Caps on rent reviews permitted – Supreme Court of Victoria rules in favour of tenants under retail leases

The Supreme Court of Victoria has recently handed down a decision which confirms that a maximum cap on a rent review is permitted under Section 35 of the Retail Leases Act 2003 (Vic) (RLA), overturning previous decisions made by the Victoria Civil and Administrative Tribunal (VCAT) on this issue.

What does the RLA say?

Under Section 35(3) of the RLA, a retail lease is prohibited from preventing the reduction of rent or to limit the extent of a reduction to rent as a result of a rent review (known as a ratchet clause). However, the RLA is silent on the issue as to whether the RLA also prohibits a maximum cap on an increase to rent as a result of market or CPI rent reviews.

This has resulted in uncertainty for tenants as to whether they could rely on a cap on the upper-limit of a CPI or market rent review under retail leases in Victoria.

The Court Decision

In December 2024, the Supreme Court of Victoria addressed this uncertainty in the decision handed down in Aldi Foods Pty Ltd v Northcote Shopping Centre Pty Ltd [2024] 799 VSC (Aldi Decision).

In the Aldi Decision, the court determined that a cap on market or CPI rent reviews is not prohibited by Section 35(2) of the RLA.

While the Landlord argued that a 6% cap on CPI reviews under the lease in question was void because the capping of the CPI review was a second method of review (not being permitted under Section 35(2) of the RLA), the Tenant was successfully able to argue that Section 35(2) of the RLA does not expressly prohibit caps on rent reviews.

In making its determination, the Court observed that there was no express provision in the RLA which prohibits a cap being place on the upper-limit of a CPI or market rent review. The Court also considered the historical context of the RLA and the intention of the RLA to create greater certainty and fairness for tenants as part of its interpretation and in handing down its decision.

The Aldi Decision marks a significant shift in the landscape of rent reviews and retail leasing in Victoria, as it overturns previous decisions made by VCAT that such caps are prohibited.

Significance of the Decision

The Aldi Decision clearly represents a win for tenants under retail leasing arrangements in Victoria, who are provided with greater certainty and financial predictability now that the Court has confirmed that rent review caps are valid under the provisions of the RLA.

It also clarifies the position under the RLA for the time being, as it remains to be seen whether the Landlord will appeal the decision.

For the time being, tenants will have further grounds to negotiate the inclusion of a cap on rent reviews under their retail leases, resulting in protections against unexpected rent increases.

What does this mean for Landlords and Tenants

Tenants under retail leases in Victoria will now have further grounds to request a cap be placed on any CPI and market rent reviews under their leases through reliance on the Aldi Decision.

Landlords can expect an increase in the number of tenant requests for the inclusion of rent review caps in retail leases, which may limit the potential of rental growth (notwithstanding high inflation).

If you are a landlord or tenant and require advice regarding rent reviews under your retail lease, contact our Corporate & Commercial team at Coulter Legal for assistance.