Attention to detail is critical in retail/commercial lease rent review mechanisms
Recent VCAT decisions have highlighted that clauses included in commercial and retail leases in Victoria in relation to rent reviews must specifically address the rent review mechanism to apply on the commencement date of any further terms granted to the tenant. If these clauses are improperly drafted, landlords could miss out on the benefit of a rent increase on the commencement of a further term of the lease.
Two recent VCAT decisions raise issues with rent review clauses
In 2016, in MD & S Griggs Pty Ltd v DWH Pty Ltd [2016] 1718, the 2006 LIV standard lease prepared did not specify in the schedule the form of rent review that would apply to the lease from the commencement of the further term.
Senior Member Riegler considered general conditions 12.2.2 and 11 of the lease and determined the:
“failure to specify a market review date in the lease schedule simply means that there will be no market review during the currency of any specific term...not that [sic] there will be no market review to determine the starting rent of any renewal”.
This is because general condition 11 contemplates a market review will occur on either the next market review date or at the end of the lease (i.e. the commencement of a further term.)
This decision was also endorsed in the 2022 decision of Baroud Nominees Pty Ltd v Mereland Technology Pty Ltd (Building and Property) [2022] VCAT 516, where Member Nash found a similar issue in interpretation of the 2009 version of the LIV standard lease.
2021 Law Institute of Victoria standard lease addresses the issue
The 2021 version of the LIV standard lease seeks to address this by asking parties to specify what rent review mechanisms apply to the further term(s) of the lease. Nonetheless, lawyers and parties should still be cognisant of this issue.
The key takeaways from these decisions
- Parties entering into a retail or commercial lease should ensure that they have agreed how the rent will be reviewed at the commencement of each further term of the lease. Parties should populate the relevant item in the lease schedule (in the 2021 LIV standard lease this is Item 13) in a way which clearly sets out the review dates that will apply throughout the term and the further term(s) of the lease and the method of rent review that will apply on each review date.
- If the lease is ambiguously drafted, this will mean that the rent for the new term will likely be determined by market review, even if the schedule to the lease states that no market reviews were applicable to the term. For landlords, if the anticipated market rent is lower than the rent at the end of the term, this is obviously not ideal.
- If the parties have agreed that a market review will not apply to the commencement date of each further term, then the schedule should clearly state that no market review will apply on commencement of the further term and specify an alternate rent review mechanism, if applicable.
Engaging a lawyer who is experienced in drafting retail and/or commercial leases, with an eye for detail, will protect all parties to the lease. Please contact us if you have any queries about your lease.
