Rent reviews – mandatory or at the landlord’s discretion?

The issue of whether a lease requires a rent review or whether the review is at the discretion of the landlord often arises. The problem can avoided by clear drafting. In Growthpoint Properties Australian Limited v Austalia Pacific Airports [2014] VSC 556 the court had to decide whether a rent review was mandatory under the lease or whether the review was at the discretion of the landlord.

Clause 4.2 of the lease provided that:

“On each Market Review Date, the Rent is to be adjusted by a market review in accordance with the Market Review Method….”

Part B of the Lease provided:

“On each Market Review Date, the Rent will be adjusted by a market review if:

(a) APAM gives written notice to the Tenant (“Rent Review Notice”) setting out APAM’s opinion of the market rent for the Premises as at the Market Review Date; and

(b) the Rent Review Notice is given to the Tenant in the period between 6 months before and 6 months after the Market Review Date.

New Rent applies unless a dispute notice is served.

The Rent stated in the Rent Review Notice applies from the Market Review Date unless the Tenant gives APAM a notice disputing the specified Rent (“Dispute Notice”) within 21 days after the Rent Review Notice is given.”

The controversy between the tenant and the landlord arose from the imperative language in clause 4.2 (“is to be adjusted”) and the use of the conditional language in Part B (“will be adjusted”).

The tenant contended that the clauses, when read together were ambiguous and that there was a conflict between the clauses. On the tenant’s construction of the lease the landlord was obliged to initiate a rent review.

The landlord submitted that the rent provisions gave the landlord an entitlement, but not an obligation, to give the lessee a rent review notice.

The court held that the rent provisions gave the landlord an entitlement, but not an obligation, to give the lessee a rent review notice.

The case is useful because it discusses in detail the principles governing the construction of leases and rent review clauses and highlights the need to examine the lease as a whole. Of particular interest is the discussion about the purpose of rent review clauses: the House of Lords in United Scientific Holdings Ltd v Burnley Borough Council [1978] AC 904 viewed the benefit of a rent review to the landlord as being the ability to adjust rent market with the benefit to the tenant being seen as the security of a long lease.

The lease in Growthpoint was a commercial lease. If the lease is a “retail premises lease” a tenant may initiate a rent review if the landlord fails to do so within 90 days after the period provided for in the lease for the review. See: s.35(5) of the Retail Leases Act 2003.