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Property: Retrospective rent review

Property: Retrospective rent review

By Russell Cocks

Real Property 

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Snapshot

  • Time is generally not of the essence for rent review clauses.
  • This presumption may be rebutted.
  • Section 35(5) of the Retail Leases Act may assist a retail tenant.

Leases generally specify a method of rent review, often on an annual basis. How time sensitive are such reviews?

A lease is essentially a contract – an agreement between the parties that is usually recorded in writing and often extends for years. Rent is agreed at the start of the term, but few landlords will be content to receive the same rent at the end of the term as applied at the start of the term. Most leases include conditions that set out a formula by which rent can be adjusted, generally by way of an increase in the rent on a regular, perhaps annual, basis.

Such formulas may rely on a fixed annual or percentage increase, an increase (or decrease) based on movements in the Consumer Price Index or a review to market. Non-retail leases may include any number of such options however retail leases must adopt only one of those possibilities (s35 Retail Leases Act).

By definition, a rent review must take place at some point in the future. Therefore, some action is going to be required to initiate this review process or else the tenant will simply continue to pay the commencing rent for the entire term. While s35(3) generally prohibits review conditions that prevent rent from decreasing, non-retail leases will generally envisage an increase in rent on review and a tenant is therefore likely to be content to allow the current rental to continue rather than risk an increase on review. The result is that if a review is to take place, it will generally only be at the instigation of the landlord. This applies equally to “automatic” increases based on fixed amounts or percentages as well as other, more complex, methods of review. If the landlord does not call for the increase or initiate the review, the tenant is unlikely to do so.

The question therefore arises: what if there is a delay in the landlord seeking to invoke the rent review procedure? This question has been considered by courts in various jurisdictions and a convenient summary of those decisions is provided in the case of Jacques Nominees P/L v National Mutual Trustees Ltd [2001] VCAT 657. It is generally accepted that the cases support the view that:

  1. where a rent review condition includes reference to the review being undertaken within a specified time, there is a rebuttable presumption that time is not of the essence and the review may be initiated after the expiration of the time period referred to in the condition
  2. the presumption may be rebutted by words in the lease or surrounding circumstances; and 
  3. if the party entitled to initiate the review fails to do so within the time specified in the lease, then the other party may make time of the essence by giving to the first party reasonable notice of a time by which the review is to be initiated.

These principles were considered in Newland International P/L v Maunder [2019] VSC 33 on appeal from Maunder v Newland International P/L [2018] VCAT 1843, although in a slightly different context.

The lease was a 99-year lease that purported to act as the equivalent of a freehold transfer of units in a holiday village. Therefore, the “tenant” did not pay rent as such (they regarded themselves as the owner) but was liable to contribute to the running cost of the park, charges akin to outgoings. The lease provided that the “landlord” could recover those costs annually pursuant to a formula set out in the lease and, importantly, specified that the landlord could recover the costs in advance, based on estimates to be made by the landlord. The landlord sought to recover amounts from the unit owners by way of a notice that those expenses had exceeded the estimates, but did so some years after the expenses were incurred. The landlord argued that time was not of the essence in respect of those notices and VCAT accepted that argument, but rejected the landlord’s claim on the basis that the wording of the lease did not justify a review at all, irrespective of whether the review was timely. This view was supported in the Supreme Court.

Phillips v Abel [2019] VCAT 1031 was a retail lease dispute relating to recovery of outgoings. Section 46 requires a landlord to give written estimates of outgoings before commencement of the lease and annually during the lease. VCAT held that a landlord who fails to give such estimates cannot recover those outgoings, even if the landlord subsequently gives notice.

Section 35(5) provides that rent reviews should be “conducted as early as practicable within the time provided by the lease”. Perhaps, when combined with the unconscionable conduct provisions of part 9 of the Act, a retail tenant may be able to contest a late attempt to review rent.

Russell Cocks is author of 1001 Conveyancing Answers. For more information go to www.russellcocks.com.au. He acknowledges the assistance of barrister Keiran Hickey in the preparation of this column.

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