HG Alert: Supreme Court Holds Ratchet Review Clauses Valid - Jun 2009

A recent decision in the Supreme Court raises issues for landlords and tenants when reviewing rent for retail shop leases. In its 9 June 2009 decision in Connor Hunter v Keencrest Pty Ltd & Ors [2009] QCA 156, the majority of the Supreme Court found that clauses in a retail lease which provided that on review, rent could not fall below the previous year’s rent, were valid.

In this matter, a retail shop lease stated that rent would be reviewed annually in line with the relevant Consumer Price Index increase, as long as the reviewed rent was not lower than the rent for the previous year. The lease also stated that if an option for a further term was exercised, rent was to be reviewed to market rent, as long as the rent for the first year of the option term was not lower than the rent for the last year of the initial term.

The Court found that the provisions of this lease were valid. It held that a rent review clause in a retail shop lease will not necessarily be invalidated if it provides for a method of rent review (for example, to CPI), and also states that on review, the rent may not fall below the previous year’s rent.

Leases which provide for rents to be reviewed to the greater of two methods of calculation (for example, the greater of CPI or a percentage increase) will still be invalid under the Retail Shop Leases Act 1994 (Qld).

Although the explanatory notes to the Act stated that the intention of section 27 was to prevent ratchet clauses, the Court found that the provisions of the Act clearly did not exclude the review in the lease.

The Court reasoned that percentage reviews, which are permitted by the Act, are arguably also ‘ratchet clauses’, as these reviews do not allow the rent to decrease. The Court also considered that a reference to the previous year’s rent was not a basis or method of review of rent in the meaning of s27 of the Act, which says that a lease cannot provide for more than one basis of review on a review date.

This decision overturns the generally held view that such minimum rent provisions are void and allows landlords to combine the flexibility of CPI and market reviews with the certainty of a minimum rent. However, care should still be taken when drafting rent review clauses in order to avoid wording that could be interpreted as creating a method of review, rather than simply a proviso that the rent will not decrease.

Landlords and tenants should be careful before relying on this decision. It could be premature to permanently amend lease documents based on this decision, and it may be wise to wait until some time has passed to see if the case is appealed or if the legislation is amended.

For more information regarding this case or other rental issues for landlords and tenants, please contact HopgoodGanim’s Commercial and Retail Leasing team.