Be Aware! Retail Leases – rent reviews and ratchet clauses

Retail premises are premises (but not any area for use as a residence) that are to be used, wholly or predominantly, for the sale or hire of goods by retail, or the retail provision of services, or carrying on of a specified business that the Minister determines pursuant to the Retail Leases Act 2003 (Vic) (the “Act”).

This article examines ‘ratchet’ clauses, which purport to make the rent review favour the landlord regardless of circumstances, and are prohibited under Victorian law.

If a retail premises lease provides for a review of the rent payable under the lease or under a renewal, the lease must state:

– when the reviews are to take place; and

– the basis or formula on which the reviews are to be made.

Under the Act, the basis on which a rent review is to be made must be one of the following:

– a fixed percentage;

– an independently published index of prices or wages;

– a fixed annual amount;

– the current market rent of the retail premises; or

– a basis or formula prescribed by the regulations.

A rent review provision under a retail premises lease must be drafted on the basis or formula prescribed above.

It is important to review your lease and check if it includes a ratchet clause.

For example, where the rent under a retail premises lease is based on ‘market review and will not decrease even if market conditions or the Consumer Price Index (CPI) decline’, such a provision is void to the extent that it purports to preclude, or prevents or enables a person to prevent, the reduction of the rent or to limit the extent to which the rent may be reduced. The rent review is then to be negotiated and agreed between the landlord and tenant.

If there is no agreement between the landlord and the tenant within 30 days after the landlord gives the tenant, or the tenant gives the landlord, a written notice specifying an amount of rent for the purposes of the review, the rental amount will be determined by a specialist retail valuer appointed by the Small Business Commissioner as the current market rent of the retail premises.

As a retail tenant, carefully reviewing rent review clauses is essential, as shifting market conditions may lead to a reduction in rent during the review process, ultimately resulting in cost savings for the business.