The Queensland Court of Appeal’s decision in Connor Hunter (a firm) v Keencrest P/L & Ors  (“Connor’s case”), handed down on 9 June 2009, will have surprised most Queensland lawyers practising in the field of retail leasing. It has created the opportunity for lessors of retail leases to reintroduce clauses which prevent the rent going down on a market rent review or on a CPI review.
Connor’s case concerned a retail shop lease of premises at Cleveland. The lease contained annual CPI rent reviews and a market review at the beginning of the option term. The lease stipulated that the new rent could in no circumstances be less than the rent payable for the previous year (“the ratchet clauses”). The issue was whether the ratchet clauses were void on the basis that they offended Sections 27 and 36 of the Retail Shop Leases Act 1994 (“the Act”).
This issue was previously litigated in the 2002 decision of the District Court in Oz Sushi Pty Ltd v Lloyd Bennett & Associates Pty Ltd (as trustee). In that case the Court confirmed the widely held view that ratchet clauses, of the type considered in Connor’s case, offended Sections 27 and 36 of the Act and were void. The practice of most lessors, both before this decision and since this decision, has been to not include ratchet provisions in retail leases on the basis that they were unlawful.
However, in Connor’s case, the Court of Appeal, by a 2-1 majority, concluded that ratchet clauses of the kind described above were lawful.
How did the majority arrive at this result?
First issue: Was section 27 breached?
- Section 27 requires that a rent review must be made using a single basis consisting of only one of five stipulated bases.
- The majority rejected the lessee’s submission that the clauses determining the rent at the commencement of the option term provided for a review of rent on 2 bases, namely:
- a market rent review, and
- the ratchet clauses stating that the rent will not be less than the rent payable in the previous year
- Likewise, the majority rejected the lessee’s submission that the clauses providing for the annual CPI rent review was a review of rent on two bases, namely:
- a CPI increase, and
- the ratchet clauses stating that the rent will not be less than the rent payable in the previous year.
- The majority held that the ratchet clauses did not amount to a basis for reviewing the rent, in the sense of adjusting or revising it. In neither form nor substance did the ratchet clauses effect any change in the rent. Put simply, they define the circumstances in which there will be no change in the rent.
- The majority held that because the review clauses did not provide for 2 bases for reviewing the rent, Section 27 was not breached.
Second issue: Was Section 36 breached?
- Section 36(e) of the Act renders void a rent review which adopts the highest rent of two or more methods (e.g. the higher of CPI or a market review).
- The majority held that the ratchet clauses did not operate to adopt the highest of two or more methods of calculating the rent. This is because they operate only to limit the application of the stated method of calculating the rent – CPI or to market, as the case may be. The effect of the ratchet clauses was to provide that if the CPI or market review did not result in an increase to the rent, there was to be no review to the rent.
The minority view taken by McMurdo P was that the ratchet clauses offended the intent of the legislation. McMurdo P stated that the legislature intended that the Act should prohibit ratchet and multiple rent review clauses. In view of the minority decision of McMurdo P and the fact that the decision in Connor’s case is at odds with retail leasing practice, the question is whether Parliament will amend the Act to restore the status quo.
Until the decision in Connor’s case is reversed by Parliament (or overturned by the High Court, which is unlikely) lessors of retail leases may now wish to consider negotiating new leases on the basis that on a market rent review or a CPI rent review the rent will not be less than the rent previously payable.