Caps are back: The Supreme Court confirms caps on a rent review are permitted in Victorian retail leases

The Supreme Court of Victoria has recently handed down a decision which confirms that a cap on a rent review is not prohibited under section 35 of the Retail Leases Act 2003 (Vic) (RLA). The decision overturns an order of the Victorian Civil and Administrative Tribunal (VCAT) which held that a cap on a rent review was a second method of review and therefore void under section 35(2) of the RLA, which provides that only one prescribed method of rent review is permitted. The Supreme Court decision follows a number of VCAT orders in the last 18 months which have held that caps on rent reviews are void resulting in the rent being determined by agreement or market review in accordance with section 35(7) of the RLA. Click here to read our earlier post on the first of the VCAT orders regarding this issue.

The decision

In ALDI Foods Pty Ltd v Northcote Shopping Centre Pty Ltd [2024] VSC 799, the tenant brought proceedings in the Supreme Court appealing an earlier VCAT order in Northcote Shopping Centre Pty Ltd v ALDI Foods Pty Ltd [2024] VCAT 641 which held that the capping mechanism in the tenant’s lease was void under section 35(2) of the RLA consistent with previous VCAT orders regarding caps on rent reviews in retail leases.

The result of the VCAT order meant that the rent under the tenant’s lease would be determined by agreement or a market review failing agreement under section 35(7) of the RLA, which can see the rent either increase or decrease according to market conditions.

In Victoria a ratchet clause (or clause prohibiting rent from decreasing) is expressly made void by section 35(3) of the RLA. However, a cap or upper limit 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.

Arguments and findings

In this case the landlord’s primary argument was that a 6% cap on CPI reviews under the lease was void because the capping on the CPI review was a second method of review which is not permitted under section 35(2) of the RLA. The landlord relied on previous VCAT orders which have arrived at the same conclusion to support their position.

The tenant argued that the 6% cap on CPI reviews under the lease was not void because:

• section 35(2) of the RLA does not expressly prohibit caps on rent reviews;
• the Court should give weight to the bargain struck between the parties and should not interfere with contractual arrangements where there is no direct conflict with the RLA;
• the RLA expressly prohibits ratchet clauses and does not expressly prohibit caps. The absence of a prohibition on caps indicates that the legislature intended for caps or upper limits on rent reviews to be permissible; and
• the RLA is remedial legislation and it would be an absurd result if a cap or upper limit on rent reviews (which are seemingly for the tenant’s benefit) were to be void. This is because it would potentially leave the tenant financially worse off without the protection of a cap or upper limit on a rent increase.

The Supreme Court ultimately agreed with the tenant’s arguments and held that a cap or upper limit on a rent review is consistent with section 35 of the RLA.

Conclusions

Many in the industry will welcome the Supreme Court decision because it gives some certainty for both landlords and tenants that rent review clauses in retail leases that are subject to a cap are not at risk of being void and subject to a market review.

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, Special Counsel