In July 2015 the Queensland Civil and Administrative Tribunal (the Tribunal) handed down its decision in Devery's Pharmacy Services Pty Ltd t/a Westcourt Plaza Pharmacy v Direct Factory Outlets Cairns Pty Ltd [2015] QCAT.

In so doing the Tribunal considered the validity of a “ratchet clause” contained in a lease of commercial premises.

The Facts

Devery's Pharmacy Services Pty Ltd (the tenant) entered into a lease of premises with Direct Factory Outlets Cairns Pty Ltd (the lessor) to operate a retail pharmacy at its shopping centre located in Cairns on 9 March 2010.

The lease was for a period of five years from 8 September 2008 to 7 September 2013, with provision for two further terms of five years each.

The tenant renewed the lease. The lease contained provisions as to the rent for the first year of the new term. The tenant and the lessor were unable to agree as to the new rent, and the calculation was referred to a specialist retail valuer.

The amount assessed by the specialist retail valuer was assessed on the basis of the current market rent, and was lower than the rental payable in the final year of the original lease term. The tenant argued that a clause in the lease, which prevented the rent from decreasing, was of no effect. Specifically, clause 2.6 of Appendix 2 of the lease provided:

“2.6 Despite anything else in this appendix, unless the Act applies and requires otherwise, the new base rent must not be less than the annual base rent payable immediately before the rent review date.”

The Decision

Section 33 of the Retail Shop Leases Act 1994 (Qld) (the Act) provides:

“33 Effect of Determination

The current market rent of the leased shop determined by the specialist retail valuer is the current market rent of the shop and the rent payable under the lease for the rental period under the review.”

The Tribunal described the principle issue to be determined as follows:

“The question … arises as to whether clause 2.6 of Appendix 2 is valid, and can stand, in the face of s 33, where the specialist retail valuer determines a current market rent that is in fact lower than the annual base rent payable immediately before the rent review date.

If a provision of the Act is inconsistent with a provision of a retail shop lease, s 20 of the Act provides that the provision of the lease is void to the extent of the inconsistency.

The provisions of the Act in relation to clauses preventing a decrease in rent, which are known as "ratchet clauses" was considered in Connor Hunter (A Firm) v Keencrest P/L & Ors where it was held that the provisions of the Act did not render void clauses in a lease which permit increases but not decreases in rent.

The Act was subsequently amended by the introduction of s 36A which expressly provided that a ratchet rent provision which prevented the rent decreasing under a rent review was void. However, s 134 provided as a transitional provision that s 36A only applies to a retail shop lease entered into after the commencement of that section. As this lease was entered into before s 36A commenced, that section does not apply to this matter.

This matter is therefore to be considered in terms of the law that applies similarly to that in Connor Hunter.”

Clause 1.3 of Appendix 2 of the lease also provided:

“1.3 No reduction

Unless the Act applies and requires otherwise, the adjustment is not made if it would result in a decrease in the base rent payable.”

A further question therefore arose as to whether clause 1.3 was inconsistent with clause 2.6, and whether this then offended section 27 of the Act and rendered clause 2.6 void. Section 27(4) of the Act provides:

“27(4)The rent may be reviewed using different bases during the term of the lease, but each review must be made using only 1 basis.”

The Tribunal considered that the lease must be read literally. Adopting this approach, the Tribunal ultimately held that:

  • Clause 2.6 was not inconsistent with section 33 of the Act;
  • There was no operative inconsistency between clauses 1.3 and 2.6;
  • The resulting legal situation was similar to that in the Connor Hunter decision, in that clauses 1.3 and 2.6 did not provide for two bases for reviewing the rent, and those clauses therefore did not offend section 27(4) of the Act; and
  • As there was nothing in the Act that applied and required otherwise, clause 2.6 was effective in preventing the base rent on the renewed term from being less than the rate immediately before the renewal date.

The Tribunal therefore dismissed the tenant’s application, and made a declaration that the rent applicable for the first year of the new term of the lease was the amount payable in the last year of the original lease term. 

The tenant’s appeal was recently dismissed by consent.

Implications of the Decision

Landlords should not look at the decision as confirming the ability to introduce ratchet clauses into retail shop leases. Section 36A of the Act will prevent that, but will leave untouched such clauses existing in leases entered into prior to the date section 36A commenced operation, being 4 April 2011.