Ratchet Clause rendered void pursuant to statutory amendments
PDF DOWNLOADGovernment plugs the Ratchet clause loophole
The Criminal Code and Other Legislation Amendment Act 2011 (Qld) was enacted on 4 April 2011 and amends the Retail Shop Leases Act 1994 (Qld) making ratchet provisions in a retail shop lease unlawful.
A ratchet rent review clause prevents rent from decreasing when a rent review is carried out. Ratchet clauses provide certainty for lessors that rental income will not suffer from market fluctuations beyond their control.
Section 27 of the Retail Shop Leases Act 1994 (Qld) (the Act)limits the way rent in a retail shop lease may be reviewed. From the Second Reading Speech and Explanatory Notes for the Retail Shop Leases Bill 1994, it was clearly the intention of Parliament that the Act would prohibit the use of ratchet clauses.
Application of Section 36A
The introduction of section 36A of the Act has closed a loophole created by the 2009 Queensland Court of Appeal decision in Connor Hunter (A Firm) v Keencrest Pty Ltd & Ors [2009] QCA 156 which upheld the validity of a ratchet clause in a retail shop lease that stipulated rent could not be less than the rent payable for the previous year.
The Bill has effectively restored ‘the intention of the legislation by ensuring that rent reviews are not avoided under ‘ratchet’ clauses preventing decreases in rent’.
The section provides that any provision of a retail shop lease that –
- Prevents the rent decreasing under a rent review; or
- Limits or specifies the amount by which the rent may decrease under a rent review; or
- Prevents, or allows the avoidance of the rent review by the lessor, for the purposes of preventing rent from decreasing or limiting the amount by which rent may decrease;
is void.
Implications for Landlords
The legislation does not operate retrospectively and as a result the new law applies only to retail shop leases entered into after its enactment. Where a lease includes a ratchet clause as part of the rental review only the ratchet clause will be invalid and therefore severed from the contract.
Uncertainty surrounds the issue of whether the legislation applies to reviews carried out under an option to renew retail shop leases. These clauses are found in leases entered into prior to the commencement of section 36A but will be exercised following the commencement of the section. It currently appears that ratchet clauses falling into this category of lease will not be rendered void by the enactment of the legislation.
Landlords will need to review and amend their standard leases to exclude ratchet provisions and ensure that contracts do not infringe the provisions of section 36A of the Act.
Triggering a market rent review
It will be interesting to see whether (in a falling market) a landlord offends the new law by not triggering a market rent review when one might have been triggered under a lease.
To get the full protection intended by the new law, perhaps a tenant may be wise to insist that it has the right (not just the landlord) to trigger a market rent review (in a falling marketing).
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