Are there any recent cases about rent review clauses on the exercise of an option for a further term in Retail Leases in Victoria?

  • Author : Bill Stark - 13-10-2016

In the recent VCAT decision of MD & S Griggs P/L v DWH P/L [2016] VCAT 1718, Senior Member Riegler was called upon the determine the preliminary issue of whether the lease between the parties provided for a market review at the expiration of each term?

The retail premises were a country hotel in Victoria. The original lease, dated 2009, had expired, and the tenant had exercised the first option for a further 5 year term. 

In response to the exercise of the option, the landlord proposed a new rent for the second 5 year term. The tenant baulked, claiming that the express terms of the lease stipulate that there was to be no market review of the rent at the expiration of each term. Consequently, rent was to remain constant upon renewal, notwithstanding that if all options for renewal were exercised, rent would remain fixed at $18,200 per annum from the commencement date of 1 October 2009 until 30 September 2029.

The lease was in the form of a Law Institute of Victoria standard form lease (2006 Revision). Clauses 11 and 12 concern rent reviews. They state, in part:
11. RENT REVIEWS TO MARKET

11.1 In this clause “review period” means the period following each market review date until the next review date or the end of this lease.

The review procedure on each market review date is

11.1.1 each review of rent may be initiated by either party unless item 17 states otherwise but, if the Act applies, review is compulsory.

11.1.2 a party may initiate a review by giving the other party a written notice stating the current market rent which it proposes as the rent for the review period. Unless the Act applies, if the party receiving the notice does not object in writing to the proposed rent within 14 days, it becomes the rent for the review period.

...

FURTHER TERM(S)
...

12.2 The renewed lease –

12.2.1 starts on the date after this lease ends,

12.2.2 has a starting rent determined in accordance with clause 11, and

12.2.3 must contain the same terms as this lease but with no options for renewal after the last option for a further term stated in item 18 has been exercised.

The Retail Leases Act 2003 applied to the lease. 

The discourse over the question of rent review stems from what the parties have inserted in Items 16 and 17 of the lease schedule. In particular:
Item 16 Review date(s):

[2.1.1, 11, 18]

Market review: Not applicable

CPI review: Not applicable

Fixed review: Not applicable

Item 17 Who may initiate reviews:

[2.1.1, 11, 18]

Market review: Not applicable

CPI review: Not applicable

Fixed review: Not applicable

The Tenant submitted that the lease did not provide for any review of rental, either during each term or upon renewal. 

This situation arose because Clause 11 of the lease is predicated on a market review date being specified in the lease. Therefore, if the parties have not specified a market review date, Clause 11 has no work to do. The market review date is defined in the lease to be the date specified in Item 16 of the lease schedule. Item 16 of the lease schedule did not specify a market review date. It stated that the market review date is Not applicable.

The tenant submitted that Clause 12.2.2 is expressly tied to Clause 11 of the lease. Therefore, if no market review is required under Clause 11, then no market review is required under Clause 12.2.2. Consequently, it argued that the parties have, by engrossing Item 16 of the lease schedule with the words Not applicable, intended Clause 12.2.2 not to do any work.

Similarly, the tenant submitted that s 35 of the Act, which regulates how rent reviews are to be performed, has no application to the lease because the lease does not provide for a review of rent.

On behalf of the Landlord, I conceded that the express terms of the lease did not provide for any rent review during each term of the lease. 

However, I argued that the lease required a review to market upon renewal of each new term. 

The express words of Clause 11.1 state that the “review period” means the period following each market review date until the next review date or the end of this lease. The words "or the end of this lease" mean the end of each term because the renewal of the lease constitutes a fresh lease of itself. 

Therefore, it was clear from the words of the lease what the parties had agreed; namely, that there was to be no mid-term rent reviews but that after the expiration of the first term and upon renewal, rent would be set according to market.

