Supreme Court holds that caps on rent reviews are permitted for retail leases in Victoria

The decision

In December 2024, the Victorian Supreme Court in Aldi Foods Pty Ltd v Northcote Shopping Centre Pty Ltd [2024] VSC 799 overturned, on appeal from VCAT, a decision that upper-limit caps on market and CPI rent reviews were prohibited by section 35(2) of the Retail Leases Act 2003 (Vic) (RLA).

There has been uncertainty about this issue for some time because of the operation of section 35(2) of the RLA which provides that the basis or formula on which a rent review is to be made must be one of the permitted methods:

• a fixed percentage;
• an independently published index of prices or wages (for instance CPI);
• a fixed annual amount;
• the current market rent; or
• a basis or formula prescribed by the regulations.

Under the RLA a retail premises lease may not prevent the reduction of rent or limit the extent of a reduction (e.g. a ratchet clause). It is, however, silent on whether a lease can limit an increase in rent.
The retail lease in this case, under which Aldi was the tenant, provided for CPI reviews and market rent reviews. Increases at those reviews were capped at 6% and 10%, respectively, of the previous year's rent.

At first instance, VCAT followed the position taken in multiple previous VCAT cases that caps on rent reviews were prohibited by section 35(2) as a cap constituted a second method of assessing rent. The tenant appealed this decision.

The tenant argued, among other things, that a cap does not amount to two different methods of assessing rent, but rather provides a limitation on the prescribed method. The tenant also argued that if the intention of the RLA was to prohibit caps, this would be expressly provided for, as is the position in respect of ratchet clauses (which are prohibited by section 35(3)).

The landlord argued the cap was prohibited by section 35(2), as it was effectively a mixed rent review that required two different methods of calculating the rent.

Croft J found in favour of the tenant and the appeal from VCAT was upheld. His Honour agreed with the tenant's submissions that a cap on market or CPI rent reviews is not prohibited by section 35(2) of the RLA. His Honour observed that there was no express provision on caps and said that this was significant in the interpretation of section 35(2). His Honour emphasised the history of the legislation and the intention of the RLA as a 'remedial' act, its intent being to create greater certainty and fairness for tenants.

Our view

The benefits of this position are clear:

• for future leases, it gives the landlord and tenant greater freedom to negotiate rent review arrangements; and
• for existing leases, it avoids a situation where a CPI rent review subject to a cap is void, which would result in a market review if the parties cannot agree on the rent.

While we agree that the intent of the RLA is to create greater certainty and fairness for tenants, query whether this decision is contrary to section 35(2). Where a rent review clause provides that rent will be adjusted by reference to CPI up to a 5% increase (for example), that effectively requires applying two different methods to the same rent review. Put another way, as the landlord argued at paragraph [43] of the judgement, 'CPI up to 6%' is not the same as 'CPI', and 'current market rent up to 10%' is not the same as 'current market rent'.

We are also concerned that the decision placed heavy reliance on aids to interpretation, such as the historical context of the RLA, in a situation where the legislation is not ambiguous.

What this means for you

It is possible that this decision may be appealed (or that the issue will be decided on appeal in a future case), but for now, the position is now that caps on market and CPI rent reviews are permitted by the RLA and are enforceable.

Until the decision is resolved on appeal, the inclusion of rent reviews with a cap in future leases (including in renewals of existing leases) does pose the risk that the rent review is void and the rent has to be reviewed to market with effect from each review date unless the parties can agree, in accordance with section 35(7) of the RLA.

Other authors: Molly Pearse, Graduate Lawyer. 

The information provided is not intended to be a comprehensive review of all developments in the law and practice, or to cover all aspects of those referred to. Readers should take legal advice before applying it to specific issues or transactions.