A recent Supreme Court of Victoria decision has changed the game for retail tenancies.
In ALDI Foods Pty Ltd v Northcote Shopping Centre Pty Ltd [2024], the Court held that rent review caps in retail leases are not prohibited under the Retail Leases Act 2003 (Vic), effectively overturning a long history of VCAT decisions indicating that such caps were void. This decision supports tenants, and will provide them with increased financial security when leasing a retail space.
Background
This case concerned a retail lease agreement between ALDI Foods (tenant) and Northcote Shopping Centre (landlord). The main issue was whether the lease agreement permitted a cap on the rent review process.
In retail leases, rent is typically reviewed periodically to adjust for inflation or market conditions. The standard review mechanisms are:
- market rent (i.e. the rent a property might command if leased on the open market);
- fixed review (eg.3% increases); or
- Consumer Price Index (CPI).
The inclusion of caps or limits on how much rent can increase during these reviews however, has often been a contentious issue in retail leasing due to section 35(2) of the Act, which states that for leases covered by the Act, “The basis or formula on which a rent review is to be made must be one of the following” [emphasis added], and then lists five defined options, including the methods identified above.
The inclusion of the word “one” in section 35(2) has generally been interpreted as having the effect of prohibiting caps on rent reviews, because the cap constitutes a second method of review.
The parties and their arguments
In this case, the lease included a provision that placed a 6% cap on CPI reviews. Northcote Shopping Centre argued that this provision was void, on the basis that the cap was not permitted under section 35(2) of the Act. Northcote Shopping Centre sought to rely on previous VCAT decisions to support their arguments.
ALDI’s position was that the cap was valid, since the Act does not expressly prohibit rental caps. In support of this, ALDI argued that since section 35(3) of the Act expressly prohibits ratchet clauses (i.e. clauses that prevent rent from decreasing during a market rent review), this would indicate that the legislators intended for caps or limits to be permitted.
Verdict
The court ruled in favour of ALDI, holding that the rent review cap included in the lease was enforceable and a valid clause. The court took the view that rental caps were consistent with retail leasing legislation, going against previous VCAT decisions.
What does this mean for landlords and tenants?
Retail tenants have an opportunity for increased financial certainty following this ruling, being in a strong legal position when and if they decide to negotiate capped increases on their rent. With business expenses rising in many industries, the decision presents an opportunity for retail tenants to better plan for the future.
Landlords should consider how this case may impact future negotiations around rent review processes. Landlords can expect caps to become a regular request from retail tenants, and will need to make a commercial decision in each case whether to agree to the inclusion of a cap to attract and retain long-term tenants.
How we can help
Moores’ Commercial Real Estate team is ready to assist with all your retail and commercial leasing needs, including expert advice on your rights around rent reviews, lease renewals, and other key leasing matters. Please contact a member of our leasing team if you would like guidance or support in this area, from strategic advice through to preparation of lease documentation.
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Disclaimer: This article provides general information only and is not intended to constitute legal advice. You should seek legal advice regarding the application of the law to you or your organisation.