Market rent reviews are often a source of controversy in relation to retail shop leases. To protect tenants, the Commercial Tenancy (Retail Shops) Agreement Act 2005 (WA) (Act) bans so called “ratchet clauses”, which provide that the rent can go up but not down on a review.
The facts
Elle Pty Ltd (Elle) owns a desirable commercial premise on Bayview Terrace in Claremont, which it leased to Beba Enterprises Pty Ltd (Beba) in 2007. Beba has, since then, been using the premises as a retail space for its clothing outlet.
The lease was for a four year period, with the option to extend for two further four year periods. It provided for six 5% fixed rental increases to occur during the period of the tenancy, and two market rent reviews, to occur at the commencement of each optional renewal period. The dispute surrounded Clause 3.2 of the lease (Clause), which provided:
Clause 3.2 Market Rent Review
The Landlord may elect to review the Base Rent at each Market Review Date. If the Landlord wishes to review the Base Rent on a Market Review Date then, subject to the Commercial Tenancy Act (if applicable to this document), the following clauses 3.3 to 3.9 (inclusive) shall apply on each occasion.
The dispute
From the Elle’s perspective, the Clause made commercial sense: if the rental market had improved, it could elect to review the rent, but were not forced to make such an election if the market had dropped. Beba, on the other hand, was in a position where it had renewed its lease, and was continuing to pay annual rent which the Clause had sustained at a level that Beba considered to be artificially higher than the market value. Beba contended that the Clause was a ratchet provision which contravened section 11(2)(c) of the Act, which states that:
…if a retail shop lease provides for the review during the currency of the retail shop lease of the amount of rent payable under the retail shop lease having regard to the market rent of the retail shop concerned…a provision in the retail shop lease purporting to preclude the increase or reduction of that market rent or to limit the extent to which that market rent may be increased or reduced is void.
One question which Beba referred to the State Administrative Tribunal was whether the conferral of the discretionary power on Elle, by the Clause, rendered the lease inconsistent with section 11(2)(c). It argued that the Clause was invalid to the extent that it only conferred the discretion on the landlord, and should be rectified.
The commercial realities of the operation of the Clause were considerable. If Beba was correct in its assertion, the rent payable under the lease would need to be adjusted, and it would save several hundred thousand dollars over the life of the lease.
The decision
In short, Member Carey rejected Beba’s argument. In doing so, he attempted to delineate the scope of section 11(2)(c), and held (amongst other things) that:
it is highly questionable whether the provision operates as Beba suggests, by giving a right to initiate a review to either party…If correct, this would lead to the curious result in cases such as this that a tenant’s ability to initiate a rent review would depend upon the entirely fortuitous circumstance that the lease made no specific provision as to the time at which a review may be initiated (at [37]); and
[regarding the Clause] those words do not invalidate any fetter placed upon the outcome of a market rent valuation once undertaken, but do not disturb the parties’ agreement about the circumstances in which a market rental is to occur (at [39]).
Also, Member Carey held that the relief sought – namely that the Clause be rectified – was not a remedy conferred by section 11(2)(c), and that to render the Clause void would be highly irregular, and would abrogate Elle’s rights under the lease.
Key points from the decision
The Clause in this case was nothing novel rather, it is a common mechanism for securing a landlord’s right to collect a certain amount of rent under a lease. Such clauses are not contrary to the Act.
In all cases surrounding the validity of a clause in a lease, the clause needs to be construed in light of its surrounding terms.
Simply because something seems like it could be contrary to the provisions of the Act, does not mean that it is. It will always be a question of statutory interpretation.
