Ratchet clauses and market rent reviews in retail shop leases do not mix. A ratchet clause is one which operates to prevent a rent decreasing at a time when the rent becomes subject to review or adjustment. It has been acknowledged since the retail tenancy legislation for NSW was introduced in 1994 that section 18(4) of that legislation renders void any ratchet clause in a market rent review clause operating when there was to be a change or adjustment to the base rent occurring during the term of the Lease.
The Tribunal has more recently held that the same section also renders void the use of a ratchet clause when the parties are setting a current market rent at the start of any renewal of a retail shop lease (Menuko Pty Limited v Tinine Group Pty Limited – July 2007). In reaching this decision the Tribunal looked to the underlying purpose and object of the retail tenancy legislation which was stated to be " to make provision for good leasing practices in the retail industry of New South Wales so that there is a more equitable bargaining position between the parties to the lease......." and decided that following a consistent approach in rendering void ratchet clauses wherever these arise in a retail shop lease or renewal thereof would best achieve the overall purposes of the retail leases legislation.
Parties to a retail shop lease should also remember that a tenant under such a lease has the opportunity to have the current market rent determined early before committing to the renewal of the retail shop lease - by following the procedure that is set out in section 32 of the the retail tenancy legislation.
The experienced retail leasing team at Coleman Greig would be happy to discuss this issue in much greater detail and with both retail shop tenants and landlords, including the restrictions on and opportunities for rent review as these arise under and are affected by the retail tenancy legislation for NSW.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.