November 25, 2009

A recent Court of Appeal decision* has clarified the validity of retail rent review provisos that allow for CPI or market review increases but specify that the resulting rent must be “not less than the rent payable during the immediately preceding year”.

The lease in question was in respect of the Courthouse Restaurant at Cleveland. It was argued that the “ratchet” provision – “not less than the rent for the preceding year” – constituted the second basis of review and therefore offended s 27 and s 36 of the Retail Shop Leases Act(“RSLA”).

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The consequence of the Court accepting this argument was that the annual rent would have been fixed for the whole of the 15 year term (5 years plus 2 x 5 year options) at the rent payable for the first year ($115,000). Given that the rent for the first year of the first option period had been independently valued at $150,000, the potential loss to the landlord was extreme.

Was the “not less than the rent for the preceding year” proviso an alternative means of reviewing the rent? “No”, said a majority of the Court of Appeal judges: The provision did not offend either s 27 or s 39 of the RSLA and the landlord would be entitled to recover rental increases throughout the lease period.

The reasoning of the majority judges was that the “ratchet” proviso did not operate to change the rent. It merely maintained the status quo. The only rent review clauses were the CPI increase provision and at option, the market review provision.

The RSLA is likely to be reviewed again within the next two years. It may well be that the government will act to reverse this outcome. How effective are the rent review provisions in your leases? Don’t assume that your leases already include all protections available to landlords for rental increases.

If your leases do not already contain sufficient landlord protections, they may be able to be remedied sooner rather than later. Every variation, renewal and even a default gives you an opportunity to rectify deficiencies and improve the provisions of the original lease!

* Connor Hunter v Keencrest P/L [2009] QCA 156 (9 June 2009)

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