A rent review construction issue in the LIV standard lease that keeps coming up…

There is a construction issue that keeps coming up in retail and commercial leasing cases about whether a market rent review is required at the commencement of a new term in the standard LIV copyright lease when the Schedule says there are no market reviews.  Different versions of the same issue keep cropping in different version of the LIV lease.

In MD & S Griggs Pty Ltd v DWH Pty Ltd (Building and Property) [2016] 1718, Senior Member Riegler (as the Deputy President was then) considered the 2006 revision of the LIV lease.  

Clause 11 is the market review clause.

Clause 12 of the LIV lease deals with renewals, and in the 2006 revision it states that (underlining added):

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.

Accordingly, clause 12.2.2 suggests that the starting rent for a new term is to be determined by market review under clause 11.

However, Item 16 of the Schedule to the lease considered by Senior Member Riegler states that (underlining added):

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 in that case argued that the lease did not provide for market reviews because of the text in the Schedule, and the landlord argued that clause 12.2.2 prevailed.  The Senior Member held that:

16.       In my view, 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. 

17.       I am of the view 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.

…

23.       … Clause 11 has two functions. The first is to provide the mechanical provisions for rent review during the currency of a term, subject to Item 16 of the lease schedule stipulating a market review date. The second function is to provide mechanical provisions to establish the starting rent of any renewed term.

24.       In my view, such an interpretation avoids the apparent disharmony between the two provisions and gives effect to what was intended. I am reinforced in this view by a review of the following authorities, which examine how a conflict between two clauses may be reconciled

The same issue arose last year in the case of Baroud Nominees Pty Ltd v Mereland Technology Pty Ltd(Building and Property) [2022] VCAT 516, in which Member Nash considered the same provisions in the May 2009 revision of the LIV lease.  In that revision, clauses 11 and 12 were in materially the same form as the 2006 Revision.  Items 16 and 17 of the Schedule in that case stated that (underlining added):

Item 16

[2.1.1, 11, 18]

Review date(s):

Term

(a) Market Review date(s);                      Not Applicable

(b) CPI review date(s):                               On the first anniversary of the commencement date and upon each anniversary of the commencement date thereafter in accordance with the increase in the CPI of the rent payable in the year preceding each such review date.

(c) Fixed review date(s) and percentage

of fixed amount increases:             Not Applicable

Item 17

[2.1.1, 11, 18]

Who may initiate reviews:

Market review:                                        Not applicable

CPI review:                                               Review is automatic

Fixed review:                                            Not applicable

Member Nash referred to the decision in Griggs and adopted and applied the same reasoning.

The same issue has arisen in a number of cases that I have been involved with recently and, given the recent volatility in rent, may well arise in other case, so practitioners should be aware of the decisions. 

Relevantly, the decisions suggest that:

1. if Eleanor has already leased a property to her tenant Fraser with options for a further term, and they used one of the the LIV standard leases, the rent for the new term will probably be determined by a market review, even if they have have marked ‘not applicable’ to market reviews in the Schedule (or words to that effect);  and
2. if Eleanor and Fraser want to use the LIV standard lease and specify a different mechanism for determining the rent for the commencement of a new term, they should expressly state that intention in their lease.  The easiest way to do that is to draft an additional provisions that expressly overrides the operation of clause 12.2.2.  They will also need to ensure that the proposed rent review complies with sub-s 35(2) of the RLA 2003 (see here).

However, practitioners should also be aware that the each lease is construed on its own terms.  While the decisions above are a good indication of how the LIV standard lease will be construed on this issue in the future, the decisions are not binding and there may be other indications in the documents that a different construction is applicable.  

Also, the LIV lease may well change – so make sure you read the whole lease before adivising clients!