanation:** The revaluation clause ensures that rent remains aligned with the market value of the property throughout the lease term. ### What happens if both parties cannot agree on an appraiser for the revaluation? - [x] A neutral third party may be appointed to select the appraiser - [ ] The tenant conducts the appraisal - [ ] The landlord conducts the appraisal - [ ] The clause is nullified > **Explanation:** If the landlord and tenant cannot agree on an appraiser, a neutral third party may intervene to choose one, ensuring fairness in the appraisal process. ### How does a revaluation clause contribute to a fair leasing agreement? - [ ] By fixing a flat rent amount for the entire lease term - [x] By adjusting the rent periodically based on market changes - [ ] By eliminating the need for lease renewal - [ ] By guaranteeing landlord profit > **Explanation:** A revaluation clause adjusts the rent periodically based on the property's current market value, contributing to a fairer lease agreement that benefits both parties. ### In what scenario might a tenant prefer a lease without a revaluation clause? - [x] In a rapidly appreciating market - [ ] In a declining market - [ ] For short-term leases - [ ] When leasing equipment > **Explanation:** In a rapidly appreciating market, a tenant might prefer a lease without a revaluation clause to avoid potential increases in rent due to rising property values.