Landlord Alert

In a nutshell

If a lease has a cap on a rent review by describing 2 methods of rent review on the same review date, then the review provisions may be void under the Retail Leases Act 2003 (Vic) (“the Act”).

Examples of non-complaint provisions are as follows:

1. On the review date, Rent shall be reviewed by a CPI increase to a maximum of 4% of the rent payable in the immediately preceding year; or
2. On the review date, Rent shall be reviewed to by CPI to a minimum of 1.5% and capped to a maximum of 4% of the rent payable in the immediately preceding year. (also known as a cap and collar)

In each clause, both methods of CPI and fixed percentage review are used in the review to determine rent. Such mixed methods are not compliant with Section 35(2) of the Act.

If the review is void for this reason, rent shall be determined by agreement between the parties. Failing agreement, rent shall be current market rent as determined by a Specialist Retail Valuer.

Indeed, this may be an attractive pursuit for tenants who wish to avoid the sharp climb of CPI in these recent times for a potentially better review by market in some areas of Victoria.

Closer Look

Rent reviews provisions are generally dealt with under Section 35 of the Act. The first two ever cases decided under this section coincidently occurred within close succession of each other in early 2023:

• Q St Kilda Tenancy Pty Ltd v Kane (Building and Property) [2023] VCAT 75 (24 January 2023); and
• Roberts Family Enterprises Pty Ltd v Meddles Bekirofski and Reshat Bekirofski (Building and Property) [2023] VCAT 121 (7 February 2023)

Generally, the Tribunal found as follows in these cases:

1. The method of rent review formulation must be set out in a retail lease;
2. Section 35 only allows one method of rent review to be applied in a retail lease; and

3. A CPI increase with a cap is considered a mixed rent review method, and is therefore prohibited under section 35(2) of the Retail Leases Act.

Having already been long established, Ratchet Clauses are prohibited under Section 35(3) of the Act (i.e. a clause providing that rent payable by the tenant after a rent review must not be less than the rent payable immediately before the rent review).

Retail Leases

Importantly, this only applies to retail leases.

Whether or not your lease is retail is not always made clear by the statements made in the lease document, and indeed, even if the lease contains a provision which expressly states whether or not the lease is retail, such a statement does not necessarily determine the fact.

Therefore, it is important to have your proposed lease reviewed by one of our experienced leasing lawyers before relying on the characterisation of your lease as retail or non-retail. This is particularly so if you seek take any action or avoid any obligation arising under the Act.

Author and Contact

Andrew Buu Trinh, Senior Associate – andrewt@zervoslawyers.com.au