PDF DOWNLOADThe Hon. Cameron Dick, Attorney General for Queensland announced on 3 November that he will introduce amendments to the
Retail Shop Leases Act 1994 (Qld) to outlaw ratchet rent reviews.
A ratchet rent review clause prevents rent from decreasing when a CPI or market rent review is carried out.
The amendments are intended to overturn the startling decision of the Court of Appeal in Connor Hunter v Keencrest Pty Ltd [2009] QCA 156 which declared that ratchet rent review clauses were acceptable - thus closing a legislative uncertainty which has existed since October 1994.
Premier Anna Bligh and Attorney- General Cameron Dick have both made public statements strongly supporting the introduction of changes in legislation that will force landlords to pass on rent savings to lessees.
Currently the Act contains provisions to help protect retail lessees from unfair rent review methods but recent court cases have found that some landlords are circumventing these provisions. This means that some leases contain provisions that allow rents to be increased if a review supports a rise, but rent cannot be lowered even if the review supports a decrease.
However, Attorney- General Cameron Dick has put forward two proposals to amend the Retail Shop Leases Act 1994 (the Act).
The purpose of the first amendment is to prevent “ratchet rent clauses” from being included in retail shop leases. The amendment will help to promote the use of fair rental review methods in retail shop leases.
The second amendment is to give assignees under retail shop leases the same rights to compensation that lessees already enjoy under section 43 of the Act.
“Connor’s Case” summary
The case concerned a retail shop lease of premises at Cleveland. The lease contained annual CPI rent reviews and a market review at the beginning of the option term. The lease stipulated that the new rent could in no circumstances be less than the rent payable for the previous year (“the ratchet clause”). The issue was whether the ratchet clause was void under Sections 27 and 36 of the Act.
The issue was previously addressed in 2002 in the District Court in Oz Sushi Pty Ltd v Lloyd Bennett & Associates Pty Ltd [2002] QDC 220 (as trustee). In that case the Court confirmed the widely held view that ratchet clauses, of the type considered in Connor’s case, did offend Sections 27 and 36 of the Act and were void.The practice of most lessors was not to include ratchet provisions in retail leases because they were unlawful.
However, in Connor’s case, the Court of Appeal concluded that ratchet clauses of the kind described were lawful.
The majority arrived at the result by addressing the following issues:
Was section 27 breached?
- Section 27 requires that a rent review must be made using a single basis for review.
- The Court rejected the lessee’s submission that the clauses determining the rent at the commencement of the option term provided for a review of rent on two bases including:
- a market rent review; and
- The ratchet clauses stating that the rent will not be less than the rent payable in the previous year.
- The Court rejected the lessee’s submission that the clauses providing for the annual CPI rent review was a review of rent on two bases, namely:
- a CPI increase; and
- The ratchet clauses stating that the rent will not be less than the rent payable in the previous year.
The Court held that the ratchet clauses did not amount to a basis for reviewing the rent, in the sense of adjusting or revising it. In neither form nor substance did the ratchet clauses effect any change in the rent.
The Court held that because the review clauses did not provide
for two bases for reviewing the rent, Section 27 was not breached.
Was section 36 breached?
- Section 36(e) of the Act renders void a rent review which adopts the highest rent of two or more methods (e.g. the higher of CPI or a market review).
- The majority held that the ratchet clauses did not operate to adopt the higher of two or more methods of calculating the rent. This is because they operate only to limit the application of the stated method of calculating rent (CPI or to market). The effect of the ratchet clauses was to provide that if the CPI or market review did not result in an increase to the rent, there was to be no review to the rent.
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