Background

The common interpretation of sections 27 and 36(e) of the Retail Shop Leases Act 1994 (Act) is that a clause in a lease which provides for more than one method of calculating a change in the rent is void. Such clauses are known as ‘ratchet clauses’.

This view was successfully challenged in a recent Queensland Court of Appeal decision in Connor Hunter (a firm) v Keencrest Pty Ltd & Ors [2009] QCA 15.

Facts

Under the retail shop lease in question:

• the rent during the initial term of the lease was to be reviewed annually to CPI, with a proviso that the rent could not decrease, and
• on exercise of the option, there was to be a market review, with a proviso that the rent could not decrease.

The tenant argued the ratchet clauses in the lease were void as they used more than one basis to review the rent and this was in contravention of sections 27 and 36(e) of the Act.

Section of the Act

Section 27 of the Act only allows rent to be reviewed using one basis.

Section 36(e) of the Act makes void a provision in a retail shop lease to the extent that it allows the rent to change in accordance with whichever of two or more methods of calculating the change would result in the higher rent.

Court of Appeal decision

The Court of Appeal concluded that sections 27 and 36(e) of the Act were not contravened. The following reasons were given:

• the rent review clauses in the lease only provide for one method of calculating the change in rent - if that method would not apply (because the calculation resulted in a reduced rent) then there was no change in rent
• section 36(e) was not breached because if the rent remained the same, for example if the CPI review would produce a reduced rent, then there was no change
• section 27 was not breached because the proviso in the rent review clauses preventing any decrease in rent was not a basis for review and did not purport to adjust or revise the rent, rather their effect is to determine the circumstances in which there is to be no change to the rent, and
• the Court did not agree with the trial judge referring to the Explanatory Notes and Ministerial speech in construing the intention of the Act because the Court stated that the language of the Act was clear enough on its own and the extrinsic material gave only a general description of the legislative purpose which was not helpful.

What does this mean?

This decision means that rent review clauses which preserve the current rent if the method of rent review would not result in a higher rent, are not void.

Consideration will need to be given though to whether the Act will be amended to overturn this decision. The appeal period to the High Court has expired so the Court of Appeal decision is now the current position on ratchet clauses.

For further assistance or enquiries please contact:

Stephen Jones on 07 3233 8973
Sharon Chan on 07 3233 8717.