Barrister William Stark, in the second article of his three-part Valuations in Leasing in Victoria series, discusses whether a rent review is due at all, with references to VCAT decisions. William presented on this topic for Legalwise at the recent Retail and Commercial Leasing Conference. Read Part 1 of the series on Options to Renew, here. The third and final instalment will explore Valuation Pitfalls.
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At the time of the exercise of an option to renew, the rent in a Retail Lease is usually reviewed to the market rent then applicable for the relevant property.
The standard form REIV Commercial Lease (May 2003 version) provides for rent reviews in clause 3(g).
The standard form LIV Lease of Real Estate (Commercial Property) (August 2014 version) provides for rent reviews in clauses 11.1 to 11.5 (inclusive).
Section 37 of the TL Act deals with rent reviews based on market rent.
In the decision of MD & S Griggs P/L v DWH P/L [2016] VCAT 1718, Senior Member Riegler had to determine (as a preliminary question) whether the lease in question provided for a market review at the end of each term.
The standard form REIV Commercial Lease (May 2003 version) applied.
The problem was that the Schedule to the Lease contained the following words:
| Item 16 | Review date(s): | |
| [2.1.1, 11, 18] | ||
| Market review: | Not applicable | |
| CPI review: | Not applicable | |
| Fixed review: | Not applicable | |
| Item 17 | Who may initiate reviews: | |
| [2.1.1, 11, 18] | ||
| Market review: | Not applicable | |
| CPI review: | Not applicable | |
| Fixed review: | Not applicable |
The Landlord contended that the express terms of the Lease provided that at the expiration of each term, rent is to be determined according to market. By contrast, the Tenant submitted that the express terms of the Lease stipulate that there is to be no market review of the rent at the expiration of each term. Consequently, rent is to remain constant upon renewal, notwithstanding that if all options for renewal are exercised, rent will remain fixed at $18,200 per annum from the commencement date of 1 October 2009 until 30 September 2029.
The Landlord conceded that the express terms of the Lease did not provide for any rent review during each term of the lease. However, it argued that the lease required a review to market upon renewal of each new term. It drew the Tribunal’s attention to the express words of Clause 11.1, which state that the “review period” means the period following each market review date until the next review date or the end of this lease. The landlord submitted that the words or the end of this lease means the end of each term because the renewal of the lease constitutes a fresh lease of itself.
Therefore, it argued that it was clear from the words of the Lease what the parties had agreed; namely, that there was to be no mid-term rent reviews but that after the expiration of the first term and upon renewal, rent would be set according to market.
The landlord referred the Tribunal to a decision of Deputy President Macnamara (as His Honour then was) in Dagles Trading Pty Ltd v Scamper Pty Ltd [2006] VCAT 1220, where the Tribunal stated:
All this leads me back to the text of the 1999 lease which I have quoted or summarised above. As Mr Wikrama contends and Mr Golvan and Mr Borsky concede, the special condition at Item 22 of the schedule must prevail to the extent that it is inconsistent with the printed terms of the standard form. I accept the submission by Mr Golvan and Mr Borsky however that there is no inconsistency. Clauses 11 and 12 of the printed form deal with one subject matter, namely the renewal of the lease pursuant to the options to renew and the fixation of rent upon that renewal and special condition 1 deals with rental reviews ‘during’ that renewed term. In accordance with the distinction drawn by Phillips JA in the Ensabella case, reviews ‘during’ the term of the lease are mid-term reviews not the process of fixation of the initial rental. The words of special condition 1 have their own work to do. That is, to stipulate what rental reviews are to take place during the renewed term and those reviews are annual CPI indexation. The clause has the effect inter alia as Mr Golvan and Mr Borsky conceded of excluding any provision for a market review at the end of year four for year five of the review term.
The landlord submitted that Clause 11 read in conjunction with Item 16 and 17 of the lease schedule operated to prevent any rent review during the currency of each term of the lease. However, Items 16 and 17 of the lease schedule had no operation upon renewal, in which case the opening words of Clause 11.1 clearly stipulated that there was to be a review of rent at the end of this lease, being the end of each term.
Senior Member Riegler accepted that the provisions of the Lease made it clear that at the commencement of each new term of 5 years, the rent was to be reviewed to market.
Conclusion
If the parties had in fact wanted there to be no review during the potential 20 years of the lease (including all renewals), as argued by the tenant, they needed to be very clear about that.
The clarity required meant that the standard wording in clause 11 of the Lease needed to be varied, to refer specifically to the agreement that the parties had made about the fact that the rent was to remain constant for the entire 20 years of the tenant’s occupation of the premises pursuant to the Lease.
William Stark has been a member of the Victorian Bar since 1998. He practises in a broad range of commercial disputes in the areas of property (especially mortgage-related property), contracts, corporations law and insolvency. William writes a blog about property law related matters. William has appeared as counsel successfully opposing a number of applications for interlocutory injunctions to restrain mortgagee sales, and successfully seeking and opposing numerous orders for the removal of caveats. William has appeared regularly at VCAT in retail tenancy and real property proceedings. William is also a nationally accredited mediator, having been involved in hundreds of mediations representing parties. In his 10 years as a solicitor, he worked with Hall & Wilcox and Mallesons Stephen Jaques. For over four years prior to coming to the Bar, William was an accredited commercial litigation specialist with the Law Institute of Victoria (being in the first intake of those specialists in late 2003). For 6 years prior to commencing articles, while studying law part- time William worked full-time for the Australian Taxation Office. Contact William at williamstark@vicbar.com.au or connect via LinkedIn
