When the Retail Shop Leases Act (“RSLA”) was amended in 2006, combination and capped rent review provisions that were in common use but of questionable legitimacy, gained validity.
The RSLA now specifies that a combination of 2 or more of CPI, fixed percentage and fixed sum increases are valid if they are combined to form a “single basis of review”. For example, a rent review that provides for “CPI plus 5%” is valid. Likewise a provision that rent for year 3 is “$150,000 per annum plus the annual CPI increase” is legitimate.
A review combination including market rent is also valid, for example “market rent plus CPI”.
Professional drafting is, of course required. The combination methods must be a “single basis of review” and there cannot be multiple methods from which the landlord or anyone else may choose.
Fixed percentage increases
Fixed percentage reviews must be of the “base rent” which must be a “specified amount of money”.
Clearly a provision that says “rent in year 2 will be 105% of the first year’s rent” is safe because the initial rent is always specified in a dollar amount in the lease. But what about “rent in year 3 is 105% of the rent in year 2”? This provision is open to question if, as in most leases, the year 2 rent is not actually specified in a dollar amount.
Rent escalation caps
Many landlords have for some time included provisions that notwithstanding a rent escalation provision, the rent would not increase by greater than a particular percentage.
For example, “CPI or 5%, whichever is the lesser”. The RSLA now specifies this to be a legitimate review formula. Note however that a provision “CPI or 5%, whichever is greater” remains an invalid rent review provision in a retail lease.
Section 27 of the RSLA states that the rent review provision restrictions do not apply to “major lessees” if the lessee provides financial advice and legal advice certificates to the lessor prior to entering into the lease and the lease is properly drafted to include the timing and basis of each rent review.
“Major lessee” means a lessee of five or more retail shops in Australia.
Notwithstanding the exemption in relation to “major lessees” concerning the rent review restrictions, another section of the RSLA, section 36, specifically prevents provisions like “CPI or 5%, whichever is greater” in relation to all leases. So in practice, the “major lessees” exemption affords landlords little benefit despite what