Leases of premises that are classified as retail premises and subject to the Retail Leases Act 1994 (NSW) (the Act) are heavily regulated by the provisions of that Act.
Accordingly landlords of retail premises must take care to ensure that the provisions of their leases are not inconsistent with the Act.
An important aspect of the Act to be kept in mind when drafting retail leases are the strict provisions governing market reviews. Section 19 (where market reviews occur during the lease term) and section 31 (where a market review applies to determine the commencing rent of an option term) of the Act set out the structure that market reviews in retail leases must follow.
In Perri v Exego Pty Limited  NSWADT 170 the Administrative Decisions Tribunal outlined the following principles in relation to the bearing of the Act on retail leases in respect of market rent reviews:
- Generally the Act has the effect of varying a lease to the extent that the provisions of that lease which are in conflict with the provisions of the Act are replaced by the relevant provisions of the Act.
- Section 19 of the Act is an overriding statutory provision which operates as a contractual term considered to be incorporated in the lease itself when the lease provides for a current market rent review.
- When a market review arises in a lease section 19 applies in its exact terms, to the exclusion of any contrary term of the lease or any contrary principle of valuation practice.
Perri v Exego outlined the above principles in relation to the application of clause 19 of the Act as that clause applied in the circumstances; however it can be inferred that those principles would also apply to clause 31 of the Act (where a market review applies to determine the rent at the start of an option term).
If a market rent valuation is carried out and the valuer does not follow the requirements of the Act, the valuation will be considered to have no legal effect, therefore not be enforceable by either party.
What this means is that a landlord could be left with no rent review at the time of the market review.
It is crucial to ensure market review clauses in leases that are governed by the Act are drafted in a way that accords with the provisions of clause 19 or clause 31 as the case may be.
Since the Act provides for the market rent to be determined by valuation if the parties do not agree, it would help if the lease clearly defines when the parties are considered not to have agreed for example there is no agreement if the tenant objects to the landlord’s assessment of the market rent.
If a valuation needs to occur, landlords and tenants must ensure that the valuer is aware of the criteria under the Act and conducts the valuation accordingly, in order that the valuation can be relied on and enforced by the parties.
Please contact us if you have any queries in relation to rent reviews under the Act.