Introduced into State Parliament on 24 November 2010, the Criminal Code and Other Legislation Amendment Bill 2010 (Qld) (Bill) proposes to make significant amendments to the Retail Shop Leases Act 1994 (Qld) (Act), including the rendering void of ‘Ratchet Clauses’ in relation to the reviewing of rent payable by a Tenant.
The amendment proposed by the Bill
The Bill seeks to amend the Act through the insertion of a new s36A, through which any ratchet provisions in a retail shop lease will be rendered void.
The Bill also makes it clear that in a lease which includes a ratchet clause as a component of a rental review provision, only the ratchet component will be invalid, not the review itself.
The proposed s36A(3) incorporates a definition of ‘Ratchet Clause’ to include any provision in a lease which:
- prevents the rent from decreasing under a rent review;
- limits the amount by which the rent may decrease under a rent review; or
- prevents or allows a rent review to be avoided by the Landlord, for the purposes of preventing the rent from decreasing or limiting the amount by which the rent may decrease.
These types of clauses are most commonly found in the market review provisions of commercial leases to provide Landlords with the certainty of knowing that the rental income which they derive will not be reduced owing to market fluctuations beyond their control.
The definition set out in the Bill is very broad and, could conceivably encompass common rent review provisions which are otherwise allowable under the Act such as reviews to fixed higher amounts, or by reference to a fixed percentage increase as each of these review mechanisms it could be said prevent the rent payable under the Lease from decreasing.
This is an issue which will be of obvious concern to landlords and one which will be of significant importance in the drafting of leases should the proposed s36A be enacted in its current form.
Leases to which the Bill applies
The Bill does not, in its current form, propose to apply the new s36A retrospectively and therefore it appears that the amendments will apply to all retail shop leases entered into after the enactment of the Bill.
This does however raise an issue in relation to how the Bill will apply to reviews carried out under options to renew retail shop leases which, though exercised after the commencement of s36A, are found in leases entered into prior to the commencement of s36A.
This issue will become particularly relevant in the situation where options to renew a pre-enactment lease are granted to a Tenant in addition to those granted as a component of the lease from the outset.
In the absence of further amendments to the Bill in this respect, it would appear that ratchet clauses falling into this category of lease will not be rendered void by the enactment of the Bill.
Suggestions for landlords
Whilst the Bill appears to achieve its intention in rendering void ratchet clauses in retail shop leases, in its current form, it raises a number of issues which will require clarification.
Notwithstanding these issues, it would be prudent for all landlords of retail shops to review their existing leases to ensure that, should the Bill be enacted in its current form, that they are not unnecessarily prejudiced through the drafting of their current rent review provisions
The passage of the Bill through the State Parliament will be of particular interest to all those in the retail leasing industry and we will continue to provide updates as they come to hand.