Macrossans Lawyers Brisbane law firm

A recent decision of the Court of Appeal in Queensland has examined the methods by which landlords may conduct rent reviews - both annual and market - under the Retail Shop Leases Act 1994 (Qld).  The decision, O'Connor Hunter v Keencrest Pty Ltd & Ors (2009 QCA), appears to contradict industry practices to provide for only one method of rent calculation. 

The Retail Shop Leases Act 1994 states in Section 27 that rent review clauses in retail shop leases must only contain a single method of calculating the reviewed rent.  For example, (and unlike commercial leases), rent cannot be reviewed under a retail shop lease to the greater of CPI or a fixed percentage. Should a retail shop lease contain more than one method of calculating the reviewed rent, then it is deemed to be invalid under Section 36.

The reasons for the inclusion of "one method of calculation provisions" follow State government policy when proposing the introduction of the legislation to protect small retail lessees from imbalances in negotiating power with large corporate landlords. In particular, both the Explanatory Memorandum, and the Minister's speech, provided to Parliament, stated that one of the goals of the Act was to protect retail tenants from such "ratchet" clauses, under which rent will always be reviewed to a higher amount.

This case involved a dispute over rent reviews under a retail shop lease. The rental review clauses (for both annual and market reviews) in the lease set out the methods by which rent was to be reviewed, in this case annually to CPI, with market reviews on the first year of any option. Significantly, the clauses went on to provide that notwithstanding the result of the rent reviews, the annual rental for the year in question would not be less than the previous rental year.

By a majority of two to one, the Court of Appeal Judges held that the rent review clauses of the lease did not offend the Act.  The basis for the reasoning was that if the clauses were interpreted such that a rental review resulted in a reduction on the previous year's rent, then effectively no review had taken place and the rent was to remain the same as the previous year's rent.

However the dissenting judge, Justice McMurdo, reviewed the Explanatory Memorandum and the Minister's speech as well as the Act and took the view to the contrary.

On face value, the case does little to alter the status quo in relation to landlords' rights under the Act. However, the decision, and especially the dissenting judge's view, demonstrates that care must be taken in drafting rental review clauses under the Act to ensure that the spirit of the Act as well as the language of the Act is captured.