In brief – Timing and basis of rent reviews governed by statutes, not lease provisions
One of the biggest causes of disputes between landlords and tenants is rent reviews, their frequency and the basis on which they are conducted. The law is similar in NSW, Victoria and Queensland, whether the shop is in a major shopping centre or retail strip or whether it is a stand-alone shop.
Standard types of rent review
The standard types of rent reviews are the following three types:
- Inflation adjustment or consumer price index adjustment on a periodic basis.
- Market rent review to bring the rent up or down to the current market.
- Fixed amount or fixed percentage increases so that the rent steps up or steps down by agreed amounts in dollar terms or percentages at agreed intervals of time.
Legislation governing rent reviews overrides provisions of retail leases
In NSW, Queensland and Victoria, the position on leases to retailers is largely affected by statutory intervention. In NSW it is the Retail Leases Act 1994. In Queensland it is the Retail Shop Leases Act 1994. In Victoria it is the Retail Leases Act 2003.
Despite whatever the parties may write into their lease, whether in a retail shopping centre or any shop, the basis for the type of review, the timing of those reviews and the method in which the reviews are done are largely governed by those statutes. If a provision of a lease is contrary to the statute, then the offending provisions in the lease are of no effect.
Many landlords and for that matter, many retailer tenants make the mistake of merely looking at the words in the lease and deciding that that rent increase or that basis of review, or the methodology set out in the market rent review applies to them, when in fact the words in the lease can be of no effect.
The situation on timing and basis of rent reviews is similar in each state, but we highlight some notable features.
Rent reviews in NSW
Timing of changes to base rent
A retail shop lease must not provide for a change to base rent less than 12 months after the lease is entered into and must not provide for a change to that rent less than 12 months after any previous change to that rent. However, this does not apply to an increase by a fixed amount or a fixed percentage.
Ratchet clause banned by legislation
A retail shop lease which has the effect of preventing the rent from decreasing on a market rent review is void. This is what is referred to in the industry as a "ratchet clause" and is banned by the Retail Leases Act.
Market rent reviews by specialist retail valuers
A current market rent review, whether during the term or on exercise of option, has a special definition in the statute which overrides whatever is written in the lease. The tenant may ask for the rent to be determined before the tenant exercises the option to renew the term.
Should the parties fail to agree on the new rent, then a specialist retail valuer determines the market rent. The valuer may only have regard to the following matters:
- The provisions of the lease.
- The rent that would reasonably be expected to be paid for the shop when unoccupied and offered for renting for the same or a substantially similar use to which the shop may be put under the lease.
- The gross rent less the lessor's outgoings payable by the lessee.
- Rent concessions and other benefits that are frequently or generally offered to prospective lessees of unoccupied rental shops. This is what is frequently referred to as the incentive and the current market rent must not take into account the value of goodwill created by the tenant's occupation or the value of the tenant's fixtures and fittings on the actual premises.
Mechanism for determining disputes
Despite what may be written in the lease regarding the mechanism for determining a dispute as to the current market rent, the statute provides for the mechanism, including appointment of a specialist retail valuer. The authors of this article have assisted in the appointment of specialist retail valuers and the compiling of submissions to valuers.
Lease provisions which disadvantage tenants
In a submission to a specialist retail valuer, we highlight any lease provisions which place the tenant at a disadvantage, such as a demolition clause, a relocation clause, outgoings clauses or lack of an option to renew. These are all brought to the attention of the valuer to discount the market rent.
Rent reviews in Queensland
The position in Queensland is substantially similar to that in NSW. In particular, while rent can change by a combination of one or more methods (e.g. change in CPI plus a fixed percentage), any attempt at a ratchet-style rent review (e.g. to the higher of change in CPI and a fixed percentage) is void.
If the legislation is breached during the rent review process, depending on the circumstances, the tenant may be able to choose the rent review method to apply.
Rent reviews in Victoria
Ratchet clauses banned
The ratchet clause is also banned in Victoria. The Victorian Act states that a provision in a retail shop lease is void to the extent that it prevents or purports to preclude the reduction of the rent or to control the level of reduction of the rent.
Basis for conducting rent reviews
In Victoria a lease must state when the rent reviews will be conducted and the basis on which the reviews are to be made. A rent review may only be made on the basis of one of the following:
- a fixed percentage
- an independently published index of prices or wages
- a fixed annual amount
- the current market rent
- a basis or formula prescribed by regulations (currently nil)
Determination of current market rent if lease does not comply
If a Victorian lease does not comply with the above, the rent payable is to be determined as agreed between the parties or by a specialist retail valuer as the current market rent, if agreement cannot be reached within 30 days after a party has given the other party a written notice specifying the proposed amount.