Caps on rent increases permitted

The long-running saga about whether the Retail Leases Act 2003 precludes “caps” on rent increases has ended with the Victorian Court of Appeal affirming that “caps” on rent increases do not contravene the Act.

In Northcote Shopping Centre Pty Ltd v Aldi Foods Pty Ltd [2024] VSCA 140 the Court of Appeal held that a “cap” on a rent increase did not infringe s35(2) of the Act.

Section 35(2) provides that 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.”

(emphasis added)

In Northcote the current market rent reviews on the renewal of the lease were stated to be no “more than the previous year’s Rent increased by 10%”. The annual CPI rent increases were to be no “more than the previous year’s Rent increased by 6%”.

The landlord commenced a proceeding in VCAT contending that the rent “caps” did not comply with s.35(2) on the basis that the effect of the “cap” was that the rent review formula for current market rent combined the bases or formula in s 35(2)(a) and (d) and the rent review formula concerning annual CPI increases combined those in s 35(2)(a) and (b). Had this argument succeeded, in the absence of agreement between the parties, the rent had to be determined by a specialist retail valuer as the current market rent of the premises (s 35(7)).

The landlord succeeded in VCAT. But in the Supreme Court of Victoria Justice Croft upheld the tenant’s appeal. The landlord then sought leave to appeal.

The Court of Appeal refused the landlord’s application for leave to appeal. Apropos the current market rent review, the Court held that the “cap” did not “alter the methodology to be adopted by the valuer in conducting the market rent review” and the “percentage cap will be irrelevant to the market rent review” [24]. Also, the Court held that where s 35(2)(a) refers to “a fixed percentage” as the “basis or formula on which a rent review is to be conducted, it refers to a predetermined percentage to be applied in every review. Plainly that is not the effect of a cap”.

With respect to the “cap” on CPI increases, the Court held that the “cap” sets a “ceiling on a CPI rent review, without adopting a fixed percentage as an alternative method or formula on which the rent review is to be conducted” and the “rent review clause does not involve an amalgam of two or more of the modes set out in s 35(2)”.

The Court also rejected an argument that the “caps” altered or qualified the basis or formula set out in s 35(2) and said that if the landlord’s submissions were correct, s 35(3) (which makes void a rent provision which precludes the rent from falling on a current market rent review) would “be otiose” [33].

The Court concluded by saying:

“[39] The caps….limit the extent to which rent can increase. They do not offend the prohibition on ratchet clauses in s 35(3) and do not produce an uncertain or obviously capricious or unintended consequence. They are not void by reason of s 35 of the Act.

[40] In our view the rent review clause provides a single basis or formula of fixing the market rent review according to the current market rent of the retail premises, and a single method for CPI rent review. The caps do not offend s 35(2) of the Act.”