New ruling on rent review caps will have knock-on effects for tenants and landlords

On 20 December 2024, the Supreme Court of Victoria handed down its decision in ALDI Foods Pty Ltd v Northcote Shopping Centre Pty Ltd [2024] VSC 799 where it found that rent review caps do not contravene section 35(2) of the Retail Leases Act 2003 (Vic).

In doing so, the Supreme Court overruled a previous order of the Victorian Civil and Administrative Tribunal and set a new precedent that favours the interests of tenants in retail leasing arrangements.

Background

In Victoria, rent reviews in respect of retail leases are governed by section 35 of the Retail Leases Act 2003 (Vic). The so-called ‘ratchet clause’ is regulated by section 35(3) of the Act which operates to void any clause that does not allow rent to be reduced following a rent review.

Importantly, however, there is no equivalent provision in respect of rent increases and as such, the lack of clarity on this issue has been the subject of various cases to date. The recent Supreme Court decision assists in clarifying the position for both landlords and tenants going forward.

An exercise of statutory interpretation

In 2023, the VCAT resolved this uncertainty. In making its determination on Q St Kilda Tenancy Pty Ltd v Kane (Building and Property) [2023] VCAT 75, VCAT found that the prescription of an upper limit was prohibited by section 35(2) of the Act by reason that it constitutes a second method of review in circumstances where only one method is permitted under the statute.

Over the past 18 months, VCAT has applied this logic in holding that caps on rent reviews are void. As a result, parties have been forced to determine rent by way of agreement or, in the absence of such agreement, market review in accordance with section 35(7) of the Act. This was reflected in the VCAT order granted to ALDI in the earlier decision of ALDI Foods Pty Ltd v Northcote Shopping Centre Pty Ltd [2024] VSC 799 in which VCAT held that any cap on rent reviews was void under section 35(2) of the Act.

However, this is no longer the case following the decision of the Supreme Court.

The decision

ALDI sought to rely on a rent review mechanism in the lease agreement which capped the consumer price index (CPI) review at 6%. Naturally, the landlord relied on previous decisions handed down by VCAT to argue that the mechanism was void on the basis that it was not contemplated by section 35(2) of the Act. In response, ALDI argued that the 6% cap should be interpreted as being a limit on a rent review method, rather than being a second method. ALDI based its argument on the following grounds:

1. Section 35(2) of the Act does not contain an express prohibition on rent review caps.
2. In the absence of any direct conflict with the Act, the court should uphold the contract as agreed between the parties.
3. By failing to impose a prohibition on cap clauses in circumstances where such a prohibition existed in respect of ratchet clauses, the legislature clearly intended for rent review caps to be permissible.
4. The Retail Leases Act, which is designed to provide avenues for remedial action, should be construed in favour of tenants (especially in the context of section 35).

The Supreme Court agreed with the arguments put forward by ALDI and decided that rent review caps do not conflict with the object and purpose of section 35 of the Act.

Significance

The decision not only overturns the order previously issued by VCAT but sets a new precedent for retail leasing arrangements in Victoria. Importantly, the decision demonstrates that the Supreme Court is willing to interpret the Act in a manner which encourages fairness between landlords and tenants.

It is yet to be seen whether the landlord will appeal the Supreme Court’s decision.

What does this mean for you?

For tenants, this decision provides greater certainty and financial predictability by confirming that rent review caps are valid under the Act. This means tenants may have stronger grounds to negotiate capped increases in their leases, offering protection against unexpected rent increases.

For landlords, the ruling may prompt increased tenant requests for rent caps, potentially limiting rental growth in high-inflation environments. Landlords should carefully review their leases and consider how this decision might affect future negotiations and long-term rental strategies.

If you have any queries or require assistance with your leasing negotiations, please contact Sarah Roettgers.