Is your rent review void? VCAT finds a cap on CPI review void under Section 35(2) of the RLA

A recent decision of the Victorian Civil and Administrative Tribunal (VCAT), has found that a cap on a CPI review falls foul of section 35(2) of the Retail Leases Act 2003 (Vic) (RLA) resulting in the rent being determined by market review in accordance with section 35(7) of the RLA.

In this case, Q St Kilda Tenancy Pty Ltd v Kane (Building and Property) [2023] VCAT 75, the tenant successfully argued that a CPI review with a 4% cap was more than one method of review for the purposes of section 35(2) of the RLA and therefore void.

Facts of the case

By way of background, the parties had entered into a retail lease for a term 5 years with 3 options to renew for further terms of 5 years each.  The tenant exercised the first and second options, however no deed of renewal was entered into by the parties for the second renewal.

After exercising the second option, the tenant requested for the rent to be reviewed by market despite the renewal clause in the lease providing for CPI reviews with a 4% cap at the commencement of each further term.  The landlord insisted that the rent be determined in accordance with the terms of the lease, so the tenant brought proceedings against the landlord at VCAT to have the rent review and other COVID rent relief issues determined.

The decision

VCAT found that the rent review mechanism in the lease was void because it used more than one method of review in contravention of section 35(2) of the RLA.  Section 35(2) provides that the basis or formula of a rent review must be one of the following:

• a fixed percentage;
• an independently published index of prices or wages (i.e. CPI);
• a fixed annual amount;
• the current market rent of the retail premises; or
• a basis or formula prescribed by the regulations.

The VCAT Member considered that there were two limbs to the rent review mechanism in the lease.  The first was the CPI review itself and the second was an assessment of that rent (determined by CPI) to ensure that it did not increase by more than 4%.  The second limb was, in the Member’s view, an alternative method of calculation.  The VCAT Member determined that the entire rent review clause (and not just the additional CPI limb) was void.

The landlord made submissions that:

• there was one method of review and that the second limb was a ceiling or cap rather than an alternative formula for determining rent, which VCAT rejected; and
• the rent review clause was not void under section 35(3) of the RLA (prohibition on ratchet clauses) due to section 35(4)(a), which provides that a review is not void if it uses a formula under section 35(2) (as set out above). VCAT agreed but this had no bearing on the ultimate decision noting that VCAT found the rent review ran foul of section 35(2) rather than section 35(3).

Having found the rent review clause void under section 35(2) of the RLA, the Tribunal Member held that the rent should be determined under section 35(7) of the RLA, being:

• the amount agreed between the parties; or
• in the absence of agreement, the current market rent determined by a specialist retail valuer appointed by the Small Business Commission.

Conclusions

This decision will come to many in the industry as a surprise given that a cap on a rent review is generally seen as a benefit to tenants and not inconsistent with the remedial nature of the RLA.

In this case there may have been a financial benefit for the tenant to have the rent determined by market review rather than a CPI review.  However, this will not always be the case noting that on a market review rent can either decrease or increase.

The decision highlights the need to ensure that only one of the prescribed methods of rent review is to be used in retail leases, even if a cap or combined method of review would seemingly provide a benefit to the tenant.

It is not yet known whether the landlord has appealed the decision.

If you found this insight article useful and you would like to subscribe to Gadens’ updates, click here.

Authored by:
Lui Scipioni, Partner
Michael Mercier, Senior Associate