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
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.
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Whilst option to purchase clauses are more in commercial properties, they are now being included in residential leases.
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