Burying the ratchet, and extending protection to lease assignees:

The Amendments

On 4 April 2011, the Retail Shop Leases Act 1994 (Qld) (“the Act”) was amended by the Criminal Code and Other Legislation Amendment Act 2011 in two significant ways.2 First, a ‘ratchet rent provision’ is now void.3 Secondly, amendments made to ss 43 and 44 of the Act, extend a lessor’s liability to loss and damage suffered by an assignee if the assignee took the assignment because of a false or misleading statement or misrepresentation made by the lessor.4

When did the Amendments take effect?

The ‘ratchet rent provision’ amendment applies to a retail shop lease entered into after 4 April 2011.5 The assignee compensation amendments apply to a retail shop lease assigned or entered into after 4 April 2011.6

Ratchet Rent Provision Amendments

These amendments apply to a retail shop lease that provides a basis for a rent review under which the rent may be varied (including by decrease) but a lease provision prevents or limits any decrease even though that may be the outcome of the review.7 The provision preventing or limiting the decrease is a ‘ratchet rent provision’. It is that provision that will be void. The most common type of rent review which might produce a decrease in rental is a market rent review.

A ‘ratchet rent provision’ is defined8 to mean any provision of a retail shop lease to the extent that it:

(a) prevents, or enables the lessor or another person to prevent, the rent decreasing under a rent review; or

(b) limits or specifies, or allows the limitation or specification of, the amount by which the rent may decrease under a rent review; or

(c) prevents, or allows the avoidance of, the rent review by the lessor or another person for a purpose mentioned in paragraph (a) or (b).

Reasons for the ratchet rent provision amendments

The above amendments came in response9 to the Queensland Court of Appeal’s decision in Connor Hunter (A Firm) v Keencrest Pty Ltd .10

In Keencrest, the retail shop lease provided for rent reviews, during the term of the lease, to be based on CPI, and for the first year of any extended term on current market rent. The lease expressly provided that, despite these reviews, the rental could not drop below the rental for the preceding year. The lessee contended that those ‘ratchet rent provisions’ offended ss 27(4) and 36(e) of the Act. Section 27(4) provides that each review can only use 1 basis of review. Section 36(e) voids a provision which permits a change of the rent on the basis of 2 or more methods with the method producing the highest rental prevailing.

The lessee, in Keencrest, argued that the inclusion of the ‘ratchet rent provision’ meant that the rent review provisions provided for review of rent on 2 bases each time the rent came to be reviewed: CPI and the ‘ratchet rent provision’ (during the term of the lease); and market rent and the ‘ratchet rent provision’ (in the first year of any intended terms). The lessee contended this offended ss 27(4) and 36(e). The critical issue was whether the ‘ratchet rent provision’ could be seen as a basis or method of rent review.

Chesterman JA (with Holmes JA concurring) held that the lease did not offend s 27(4): the ‘ratchet rent provision’ was not a basis of rent ‘review’ because it did not effect any change in the current rental.11 Similarly, s 36(e) was not contravened as the ‘ratchet rent provision’ did not effect a ‘change’ i.e. the ‘ratchet rent provision’ preserved the status quo.12

The outcome in Keencrest preserved the validity of a lease provision that maintained the current rental despite a review determining that market rental had decreased. The amendments, then, are made to ensure ‘that rent reviews are not avoided under “ratchet” clauses preventing decreases in rent.’ 13 

Commercial decisions

Lessors particularly will need to take note of the above amendments when negotiating for the basis of any rental review. If a lessor wants to ensure that rental will increase then the rent review should provide for rental to increase by a fixed percentage of the base rental or by a fixed actual amount. Rent reviews on these bases are expressly allowed under the Act.14 Absent a ‘ratchet rental provision’, a market rental review may produce a decrease in rental. Lessees will obviously, as part of the negotiations, want to bring about what is best for their own commercial interests.

The Amendments extend Lessor’s liability to assignee for misrepresentation

Section 43(2)(a) of the Act makes a lessor liable for loss or damage suffered by a lessee as a result of the lessee entering into, or renewing, a retail shop lease on the basis of a false or misleading statement or misrepresentation made by the lessor or their agent.

McMurdo J in Logan City Shopping Centre Pty Ltd v Retail Shop Lease Tribunal15 held that s 43(2)(a) had no application to an assignee of a retail shop lease.

The amendments to ss 43 and 44 of the Act were made to counter the decision in Logan City Shopping Centre.16 Now, an assignee that enters into an assignment of a retail shop lease because of a lessor’s misrepresentation can seek compensation for loss or damage suffered.

The article was first published in the May 2011 edition of Proctor, the Queensland Law Society magazine.

Anand Shah and Steven Hogg are Brisbane barristers.

Footnotes

1. These provisions allow rental to rise but not to fall.
2. Reprint no. 5B of the Act incorporates the amendments.
3. Section 36A of the Act inserted by s 24 Criminal Code and Other Legislation Amendment Act 2011.
4. These amendments were made via s 25(4), (5) and (6) of the Criminal Code and Other Legislation Amendment Act 2011.
5. Section 134 of the Act inserted by s 27 of the Criminal Code and Other Legislation Amendment Act 2011.
6. Section 135 of the Act inserted by s 27 of the Criminal Code and Other Legislation Amendment Act 2011.
7. Section 36A(1) of the Act.
8. Section 36A(3) of the Act.
9.  Criminal Code and Other Legislation Amendment Bill 2010 explanatory notes at p 6.
10. [2009] QCA 156 (Holmes JA, Chesterman JA; McMurdo P dissenting).
11. [2009] QCA 156 at [68] — [71].
12. [2009] QCA 156 at [61] — [66].
13.  Criminal Code and Other Legislation Amendment Bill 2010 explanatory notes at p 6.
14. Section 27(5) of the Act.
15. [2007] 1 Qd R 246; [2006] QSC 172.
16.  Criminal Code and Other Legislation Amendment Bill 2010 explanatory notes at p 6.