Caps on rent reviews are permitted, confirms the Victorian Supreme Court
The Victorian Supreme Court has resolved the uncertainty relating to caps upon rent reviews under the Retail Leases Act 2003 (Vic) (RLA) by confirming that such caps do not contravene section 35(2) of that Act.
Croft J, in ALDI Foods Pty Limited v Northcote Shopping Centre Pty Ltd [2024] VSC 799, granted the appeal against the earlier VCAT decision[1] in favour of ALDI, applying the law in a different manner to VCAT’s approach over the last 24 months.
Birdsong Legal were instructing solicitors in relation to the successful appeal.[2]
Summary
Parties are permitted to impose upper limits or ‘caps’ upon rent increases based upon an index of prices or wages or market rent reviews under retail leases governed by the RLA.
Reasoning of the Supreme Court
In a judgment issued 20 December 2024, his Honour took the view that:
1 The words of section 35(2) of the RLA do not expressly or impliedly prohibit maximum caps by requiring that the method of rent view “must be one” of the prescribed methods.
Croft J examined the history of retail tenancies legislation in Victoria and concluded that that the structure of the RLA allows for caps on rent increases while prohibiting provisions that prevent or limit rent reductions.
2 The presumption at law that the legislature does not intend to interfere with vested contractual or proprietary rights tends against the implication of a restriction upon caps.
On that basis, section 35(2) should not be construed in a way to make a tenant worse off than the tenant would have been had the parties not contractually negotiated a cap. The Court accepted that parties to a retail lease must be entitled to agree arrangements between themselves where there is no direct conflict with the RLA.
3 Section 35(3), by expressly prohibiting a collar but not dealing with caps, effectively permits caps.
It is consistent with the language of section 35 and the ongoing legislative approach to regulation of rent reviews for the provisions to render void a “collar” on rent after a review but not a “cap” on the outcome of a rent review process.
4 The provisions of section 35 should be construed in favour of tenants.
While Croft J recognised that while one of the primary purposes of the RLA is to enhance certainty and fairness of retail leasing arrangements (s 1(a)), this does not detract from the ameliorating nature of certain provisions of the RLA such as section 35, which provides protection to tenants. In other words, not every provision of the RLA needs to act reciprocally or be interpreted for the benefit of both tenants and landlords.
Commentary
The decision of the Supreme Court reestablishes a position that was commonly presumed to exist by the retail leasing industry before VCAT’s contrary decisions in 2023 and 2024.
It reflects a sensible outcome on the basis that tenants should be entitled to protect themselves by negotiating limits on rent increases, while maintaining restrictions upon landlords’ abilities to prevent rent decreases.
Some may justly enquire why tenants should be entitled to limit rent increases while landlords are not permitted to similarly protect themselves from decreases. The applicable legislation has arisen in circumstances where rentals tend to rise, leases build in rent increases and landlords (both individually and collectively) tend to hold the balance of power in lease negotiations. Given historical legislative moves to address this imbalance, it would be extraordinary for protective provisions negotiated by tenants to be rendered nugatory.
What now for landlords and tenants?
Retail tenants can now confidently seek to negotiate limits upon rent increases arising out of index-related and market rent reviews under the RLA.
Moreover, landlords cannot insist upon renegotiating rentals on an open market basis due to purportedly “void” caps imposed under CPI rent reviews or market rent reviews.
Parties who have altered their positions as a result of VCAT decisions which have been overturned by this case may wish to revisit their approach to rent reviews.
Further comment
The Supreme Court, through the Honourable Justice Croft, is to be commended for dealing with this matter in a highly efficient manner considering the importance of this case to parties involved in retail and commercial leasing in Victoria. With the notice of appeal lodged at the end of July 2024, the swift delivery of the Court’s interpretation of the law is sure to have saved many parties time and money.
[1] Northcote Shopping Centre Pty Ltd v ALDI Foods Pty Ltd [2024] VCAT 641 (10 July 2024)
[2] Birdsong Legal director David Krolikowski instructed counsel, Robert Hay KC and Brett Harding.