Caps are 'on' according to the Supreme Court.

The Supreme Court gives rent review caps a ‘nod’

The Supreme Court of Victoria has recently delivered a ruling confirming that a cap on rent reviews is not prohibited under section 35 of the Retail Leases Act 2003 (Vic) (RLA). This decision overturns a ruling by the Victorian Civil and Administrative Tribunal (VCAT), which had previously determined that a cap on a rent review constituted a second method of review and was therefore void under section 35(2) of the RLA, which allows for only one prescribed method of rent review. The Supreme Court’s decision contrasts with several recent VCAT rulings from the past 18 months, which found that caps on rent reviews were void, leading to rent being determined either by agreement or market review under section 35(7) of the RLA.

The catalogue of facts

In ALDI Foods Pty Ltd v Northcote Shopping Centre Pty Ltd [2024] VSC 799, the tenant appealed an earlier VCAT decision in Northcote Shopping Centre Pty Ltd v ALDI Foods Pty Ltd [2024] VCAT 641, which ruled that the capping mechanism in the tenant’s lease was void under section 35(2) of the RLA. This earlier decision aligned with previous VCAT rulings that caps on rent reviews in retail leases were invalid.

As a result of the VCAT order, the rent under the tenant’s lease would be determined either by agreement or through a market review in the absence of an agreement, as per section 35(7) of the RLA. This process could lead to the rent either increasing or decreasing, depending on market conditions.

While section 35(3) of the RLA explicitly makes ratchet clauses (which prevent rent from decreasing) void, the issue of a cap or upper limit on rent reviews – such as a CPI review with a 5% maximum increase – is not directly addressed in the RLA and has been the subject of ongoing legal interpretation.

In this case, the landlord’s main argument was that the 6% cap on CPI reviews in the lease was invalid, as it represented a second method of review, which is prohibited by section 35(2) of the RLA. The landlord argued that previous VCAT decisions had arrived at similar conclusions.

The tenant, on the other hand, argued that the 6% cap on CPI reviews was not void for several reasons:

• Section 35(2) of the RLA does not explicitly prohibit caps on rent reviews.
• The Court should respect the agreement between the parties and refrain from interfering with the contractual terms unless there is a clear conflict with the RLA.
• While the RLA explicitly renders ratchet clauses void, it does not prohibit caps. The lack of such a prohibition implies that the legislature intended to permit caps or upper limits on rent reviews.

A decision as exciting as the ‘middle aisle’ (*Aldi shoppers will understand … )

The Supreme Court ultimately found in favour of the tenant, ruling that a cap or upper limit on a rent review does not conflict with section 35 of the RLA.

The Supreme Court’s decision will be welcomed by many in the industry, as it provides clarity for both landlords and tenants that rent review clauses with caps in retail leases are not at risk of being deemed void or subject to a market review.

The Bespoke team have extensive expertise in leasing, representing both landlords and tenants in commercial, retail, and office lease agreements.