Whether a retail lease may cap the extent to which rent increases on review has been a source of uncertainty for landlords and tenants in Victoria. The position is now considerably clearer: such caps appear to be permissible, provided the clause is drafted consistently with the Retail Leases Act 2003 (Vic).
The Court of Appeal's Decision
In Northcote Shopping Centre v Aldi Foods [2026] VSCA 140, the Court of Appeal refused the landlord leave to appeal, resolving a question that had previously divided VCAT and the Supreme Court.
Northcote Shopping Centre v Aldi Foods [2026] VSCA 140
The Court of Appeal confirmed that a clause capping the outcome of a rent review does not, of itself, contravene section 35 of the Retail Leases Act 2003 (Vic), provided the cap operates on a valid review method rather than altering it.
The Landlord's Argument
The lease provided for rent to be reviewed by reference to CPI and to current market rent, with increases capped at 6% and 10% respectively. The landlord contended that the caps had the effect of introducing a second basis or formula into each review, contrary to section 35 of the Retail Leases Act 2003, which permits only one. On that argument, the caps were invalid, and rent fell to be assessed at full market value.
How the Court Approached the Question
The Court rejected that construction. A cap, it held, does not alter the basis or formula by which the rent is determined; it operates only to limit the outcome once that determination has been made. The valuer still assesses current market rent in the ordinary way, and the CPI adjustment is still applied as such. The cap takes effect only where the reviewed figure would otherwise exceed it. The Court drew an analogy with a statutory cap on damages: liability is assessed according to the usual principles, and the maximum is applied at the conclusion of that exercise.
The Limits of the Decision
The Court was careful to confine its reasoning. A provision that modifies the method itself, such as one fixing rent at half the CPI movement or twice the current market rent, stands in a different position, and the Court expressly declined to indicate that such a provision would comply with section 35. Ratchet clauses, which permit rent to rise but not to fall, remain void under section 35(3).
Practical Points for Landlords and Tenants
- A cap that limits the outcome of an otherwise valid review method is likely to be enforceable
- A clause that alters the review method itself – for example, by fixing a multiplier or fraction of CPI or market rent – remains exposed to challenge
- Ratchet clauses preventing rent from falling on review continue to be void under section 35(3)
- Existing leases with capped review mechanisms should be reviewed in light of the Court's reasoning
- Drafting matters: the validity of a cap will turn on the precise language used and how it interacts with the review formula
The Takeaway
Subject to the requirements of the Retail Leases Act 2003, a cap on rent increases may be a useful mechanism, affording tenants a measure of protection while preserving certainty for both parties. Its validity, however, is likely to turn on the drafting. On the Court's analysis, a cap is more likely to be upheld where it operates upon a valid review method rather than altering or replacing it. Whether any particular provision complies will depend on its precise terms and the circumstances of the lease.
How Abbots Legal Can Help
Our leasing team advises landlords and tenants across retail and commercial leasing matters, including the drafting and review of rent review provisions. If you are negotiating, renewing or reviewing a retail lease, we would be glad to assist you in considering whether your rent review provisions are sound.
Contact us on (03) 9427 7641 or fill out the enquiry form on our website – we'll be in touch within one business day.
This article is general in nature and does not constitute legal advice. Contact Abbots Legal on (03) 9427 7641 for advice specific to your situation.