Relief Against Rising Rental Increases: Maximum Caps Now Permitted in Victorian Retail Leases
One of the biggest concerns for business owners entering retail leases is how to keep costs low. When negotiating the terms of the lease with the landlord, you may want to consider implementing a fixed upper limit on rental increases throughout the tenancy. This proposition has recently been debated in a Victorian Supreme Court Decision, Aldi Foods Pty Ltd v Northcote Shopping Centre Pty Ltd [2024] VSC 799 . The question of law discussed by the Supreme Court was whether maximum caps on rent increases contained in retail lease rent review provisions contravene s 35(2) of the Retail Leases Act 2003 (Vic) (the ‘RLA’).
The facts of this case involved a tenant of a shop in Northcote having negotiated with the initial landlord to include the following terms into the schedule of their retail lease:
• “In no case is Rent varied by CPI to be more than the previous year’s Rent increased by 6%”
• “In no case is Rent varied by market review to be more than the previous year’s Rent increased by 10%.”
In effect, the above provisions ensured that the rent would not increase beyond 6% annually during the term of the lease or beyond 10% at the commencement of each new term.
On appeal from the Victorian Civil and Administrative Tribunal, Justice Croft found that a maximum cap is compliant with s 35(2) of the RLA and therefore the above terms were valid.
The reasoning behind Justice Croft’s decision centered around the four submissions made by the tenant:
1- Section 35(2) of the RLA does not expressly prohibit maximum caps on rent increases
The wording of s 35(2) states that there must only be one basis or formula on which a rent review can be made. An argument had been put forward by the landlord that having a rent review with both CPI or market rent and a maximum fixed percentage involves two limbs which s 35(2) prohibits. Through consideration of the context of the remaining provisions of s 35 and the structure of the RLA as a whole, Justice Croft found the legislative intention behind stating only one basis or formula can be used was to prevent landlords from combining multiple rent review options to obtain higher rental increases. A maximum cap operates in favour of the tenant and therefore does not act contrary to the intention of the legislature.
2- Protection of contractual rights of the parties where there is no direct conflict with the RLA.
As a matter of policy, Justice Croft agreed with the tenant that there is a presumption against interfering with vested contractual or proprietary rights. As the parties involved were both sophisticated and legally represented at all times, their agreement to include a maximum cap to protect the tenant’s interests aligns with the operation of s 35(7) of the RLA which states the parties may reach an agreement about the rent. For the court to interfere with the parties’ right to negotiate in this manner would lead to a construction of s 35(2) which leaves the tenant worse off than they otherwise would have been had they not engaged in commercial negotiations.
3- Section 35(3) of the RLA prohibits a collar but not a cap on rent after review
Section 35(3) states that a provision in the lease is void if it prevents the reduction or limitation of rent. By including this section, it demonstrates the legislative intention to prevent there being a minimum rental increase during rent reviews. Inherently through including this section to protect tenants, it suggests that the legislature intentionally omitted the inclusion of an equivalent section rendering void maximum caps on rental increases to protect landlords’ interests.
4- Upholding commercial arrangements between landlord and tenants enhances certainty and fairness
The tenant argued that the interpretation of the RLA requires a purposive approach meaning the courts should not transcend clear express words to disregard the fundamental structure of the legislation. Given there are no express words preventing the parties from agreeing to maximum caps on rent increases, a purposive approach would ensure such agreements are upheld rather than stricken down.
When it comes to entering into a retail lease or renewal of lease agreement, tenants should consider negotiating with their landlords to include a maximum cap on rent increases during rent reviews. This will protect their interests should CPI or market value rental amounts skyrocket during their tenancy.
For landlords, such an arrangement may be beneficial as you can entice reliable and trustworthy tenants to enter long-term tenancies whilst still achieving mutually acceptable rental increases during rent reviews.
DISCLAIMER: This article is intended only to provide a summary of the subject matter covered. It does not purport to be comprehensive or to render legal advice. No reader should act on the basis of any matter contained in this article without first obtaining specific professional advice.
We accept no responsibility for any action taken after reading this article. It is intended as a guide only and is not a substitute for the expert legal advice you can get from De Marco Lawyers and other relevant experts.