Rent capping in retail leases
The Supreme Court has held that there is no prohibition on the capping of rent increases in retail leases in Victoria under the current retail leases legislation.
In the case of Aldi Foods Pty Ltd v Northcote Shopping Centre Pty Ltd,[1] in a decision which traversed the changing legislative regime governing retail leases in the state, Croft J analysed the Retail Leases Act 2003 (Vic) (RLA) s 35 — the provision concerning the calculation of rent upon a rent review — as well as similar provisions in predecessor legislation, and concluded that ‘the structural change in the rent review provision indicates a substantive change in the legislative approach to the regulation of rent review arrangements’.[2] The upshot of this was that, whatever the position under the Retail Tenancies Act 1986 (Vic) and the Retail Tenancies Reform Act 1998 (Vic), the rent review provisions in the RLA did not prohibit the capping of rent and a term in a retail lease providing for such would not risk being void under the RLA.[3]
In the particular facts of the case, the parties had included terms in their lease stating that rent was not to increase by more than six percent or, in some cases, 10 percent, year on year during the life of the lease. In reaching his Honour’s conclusion regarding the status of rent capping, Croft J acknowledged the ‘important and difficult issues with respect to the interpretation of the present retail leases legislation’.[4] That said, his Honour ultimately was persuaded by submissions advanced by the tenant, an entity operating an ALDI supermarket, in four key respects.
First, Croft J held that the relevant wording of s 35 did not expressly prohibit the capping of rent. His Honour also noted:
[T]he structure of s 35 now separates the permissible rent review formula provisions, which are contained in s 35(2), from the provisions with respect to rent review outcomes, now addressed in s 35(3). In my view, this is not merely a drafting change but, rather, reflects in this legislation ‘a new scheme’ with respect to the permissible rent review regime.[5]
His Honour added: ‘[h]aving regard to this legislative history and the express words of s 35 this cannot, in my view, be viewed as anything but significant. It cannot be viewed as a mere legislative “accident” or “omission”.’[6]
Second, his Honour considered that it would produce an absurd result if s 35 were to be construed as prohibiting rent capping; if it were to contain such prohibition, a tenant might stand to be ‘worse off than [it] otherwise would have been had the parties not had commercial negotiations’.[7]
His Honour noted the ‘presumption … against interfering with vested contractual or proprietary rights’, albeit a presumption which ‘cannot survive the clear words of a statute’[8]. Earlier, in Krajcar v Eastern Central Real Estate Pty Ltd,[9] his Honour held of the interplay between freedom of contract and the limits sometimes imposed by legislation:
[T]he purpose of the RLA, generally expressed in s 1 in terms of enhancing ‘certainty and fairness in retail leasing arrangements between landlords and tenants’ is not served by disregarding the ameliorating and remedial nature of the legislation and striking down commercial arrangements involving retail leases on the basis of a strict and literal approach to the interpretation of its provisions. … As indicated previously, this approach cannot be carried so far that a court is, effectively, giving pre-eminence to contractual or lease provisions over clear legislative provisions …[10]
The question in the present case was whether the RLA s 35 had been expressed in such a way as to deprive parties to a retail lease of the capacity or freedom to negotiate a rent cap. His Honour appears to have considered that it had not.
Third, acknowledging that s 35(3) prohibited the setting of a threshold or ‘collar’ on rent upon review, his Honour did not consider that this indicated necessarily a similar prohibition on capping. A prohibition on one but not the other would not necessarily offer a ‘windfall’ to tenants and instead was ‘entirely consistent with the language of s 35 and, indeed, the ongoing legislative approach to the regulation of rent reviews and retail tenancy leases’.[11]
Fourth, even accepting for argument’s sake that the provisions of the RLA generally should be construed in favour of tenants, this did not necessarily mean that s 35 in particular ought also toe that line. His Honour referred to the balancing of the interests of tenants and landlords under the RLA and, in doing so, endorsed comments made by Deputy President Macnamara in Ross-Hunt Pty Ltd v Cianjan Pty Ltd,[12] including where the Deputy President said:
The only way in which it can be determined exactly how the balance between the rights and liabilities of landlords and tenants has been struck by Parliament is to analyse in accordance with normal statutory maxims the words which Parliament has used.[13]
In determining where Parliament had sought to strike the balance in this situation, it appears that, for his Honour, a proper reading of s 35 evinced the legislative intention that there be no prohibition on rent capping. It so happened that the ‘balance’ in this instance favoured the tenant.
[1]: [2024] VSC 799.
[2]: Ibid [23].
[3]: The RLA s 94(1) states: ‘A provision of a retail premises lease or of an agreement (whether or not the agreement is between parties to a retail premises lease) is void to the extent that it is contrary to or inconsistent with anything in this Act (including anything that the lease is taken to include or provide because of a provision of this Act).’
[4]: Aldi Foods Pty Ltd v Northcote Shopping Centre Pty Ltd [2024] VSC 799, [14].
[5]: Ibid [52].
[6]: Ibid.
[7]: Ibid [53].
[8]: Ibid.
[9]: [2022] VSC 173.
[10]: Ibid [43].
[11]: Aldi Foods Pty Ltd v Northcote Shopping Centre Pty Ltd [2024] VSC 799, [55].
[12]: [2009] VCAT 829.
[13]: Ibid [33], quoted in Aldi Foods Pty Ltd v Northcote Shopping Centre Pty Ltd [2024] VSC 799, [47].