Court of Appeal Confirms Rent Review Caps Are Valid Under the Retail Leases Act

Northcote Shopping Centre Pty Ltd v Aldi Foods Pty Ltd [2026] VSCA 140

The Victorian Court of Appeal has handed down an important decision that brings clarity to retail leasing in Victoria. In Northcote Shopping Centre Pty Ltd v Aldi Foods Pty Ltd [2026] VSCA 140, the Court confirmed that rent‑review caps are lawful under the Retail Leases Act 2003 (Vic) (RLA).

Background

Aldi leased premises within the Northcote Central Shopping Centre under a long‑term retail lease originally granted in 2008. The lease included:

1. CPI rent reviews subject to a 6% cap, and
2. market rent reviews subject to a 10% cap.

These caps were expressly included in a deed of variation executed in 2021 when Aldi exercised its option for a further five‑year term commencing in May 2022

The Landlord argued that these caps amounted to a second rent‑review method, contrary to s35(2) of the RLA, which prohibits multiple rent‑review mechanisms in a single review. Aldi maintained that the caps were simply contractual limitations on the outcome of the agreed method.

Procedural History

• VCAT (First Instance) VCAT initially held that the caps breached s35(2), reasoning that each cap introduced a second basis or formula (e.g. CPI and fixed percentage). The Tribunal therefore found the clauses void.
• Supreme Court (Trial Division) Aldi appealed. Justice Croft overturned VCAT’s decision, finding that a cap is not a second method but a constraint on the chosen method.
• Court of Appeal The landlord sought leave to appeal. The Court of Appeal refused leave, unanimously confirming the Supreme Court’s reasoning and upholding the validity of rent‑review caps.

Key Legal Issue

Section 35(2) of the RLA requires that each rent review use one of the prescribed methods:

• fixed percentage.
• CPI or other published index.
• fixed annual amount.
• current market rent.
• prescribed formula.

The Landlord argued that a cap effectively combined two methods (CPI and fixed percentage), breaching the “single method” requirement.

Court of Appeal’s Findings

The Court found that s 35(2) requires rent to be reviewed using one of the prescribed methods, such as CPI or current market rent. It held that:

1. A cap does not create a new method of review.

The rent is still determined by the nominated statutory method. The cap only limits the amount by which the rent may increase after that determination has been made.

For example:

• Review method: CPI
• Result of CPI calculation: 8%
• Contractual cap: 6%

The review is still a CPI review. The cap does not replace CPI with another formula.

2. A cap is not a second review formula

The landlord argued that a clause such as “CPI, capped at 6%” effectively combines two review methods and therefore breaches s 35(2). The Court rejected that proposition. It held that the cap is not itself a review method or formula. Rather, it is a contractual limitation on the outcome produced by the permitted review method.

The Court characterised a cap as a parameter, qualification or constraint operating on the result of the review, rather than as a separate basis for calculating rent.

3. The statutory text contains no prohibition on caps

A significant aspect of the Court’s reasoning was that nothing in the wording of s35 expressly prohibits a cap on rent increases. The Court approached the matter by focusing on the language used in s35 rather than implying additional restrictions into the section.

4. Consistency with s 35(3)

The Court’s reasoning is also consistent with the structure of s35. The Act expressly invalidates provisions that prevent rent reductions (the anti-ratchet provision in s 35(3)), but it contains no corresponding prohibition on limiting rent increases.

Key Takeaways

Rent‑review caps are lawful and enforceable

The Court of Appeal has confirmed that caps on CPI or market rent reviews do not breach the Retail Leases Act. A cap is simply a limit on the outcome of the chosen method, not a second method. This gives landlords and tenants confidence to negotiate capped rent‑review clauses without fear of invalidity.

Greater flexibility in lease negotiations

Parties can now use caps as a commercial tool.

Landlords may offer caps to secure long‑term tenants or anchor retailers.

Tenants can request caps to manage rent volatility and improve budgeting. The decision supports more tailored rent‑review structures that reflect market conditions and risk appetite.

Caps provide real protection in volatile markets

With CPI fluctuations and rising market rents in many retail sectors, caps help stabilise occupancy costs. Tenants gain meaningful protection against sudden rent spikes, while landlords retain predictable, structured rent growth.

Valuers must apply caps correctly

The decision reinforces that valuers must:

• Apply the agreed review method (CPI or market rent), and
• Apply the cap after determining the result. This ensures consistency and reduces disputes about how caps interact with valuation methodology.

Existing leases with caps

Landlords and tenants with capped rent‑review clauses in current leases can rely on them with confidence. The decision removes uncertainty that previously surrounded capped reviews and reduces the risk of challenges under s35.

Drafting clarity is essential

Although caps are lawful, they must be drafted with careful consideration. Ambiguous wording can still lead to disputes. Clauses should specify:

• the exact percentage or amount of the cap,
• when it applies, and
• how it interacts with CPI or market rent calculations.

Renewals and variations should be reviewed

Parties should revisit rent‑review clauses at renewal or variation to ensure caps remain appropriate and aligned with commercial objectives. Tenants may seek caps where none existed previously, and landlords may use caps strategically to secure longer terms.

Contact us

For more information contact our Property & Development team on 03 5273 5273 or email info@coulterlegal.com.au.