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Retail Landlord’s Beware! Rent Review Caps now permitted!
A recent Supreme Court of Victoria decision has changed the game for retail leasing practices in the state.
In ALDI Foods Pty Ltd v Northcote Shopping Centre Pty Ltd (2024) VSC 799, the Supreme Court held that rent review caps are permitted under the Retail Leases Act 2003 (Vic) (RLA). This decision overturns the VCAT decision in Northcote Shopping Centre Pty Ltd v Aldi Foods Pty Ltd (2024) VCAT 641 in which the Tribunal held that a ‘cap’ on either a current market rent review or rent review by CPI or similar is a form of mixed review that is prohibited by section 35(2) of the RLA.
In Victoria a ratchet clause – or clause prohibiting a decrease in rent is expressly made void by section 35(3) of the RLA. However, a cap on a rent review (for example CPI review but no greater than a 5% increase) is not expressly addressed in the RLA and has been subject to interpretation.
Background
The case concerned a retail lease between ALDI Foods (tenant) and Northcote Shopping Centre (landlord). The lease included a provision that placed a 6% cap on CPI reviews.
Northcote argued that this provision was void on the basis that the cap was not permitted under section 35(2) of the RLA. ALDI’s position was that the cap was valid, since the RLA does not expressly prohibit rental caps. Specifically, ALDI argued that legislators intended for caps to be permitted given that section 35(3) of the RLA expressly prohibits ratchet clauses (clauses that prevent rent from decreasing during a market rent review).
Verdict
The court ruled in favour of ALDI, holding that a rent review cap included in the lease was an enforceable and valid clause. The court took the view that rental caps were consistent with rental leasing legislation and emphasised that a cap serves as a limit on the extent of rent increases rather than introducing an additional method of determining rent.
Implications
The decision provides greater financial security for tenants by allowing for capped rent increases, protecting against unexpected and potentially steep hikes in rent. This is particularly beneficial in long term leases where rent escalation can significantly impact operating costs.
For landlords, it offers a framework to negotiate rent increases with defined limits, which can be appealing to prospective tenants seeking stability. This can be a competitive advantage in attracting and retaining tenants.
Our Property Law team are ready to assist with all your retail and commercial leasing needs, including expert advice on rights around rent reviews, lease renewals and other key leasing matters. Please reach out to our Property Law team if you would like guidance or support in this area.
