Landlords and tenants – check your rent review clauses

– they may be void

 

Case Note - Hurrren & Anor v Keencrest Pty Ltd & Anor [2008] QSC 194

Court declares retail shop lease rent review clauses with more than 1 review basis – increase by CPI, but rent shall not be less than previous year  – void

 

What happened?

 

The tenant leased a premises comprising of a restaurant and a reception centre at Cleveland in 2002. 

 

Following the tenant’s exercise of the option to extend the lease term, the parties were unable to agree on the rent to be paid and the tenant argued that the review provisions of the lease were void because they were inconsistent with the provisions of the Retail Shop Leases Act 1994 (Qld) (the “Act”).

 

In early 2008, the tenant applied to the Supreme Court of Queensland for a declaration as to the validity of 3 rent review provisions in the lease. Those provisions were:

 

“Provided always that the yearly rental determined may in no case be less than 100% of the yearly rental payable before the preceding Rental Year.”

 

“If there is no increase in CPI…rent is the same as was payable during the Rental Year immediately preceding the date of recalculation.”

 

“Rental for a further term…will be increased by market review…provided always that the rental for the first year of the renewal period is not less than that payable during the immediately preceding Rental Year.”

 

 In other words:

 

• on each anniversary of lease term, rent will change in accordance with whichever is the higher amount of rent increased by CPI for Brisbane and rent payable in the previous year; and

 

• on extension of the lease term, rent will change in the accordance with whichever is the higher amount of rent increased by market review and the rent payable in the previous year.

 

The Retail Shop Leases Act

 

The Act applied to the lease and the relevant provisions were sections 27 and 36.

 

In essence, section 27(4) provides that rent may be reviewed using different methods of calculation (eg, fixed interest, CPI or market review) during the term of the lease, but each review must be made up using only a single basis of calculation. 

 

If a review made under the lease uses more than 1 basis or is carried out more than once in a year of the lease (other than the first year) the review is invalid (s. 27(7)).

 

Section 36 of the Act is also relevant.  It provides that a retail shop lease is void to the extent that it provides for rent to change in accordance with whichever of a review to market and the rent previously payable results in the higher amount. 

 

What the Court said

 

The issues before the Court were whether the provisos (i.e. rent must not be less than the previous year) constituted more than one “basis of review” or “method of calculation”. 

 

The landlord argued that only those parts of the lease which operated as a ratchet clause – those provisos that rent could not decrease – were void. In other words, rent ought to still increase annually in accordance with CPI or following a market review on exercise of the option.  

 

The Court, however, disagreed and held that that the lease contained more than one basis of review of rent in that the rent was calculable as the higher of:

 

(a)              rent previously payable; or

 

(b)              rent increased as to CPI or in accordance with a market review (as the case may be).  

 

The Court found the rent review clauses to be void to the extent they provided for rent to change on more than one basis.

 

Significantly, this finding brought into effect section 27(7)(c) of the Act which provides that where the lease contains an invalid review (i.e. more than one basis of review) the rent would be reviewed on the basis chosen by the tenant.  Unsurprisingly, the basis of review chosen by the tenant was “the rent (not less than the amount) previously paid”. 

 

The Court also allowed the tenant to file a counterclaim for any additional amounts paid under those ratchet clause provisions (i.e. the amount paid by way of increases due to CPI reviews) and was given the opportunity to recover its legal costs against the landlord.

 

Our comments

 

Because the basis of review chosen by the tenant was “the rent (not less than) previously paid”, quite extraordinarily, the practical effect of the decision was that the tenant was able to insist that rent not be reviewed for the life of the lease.

 

This decision reinforces earlier retail shop lease decisions about prohibition of ratchet clauses.  It highlights that the Act only allows rent be reviewed using only 1 basis, although different bases may be used during the term of the lease.

 

The basis for a rent review must a single basis of one of the following:

 

(a)              the current market rent of the leased shop;

(b)              an independent published index of prices, costs or wages (e.g. CPI);

(c)               a fixed percentage of the base rent;

(d)              a fixed actual amount; or

(e)              another basis prescribed by regulation.

 

When parties negotiate, it is very important (especially for landlords) to distinguish that retail shop leases must not contain ratchet clauses (and consider the adequacy and fairness of rent review provisions).  

 

Under the Act, if there is an invalid review, the tenant has the option of determining the rent to be worked out on one of the bases, chosen by the tenant.  This can result in significant practical and financial consequences.

 

If you are already a party to a retail shop lease, it would be a useful and worthwhile exercise to review your rent review provisions, sooner rather than later and make sure that they do not fall foul of the Act.

 

This case is current under appeal, so “watch this space”, as we will keep a close eye on the outcome.

 

Please contact us if we can be of any assistance in this difficult to navigate area.