For landlords and tenants in Victoria, negotiating a retail lease involves more than just agreeing on location and fit-out. One of the most critical – and often underestimated – components of the lease is the rent review clause. This clause determines how rent will increase over the life of the lease and can have long-term implications for both profitability and cash flow.
Under the Retail Leases Act 2003 (Vic) (the Act), the method of rent review must be clear, fair, and legally compliant. Whether the rent increases are tied to the Consumer Price Index (CPI), a fixed percentage, or a market rent review, each approach has its own benefits, risks, and strategic considerations. This article outlines the key rent review methods used in Victorian retail leases and factors to consider when choosing the right method.
What Is a Rent Review Clause?
A rent review clause sets out when and how the rent will change during the lease term. Most retail leases include annual rent reviews, with the possibility of additional reviews when a tenant exercises an option to renew.
The Act allows parties to agree on different types of review mechanisms, but only one method may apply at any given time. This was made clear in the 2023 VCAT case of Q St Kilda Tenancy Pty Ltd v Kane. In that lease, the rent was to be increased annually by CPI, but with a cap of 4%.
The Tribunal found that this blended approach breached the requirement for a single, clear method. As a result, the rent review clause was declared void, and the rent had to be determined by a valuer based on the current market rent.
The common review methods in Victoria include:
- CPI-based increases
- Fixed percentage increases
- Market rent reviews
1. CPI-Based Rent Review
A CPI rent review adjusts the rent in line with inflation, using the Consumer Price Index (All Groups, Melbourne) published by the Australian Bureau of Statistics. It’s a popular option when both parties are looking for a predictable and steady approach to rent increases.
For tenants, CPI reviews offer stable, manageable increases that track general economic conditions. This makes budgeting easier and reduces the risk of sudden rent jumps. For landlords, it provides a gradual, reliable rise in rental income without the need for ongoing negotiation or valuation. Because the calculation is formulaic, there’s usually little room for disputes.
However, CPI reviews have their downsides. In periods of low inflation, the increase may be minimal, which can be frustrating for landlords. CPI also has a lagging effect and may not match real-time market demand.
This method suits longer-term tenants who value stability, smaller retailers, and landlords seeking to avoid valuation costs.
2. Fixed Percentage Increases
A fixed percentage rent review sets out an agreed annual increase, usually 3% or 4%, applied each year regardless of inflation or market trends.
The appeal is simplicity. There’s no need for valuations, and both parties know exactly how much the rent will go up. This makes budgeting straightforward and avoids surprises.
However, this method can drift away from market reality over time. A 4% increase might feel steep during low inflation, or too low in a booming market. Changing the rate typically requires renegotiating the lease.
Fixed increases suit shorter leases (e.g. three to five years) and situations where both sides want a predictable arrangement with minimal admin.
3. Market Rent Reviews
Market rent reviews adjust rent to match what comparable properties are charging. They’re common when a tenant renews a lease, but may also appear during longer terms.
The main benefit is that rent reflects real-world conditions. Landlords can align rent with rising values, while tenants may benefit if the market softens.
However, the downside is uncertainty. Neither party knows the new rent until a valuation is done. Valuations can be subjective and costly, and disputes are not uncommon.
Importantly, under section 37 of the Retail Leases Act, if a market review is due at renewal, the landlord must give at least 60 days’ notice that the tenant may seek an early rent determination.
If agreement can’t be reached, the tenant can apply to the Victorian Small Business Commissioner for an independent valuer. This prevents surprise hikes that could price tenants out of renewing.
Market reviews suit established businesses, landlords tracking rising rents, and prime locations where market conditions shift quickly.
Factors to Consider When Choosing the Right Rent Review Method
There’s no one-size-fits-all solution. Choosing the right rent review method depends on:
- Lease Term: Shorter leases favour fixed or CPI increases. Longer leases should include market reviews at renewal.
- Tenant’s Business Model: Retailers with tight margins or seasonal revenue might prefer CPI reviews. Larger chains may opt for market reviews.
- Cash Flow & Property Value: Fixed or CPI increases offer predictable income preferred by lenders. Market reviews may yield higher returns but come with uncertainty.
- Legal Compliance: Use only one review method per period. Mixed methods (e.g. CPI or 4%, whichever is greater) can be void under Victorian law.
Final Thoughts
Rent review clauses are central to the financial health of a lease. The Retail Leases Act 2003 ensures fairness, but the choice of method lies with the parties.
Whether opting for CPI, fixed, or market reviews, the priority should be clarity, predictability, and compliance.
Tenants should seek legal advice before exercising their options. Landlords must meet their notice obligations. A well-drafted rent review clause supports long-term leasing success for both parties.
Disclaimer
Legal Information Only
The information on our website is general and is not legal advice. We put lots of work into making our content insightful but it may not apply to your personal circumstances. We’re more than happy to help with your individual issues – just reach out.