In Northcote Shopping Centre Pty Ltd v Aldi Foods Pty Ltd [2026] VSCA 140, the Victorian Court of Appeal confirmed that a cap on rental increase following a CPI review or market rent review was not contrary to section 35(2) of the Retail Leases Act 2003 (Vic).
What were the facts?
Aldi leased a shop at Northcote Shopping Centre under a 15-year lease with two further terms of five years each. Aldi exercised its option to renew the lease for its first further term.
The lease provided in relation to the further term that:
a) The rent for year 1 would be determined by a market review;
b) The rent for years 2 to year 5 would be varied annually by CPI;
c) The rent as varied by CPI could not be more than the previous year’s rent increased by 6%; and
d) The rent as varied by market review could not be more than the previous year’s rent increased by 10%.
What was the dispute?
Thelandlord and tenant were in dispute about the validity of the rent review clauses.
In the first instance, the VCAT held that both the CPI and market rent review clauses offended section 35(2) of the Retail Leases Act 2003 (Vic) (the Act).
Aldi appealed the VCAT’s decision, and the Supreme Court allowed the appeal and held that the CPI and market rent review ‘cap’ clauses were not contrary to the Act.
The landlord sought leave to appeal the Supreme Court’s decision to the Court of Appeal.
The landlord relied on the following two arguments:
- The clause contained or combined two of the permitted mechanisms provided in section 35(2), when the section only allows the use of a single basis or formula; and
- The clause represents an impermissible qualification or alteration to the basis or formula prescribed.
The Court of Appeal refused the landlord’s leave for appeal.
What is section 35 of the Retail Leases Act?
Section 35(1) of the Retail Leases Act requires a retail lease to state when rent reviews are to take place and the basis or formula that they are to be made.
Rent reviews are limited by section 35(2) of the Retail Leases Act and must use one of the following prescribed methods:
- A fixed percentage;
- An independently published index of price or wages;
- A fixed annual amount;
- A current market rent of the retail premises; or
- A basis or formula prescribed by the regulations.
Section 35(2) does NOT prevent a lease from using different rent review methods at different rent review dates. For example, a lease can provide for a market review at the start of each term followed by annual CPI reviews.
The section DOES prohibit a lease from using more than one method at the same rent review date. For example, a lease cannot provide that the new rent must be the higher of the market rent and the previous rent increased by CPI.
What was the determination made by the Court of Appeal?
As to the landlord’s first argument, the Court held that the Lease did not combine two or more methods of review at the one rent review date. It did not, for example, provide that the new rent was to be the higher of the market rent and a fixed increase. The Lease provided for a market review (with a cap) at some review dates and for a CPI adjustment (with a cap) at other review dates.
As to the second argument, the Court held that there was a conceptual difference between altering a formula under section 35(2) of the Act and an imposition of a cap after a formula was applied. In this case, the cap did not affect how a valuer determined the current market rent or CPI. Instead, when a prescribed review method was applied to a valuation, a cap was imposed only after the method was adopted.
Therefore, the Court stated that the cap represented a ceiling but not a floor on the review. The Court illustrated an example that if a market rent was increased as determined by market review, the cap would only apply if the market rent increased more than the limit imposed by the cap. A cap did not operate the same way as a ‘fixed percentage’ rent review because that method is a predetermined percentage applied at every review.
The Court further distinguished between clauses that modify a prescribed formula such as a review based on ‘half of the CPI movement’ or ‘twice the current market rent’, as types of modifications that would not be permissible. This is in contrast to a cap that applies after a prescribed formula is adopted.
What about “Rachet” Clauses and “Collars”?
If the Court is prepared to allow “caps” on rent increases under retail leases, does this mean a retail lease include a ratchet clause or a collar which prevent the rent falling (or limit how much it can fall) on a rent review?
The short answer is “No”.
Section 35(3) of the Act says:
A provision in a retail premises lease is void to the extent that it purports to preclude, or prevents or enables a person to prevent, the reduction of the rent or to limit the extent to which the rent may be reduced.
The Act makes clear that section 35(3) does not prevent a lease providing for an increase in rent by a fixed amount or by a fixed percentage or by CPI.
But section 35(3) does prohibit ratchet clauses and collars.
Practical Takeaways: What this means for rental reviews of retail leases?
The Supreme Court of Appeal’s decision confirms that caps may be applied to rental reviews based on CPI or market review, and that such mechanisms are not expressly prohibited by section 35(2) of the Act.
However, the Court’s decision should not be viewed as a blanket approval for every clause that may include a ‘cap’. The wording and drafting of rent review clauses in a retail lease should be reviewed in each instance.
How can BSP Lawyers assist you? If you require any legal assistance regarding interpreting or drafting rent review provisions of a retail lease, please do not hesitate to contact us.
This update does not constitute legal advice and should not be relied upon as such. It is intended only to provide a summary and general overview on matters of interest and it is not intended to be comprehensive. You should seek legal or other professional advice before acting or relying on any of the content.
