Two interesting cases about s 35 of the Retail Leases Act 2003 (Vic)

Until recently, there were no cases about s 35 of the RLA 2003 – and now there are two in the last few weeks!

The first held case that a clause that reviews the rent by CPI with a ‘cap’ did not comply with sub-s 35(2) of the RLA 2003.  The second held that a rent review that reviewed the rent by CPI with a ‘cap and collar’ didn’t comply with sub-s 35(2).  In both cases, the Tribunal ordered that the rent for both was to be determined as the current market rent under sub-s 35(7).

Section 35 of the RLA 2003 states that (relevantly):

(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.

Note

For reviews based on the current market rent of the retail premises, see section 37.

…

(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 Q St Kilda Tenancy Pty Ltd v Kane (Building and Property) [2023] VCAT 75 (24 January 2023), Member Nash considered a rent review clause that allowed for the rent to be reviewed by CPI up to a maximum of 4%.  The member held that CPI with a cap was a mixed rent review covenant, and that sub-s 35(2) permitted one only of the approved forms of review set out in sub-s 35(2), so the formula of CPI with a cap did not comply.

A coupe of weeks later, in Roberts Family Enterprises Pty Ltd v Meddles Bekirofski and Reshat Bekirofski(Building and Property) [2023] VCAT 121 (7 February 2023), the same member considered a rent review covenant that reviewed rent by CPI, provided that any rent increase would be a minimum of 1.5% and a maximum increase of 5%, known as a ‘cap and collar’.  Again, the Member held that this form of review clause was a mixed review that was not permitted by sub-s 35(2) of the RLA 2003.

In both cases, the remedy for an offending rent review covenant is prescribed by sub-s 35(7) as the current market rent, to be determined by a specialist retail valuer if the parties cannot agree.

This finding is interesting, particularly the decision in Q St Kilda Tenancy, as: 

1. I have been told that a number of practitioners in the leasing community held the view that CPI with a cap complied with sub-s 35(2) of the RLA 2003.  As a result, there may be a significant number of leases around that use that formula;  and
2. it has been a turbulent few years, sending rent in some areas down and CPI skyrocketing.  This combination might make a market rent review attractive to some retail tenants.