In a split 2-1 decision, a Court of Appeal has ruled that rent “ratchet” clauses are valid in leases falling under the Retail Shop Leases Act. Such clauses artificially prevent rental from falling even though this may be indicated by a market review or CPI index. Notwithstanding the judicial correctness of the ruling, this is contrary to the intent of the Act – the Court itself acknowledged that. It is certainly contrary to the commonly held belief amongst industry participants that “ratchet” clauses were void, including the Tribunal that administers the Act.

“Ratchet” clauses have not been a major issue over the last decade or so given the booming economy – but that has now changed. At a time when many retail tenants are hoping to negotiate a lower rental in line with falling sales and business profitability, the potential impacts of this decision will place further stress on the viability of some retailers.

The latest available retail sales data from the Australian Bureau of Statistics released 01June’09 highlights the plight of small retailers in Queensland. Whilst the larger chains, supermarkets and department stores state-wide recorded a relatively healthy 10.1% turnover increase during the four months to 30April’09 compared to the previous year, some sectors showed double digit decreases. Worst hit are: Cafes and restaurants (-15%), Furniture and floor covering (-10%). For some traders it’s far worse than that. Anecdotal evidence from our field research and client contact indicates many are experiencing falls up to 30%.

In this case, Connor Hunter v Keencrest Pty Ltd [2009] QCA 156, the Court found that notwithstanding that the intention of Section 27 was to prevent ratchet clauses, it considered that the actual wording of Section 36 (e) referring to calculation methods was sufficiently clear and did not necessarily prevent ratchet rent review clauses. It seems a case of adopting the literal letter of the law rather than the intent of the law.

It is understood that several representative groups will be making submissions to the Government to have the Act amended.

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