Rental caps and collars in retail leases

---

You have probably heard of the Retail Leases Act 2003 (Vic), which applies generally where tenants use rental premises wholly or predominantly for the sale or hire of retail goods or the provision of retail services. However, you may not be as familiar with section 35 of the Act, which governs rental reviews. After all, its provisions have never been tested… until now. This post examines two recent cases on rent reviews in retail leases.

What does section 35 do?

Section 35 of the Act provides as follows:

(1) If a retail premises lease provides for a review of the rent payable under the lease or under a renewal of the lease, the lease must state—

(a) when the reviews are to take place; and

(b) the basis or formula on which the reviews are to be made.

(2) The basis or formula on which a rent review is to be made must be one of the following—

(a) a fixed percentage;

(b) an independently published index of prices or wages;

(c) a fixed annual amount;

(d) the current market rent of the retail premises;

(e) a basis or formula prescribed by the regulations.

Recent decisions

In a decision from 24 January 2023, Q ST Kilda Tenancy Pty Ltd v Kane (Building and Property) [2023] VCAT 75, the Tribunal considered a provision in a lease that provided for a CPI rental review capped to a maximum of 4%. The Tribunal held that subsection 35(2) above only permits a landlord to use one of the above methods in a rent review and that it is not permitted to amalgamate different methods in the one review.

Further, in the 7 February 2023 decision in Roberts Family Enterprises Pty Ltd v Meddles Bekirofski and Reshat Bekirofski (Building and Property) [2023] VCAT 121, the same tribunal member held that a CPI rental review with a minimum increase of 1.5% and maximum increase of 5% (i.e. a cap and collar) was also not permitted under section 35(2).

So how was the rental decided? In the event that a rent review does not comply with section 35(2), subsection 7 provides as follows:

(7) If a provision in a retail premises lease that provides for a review of the rent payable under the lease does not comply with subsection (2) or is void under subsection (6), the rent is to be—

(a) as agreed between the landlord and tenant; or

(b) if there is no agreement within 30 days after the landlord gives the tenant, or the tenant gives the landlord, a written notice specifying an amount of rent for the purposes of the review, the amount determined by a specialist retail valuer appointed by the Small Business Commission as the current market rent of the retail premises.

In both of these cases therefore, a market rental review was applied.

Why are these findings significant?

With the cost of living and the cash rate skyrocketing, tenants have become increasingly wary about entering into leases with CPI rental review provisions. One common method we have seen of mitigating this risk is for parties to negotiate a cap on the CPI rental review so that it will not exceed a certain fixed amount. With the Tribunal finding that such rent review provisions are invalid, parties to retail leases will need to utilise other mechanisms to reduce rental risk and uncertainty, or recognise that if challenged, the rent will likely end up being reviewed to market. Market reviews can be incredibly unpredictable in a volatile economy, leaving parties to assume a high level of risk in predicting how the market will swing in future years or lease terms.

If you are a party entering into a retail lease and you are unsure which mechanism for rent review may work best for you, Lang Legal can assist. Please reach out for a no obligation conversation.