Rent reviews and caps for retail leases in Victoria

The Victorian Supreme Court’s decision in Aldi Foods Pty Ltd v Northcote Shopping Centre Pty Ltd [2024] VSC 799 confirms that rent review caps are permitted under the Retail Leases Act 2003 (Vic) (Act), overturning several previous VCAT decisions that had declared such clauses void. 

Rent review under the Act 

Section 35 of the Act sets out how rent reviews must be conducted. Under section 35(2), the basis or formula of review must be one of the following: 

1. a fixed percentage; 
2. an independently published index of prices or wages (commonly known as CPI); 
3. a fixed annual amount;  
4. the current market rent; or 
5. a basis or formula prescribed by Retail Leases Regulations 2023 (Vic).  

Importantly, section 35(3) of the Act voids any “ratchet clause” that prevents the reduction of rent or limits the extent the rent may be reduced after a review.  

What are rent review caps? 

A rent review cap limits how much rent can increase during a review. For example, a lease might state that rent increases annually in line with CPI but cannot exceed 5%. Caps are often applied when tenants renew leases, particularly for CPI or market reviews. 

The Aldi case 

Aldi leased premises in Northcote Shopping Centre under a 15-year lease starting in 2007, with two 5-year renewal options. The rent review clauses contained in the lease provide for 6% cap on any CPI reviews or 10% cap on any market reviews. 

The landlord relied on previous VCAT orders and argued that these caps breached section 35(2) because the cap on reviews meant that more than one review method has been specified in the lease.  

The Court ruled in favour of Aldi and found that rent review caps do comply with the Act. Croft J found that 

1. section 35(2) does not expressly prohibit caps on rent review.  While it requires the review method to be “one” of the prescribed methods, the structure of section 35 separates review methods (s 35(2)) from outcomes (s 35(3)). This indicates a legislative intent to prevent mixed formulas, not caps on outcomes. 
2. interpreting section 35(2) to prohibit caps would undermine negotiated agreements and create absurd results, making tenants worse off than if no negotiations occurred. Section 35(7) supports the idea that parties can agree on rent formulas subject to caps. 
3. section 35(3) voids “ratchet clauses” (collars preventing rent decreases) but does not prohibit caps. Allowing caps is consistent with the language and purpose of the Act.
4. the Act aims to promote certainty and fairness. Prohibiting caps would contradict this purpose, as caps protect tenants from excessive rent increases without breaching the prescribed review methods. 

Practical implications for landlords and tenants 

The Aldi decision has significant practical consequences for retail leasing in Victoria: 

• Negotiation dynamics: Tenants now have stronger grounds to request rent caps during lease negotiations. Landlords should anticipate this shift and prepare strategies that balance commercial objectives with tenant expectations. 
• Lease drafting: Caps are permitted under the Act, but clarity is critical. Ambiguous wording could lead to disputes, so landlords and tenants should ensure caps are clearly defined in the lease. 
• Risk management: Tenants gain protection against sudden or excessive rent hikes, improving financial certainty. Landlords, while conceding some flexibility on rent increases, can use caps to secure long-term tenants and reduce vacancy risk.
• Compliance and review: Landlords should review existing leases and future templates to ensure compliance with the Act and alignment with this decision. Tenants should check renewal clauses to confirm whether caps apply. 
• Market impact: Expect caps to become a standard feature in retail leases, influencing rental strategies and market norms across Victoria. 

This decision promotes fairness and flexibility in retail leasing. It balances landlord and tenant interests by allowing caps that limit excessive rent hikes while preserving agreed review methods under the Act. 

If you have any queries regarding your lease, please contact our commercial property and development team. 

This article was originally written by George Smart, Evelyn Wong and Elizabeth Ho.

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