Rent Review Caps are Back in Victoria: What the Aldi Decision Means for Leases

Key Takeaways

• Following the Victorian Supreme Court’s decision in Aldi v Northcote Shopping Centre, rent review caps are now lawful under the Retail Leases Act 2003 (Vic) (RLA).

• Caps on CPI or market rent reviews do not breach section 35(2) of the RLA – they are considered a limitation on the chosen rent review method, not a separate method.

• Landlords and tenants now have more flexibility in negotiating rent review mechanisms, including caps on increases.

• Caution remains: until further appellate guidance, there is still a risk that rent review clauses including caps could be challenged, particularly where parties disagree on interpretation.

• This decision does not change the prohibition on rachet clauses (which prevent rent from decreasing), which remains under section 35(3) of the RLA.

Background

The long-debated question of whether rent review caps are permitted under the RLA has now been clarified. In Aldi Foods Pty Ltd v Northcote Shopping Centre Pty Ltd [2024] VSC 799, the Supreme Court of Victoria overturned a decision in the Victorian Civil and Administrative Tribunal (VCAT) that had ruled such caps unlawful. This case marks a significant development in Victorian leasing law, providing long-awaited certainty for landlords and tenants negotiating commercial lease terms.

The Legal Issue

At the heart of the dispute was section 35(2) of the RLA, which limits rent reviews to one of five prescribed methods:

• a fixed percentage;

• an independently published index (such as CPI);

• a fixed annual amount;

• current market rent; or

• a method prescribed by regulation.

While the RLA expressly prohibits rent from decreasing, referred to as a ratchet clause, it is silent on whether landlords and tenants can agree to limit rent increases via caps on CPI or market rent reviews.

The Lease and the Dispute

Aldi was the tenant under a retail lease that provided for both CPI-based and market-based rent reviews. However, the lease-imposed caps: increases were not to exceed 6% for CPI reviews and 10% for market reviews.

In the first instance VCAT followed its own precedents and held that these caps effectively introduced a “second method” of rent review, which was not permitted under section 35(2) of the RLA.

Aldi appealed the decision.

The Appeal Decision

Justice Croft of the Supreme Court allowed the appeal and found in favour of Aldi. His Honour held that a rent cap is not a separate method of rent review but rather a constraint on an otherwise valid method. Importantly, the RLA does not explicitly prohibit such limitations – unlike the clear prohibition on rachet clauses in section 35(3).

The Court emphasised that if Parliament had intended to ban caps, it could have done so explicitly. His Honour also noted the remedial purpose of the RLA: to enhance certainty and fairness in retail leasing, particularly for tenants. In that light, parties should be free to negotiate rent caps, provided the core method of review remains one of the permitted forms.

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