Court of Appeal declares that "ratchet" rent review clauses in retail shop leases are ok

Connor Hunter v Keencrest Pty Ltd [2009] QCA 156

The Queensland Court of Appeal has today declared that ‘ratchet’ rent review clauses in a lease are permitted by the Retail Shop Leases Act 1994 (“Act”). Ratchet rent review clauses do not allow CPI or market rent reviews to decrease the rent.

Section 36(e) of the Act provides that a rent review clause in a lease is void if it provides for the rent to change in accordance with whichever of two or more methods of calculating rent will result in the highest amount.

The tenant in this case (Keencrest Pty Ltd) successfully argued at first instance that the ratchet rent review clause was void because it stopped the rent from decreasing. [Barry & Nilsson] However, the Court of Appeal by a 2 to 1 majority, has today overturned that decision.

The Court of Appeal considered the wording of section 36(e) of the Act and noted that it refers to methods of calculating a ‘change’ in the rent. By requiring the rent to remain the same if there was to be no increase, the Court concluded that the ratchet rent review clauses did not fall foul of section 36(e) because if rent remained the same then there would be no change in the rent.

The Court found that the wording of section 36(e) was clear and so it considered that it was not entitled to have regard to the explanatory memorandum for the Act and the Minister’s second reading speech from 1994, [Barry & Nilsson] despite that fact that these sources made it clear that it was the Parliament’s intention to prohibit ratchet rent reviews.

After nearly 15 years, this decision overturns the previously held belief that ratchet rent review clauses in retail shop leases are void. In light of the express intention of Parliament to discourage these types of clauses, it is likely that we can expect further amendments to the Act to reverse this decision in the near future.

We recommend that you do nothing for future leases. It would be a brave landlord who re-tests the intent of Parliament.

For further information on this topic, please contact Cameron Graham, Clive Nichol or Sonia Whitehouse at Barry & Nilsson Lawyers.

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