Ratchet Clauses in Retail Shop Leases

Retail Shop Leases- Ratchet Clauses
On 4 April 2011, Criminal Code and Other Legislation Amendment Act 2011 (Qld)was passed to prevent the use of ‘ratchet clauses’ in Retail Shop Leases.

What is a ‘ratchet clause’?
When it comes to Retail Shop Leases, a ‘ratchet rent review clause’ refers to a clause which prevents the rental payable under the Lease, from decreasing following a rent review. They are commonly placed in Leases in order to assure the Landlord that income earned from rental payments remain steady, despite fluctuations of the property market.

Until 4 April 2011, the case of Connor Hunter (A Firm) v Keencrest Pty Ltd [2009] QCA 156, had provided an avenue for Landlords to validly enforce ratchet clauses, and contract that rent could not be an amount less than the prior year.

With the intention of eliminating any possibilities of ratchet clauses being enforceable, section 36A of the Retail Shop Leases Act 1994 (Qld), provides that a clause in a Retail Shop Lease is void if it:
prevents the rent decreasing under a rent review; or
limits or specifies the amount by which the rent may decrease under a rent review; or
prevents, or allows the avoidance of the rent review by the lessor, for the purposes of preventing rent from decreasing or limiting the amount by which rent may decrease.

When does the legislation apply and to what extent?
S 36A of the Retail Shop Leases Act 1994 (Qld), applies to all Retail Shop Leases that are entered into after 4 April 2011.

In circumstances where a Retail Shop Lease includes a ratchet clause in regards to rental reviews, the ratchet clause alone will be invalid and severed, and the remainder of the Lease will remain enforceable.
However, any Lease entered into prior to 4 April 2011 which includes a ratchet provision in an option to renew, will be deemed enforceable.

To ensure your interests are protected if you have entered into a Lease prior to 4 April 2011, our property experts at Rostron Carlyle can evaluate and amend your current Lease to remove any ratchet provisions.

Gavin McInnes

Partner

Brisbane 07 3009 8444
Sydney 02 9307 8900
Email g.mcinnes@rclaw.com.au

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