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Can the Auditor's institute clarify whether a related party lease executed with terms consisting of fixed interest increases (i.e 3 or 4 or 5% fixed increase per annum) for the life of the 3-5 year lease agreement are considered arms length? If yes, is there any other evidence i need to support an arms length position?
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Hi Mark
I assume we are referring to a commercial lease to a related party. In my view a fixed interest rate increase of 3 or 4 or 5% per annum is commercial as it is close to our current inflation rate. The CPI rose 3.6% for the 12 months ending 31 March 2024.
To support an arm's length position of rental to a related party you would need an external appraisal by an estate agent or valuer of the annual rental amount for the first year of the lease.
If other members have a view whether a fixed interest rate increase of 3 or 4 or 5% per annum is commercial please let the forum know.
Thanks
The Auditors Institute