I relied on a decision of Deputy President Macnamara (as he then was) in Dagles Trading Pty Ltd v Scamper Pty Ltd, [2006] VCAT 1220 where the Tribunal stated:


All this leads me back to the text of the 1999 lease which I have quoted or summarised above. As Mr Wikrama contends and Mr Golvan and Mr Borsky concede, the special condition at Item 22 of the schedule must prevail to the extent that it is inconsistent with the printed terms of the standard form. I accept the submission by Mr Golvan and Mr Borsky however that there is no inconsistency. Clauses 11 and 12 of the printed form deal with one subject matter, namely the renewal of the lease pursuant to the options to renew and the fixation of rent upon that renewal and special condition 1 deals with rental reviews ‘during’ that renewed term. In accordance with the distinction drawn by Phillips JA in the Ensabella case, reviews ‘during’ the term of the lease are mid-term reviews not the process of fixation of the initial rental. The words of special condition 1 have their own work to do. That is, to stipulate what rental reviews are to take place during the renewed term and those reviews are annual CPI indexation. The clause has the effect inter alia as Mr Golvan and Mr Borsky conceded of excluding any provision for a market review at the end of year four for year five of the review term.Clause 11 read in conjunction with Item 16 and 17 of the lease schedule operated to prevent any rent review during the currency of each term of the lease. However, Items 16 and 17 of the lease schedule had no operation upon renewal, in which case the opening words of Clause 11.1 clearly stipulated that there was to be a review of rent at the end of this lease, being the end of each term.

The Tribunal accepted that the words "market review date" in Clause 11 refer to a point in time during the currency of the lease. Similarly, Items 16 and 17 of the lease schedule refer to mid-term reviews, not the process of fixing the initial rent at the commencement of each renewal.

The Tribunal concluded that Clause 12.2.2, which states that the renewed lease has a starting rent determined in accordance with clause 11, means that the mechanical provisions of Clause 11 are to be utilised to determine what the starting rent is to be for the renewed lease. This is because the opening words of Clause 11.1 contemplate that the review period will cease either at the next review date (if there is one) or alternatively, at the end of this lease. 

Therefore, the market review date refers to a point of time during the currency of the lease. The failure to specify a market review date in the lease schedule simply means that there will be no market review during the currency of any specific term. However, it does not therefore follow that there will be no market review to determine the starting rent of any renewal. Such an interpretation would be inconsistent with Clause 12.2.2 which requires that there be a determination of the starting rent of any new term. 

Counsel for the tenant submitted that there is no inconsistency when clauses 11, 12.2.2 and Items 16 and 17 of the lease schedule are read together. The Tribunal did not accept that submission. It concluded that such an interpretation leaves Clause 12.2.2 in a lacuna. In particular, Clause 12.2.2 contemplates that the starting rent of any new term is to be determined, rather than simply rolled over from the previous term. 

However, adopting the interpretation advanced by the tenant would prevent the procedure described under Clause 11 to operate, which would then frustrate the way in which starting rent was to be determined. This created a conflict between the two clauses, because on one hand, Clause 12.2.2 required the starting rent to be determined while on the other hand, the very procedure which would have allowed that to occur was removed from the lease.

The tenant submitted that because Clause 11 is inoperative (by reason of no market review date being specified), Clause 12.2.2 is also to be read as being inoperative. 

The Senior Member rejected that proposition. Clause 12.2.2 imposed a positive obligation on the parties to determine the starting rent of any renewed term. If the parties had intended for there not to be a review on renewal, Clause 12.2.2 could have been deleted. This had not occurred. 

The interpretation placed on Clause 12.2.2 by the tenant required the Tribunal to construe the clause as meaning that there will only be a determination of the starting rent if, and only if, the parties have specified that there is a market review date. However, such an interpretation ultimately led to disharmony between the two clauses. In particular, on one hand, Clause 12.2.2 requires that the starting rent be re-set; while on the other hand, the tenant’s interpretation of Clause 11 prevents that from occurring.

In the Tribunal's view, Clause 12.2.2 discloses an intention that the starting rent upon renewal was to be re-set. Therefore the reference to market review date in Clause 11.1 and Item 16 of the lease schedule is to be qualified by confining it to mid-term reviews. It cannot mean starting rent reviews. This is reinforced by the words of Clause 11.1 which contemplate that the market review date defines the review period from the market review date to either the next review date or the end of the lease. This assumes that the review period is re-set at the end of the lease.

The Tribunal concluded that the landlord and tenant had intended to review the rent to market for the leased premises at the commencement of each new term, if the tenant exercised its option. 

This decision by VCAT confirms that parties who use the standard form of lease in use in Victoria, and who wish to agree that there is to be no rent review for the entire period of the lease (including options), must be very specific in their agreement. If necessary, the standard form of lease should have clauses 11 and 12 specifically varied or excluded, to ensure that their intentions in this regard are made very clear.

About the Author

Bill Stark

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