Rent review caps upheld under the Retail Leases Act 2003 (Vic)

Landlords and tenants negotiating Victorian retail leases gain clarity on the use of rent caps.

On 16 June 2026, the Victorian Supreme Court of Appeal in Northcote Shopping Centre Pty Ltd v Aldi Foods Pty Ltd [2026] VSCA 140 refused leave to appeal the earlier Supreme Court decision, confirming that contractual caps on rent increases in retail lease rent review clauses do not contravene section 35(2) of the Retail Leases Act 2003 (Vic) (the Act).

The decision resolves the lingering uncertainty on the use of rent caps and confirms that parties can negotiate limits on rent increases within the Act’s rent review framework.

A reminder: Key facts

• The applicant landlord is the registered proprietor of the Northcote Central Shopping Centre located at 5 Separation Street, Northcote.
• The respondent, Aldi Foods Pty Ltd, is the tenant of a shop on the premises under a retail lease originally granted on 2 June 2008 for an initial term of 15 years, with the option for two further terms of five years each.
• In November 2021, Aldi exercised its option to renew for a further five-year term commencing on 3 May 2022.
• The lease, as varied by deed, provides for annual rent reviews adjusted by reference to the Consumer Price Index (CPI) and reviews on commencement of each new term based on current market rent.
• Critically, the lease imposed a cap of 6% on annual CPI-based rent increases and a cap of 10% on market rent review increases. Additionally, the lease expressly acknowledged that rent may increase or decrease following review, depending on market movement.
• The landlord contended that the caps were void under section 35 of the Act, with the consequence that the rent should be determined at current market rent without limitation pursuant to section 35(7).
• At VCAT, the Tribunal initially determined under Part 10 of the Act that a cap on rent reviewed under a Victorian retail premises lease constituted a second method of review and was therefore void under section 35(2) of the Act. However, that decision was subsequently reversed on appeal to the Supreme Court trial division (Croft J).

Proposed grounds of appeal

In support of its application for leave to appeal, the landlord raised two proposed grounds:

1. Whether the rent review clause impermissibly combines two of the permitted bases or formulae set out in section 35(2) of the Act.
2. Whether the cap represents an impermissible qualification or alteration of the statutory basis or formula, rendering the clause void even if characterised as a single method.

The decision

Leave to appeal was refused.  The Court of Appeal unanimously held that the Supreme Court decision was correct.

The Court accepted that section 35(2) requires a single basis or formula for each rent review. However, it held that the caps do not introduce a second method. Rather, the cap operates as a ceiling on the outcome after applying the compliant review method (market rent or CPI), without altering the underlying methodology.

Critically, the cap is irrelevant where rents have fallen or increased by less than the capped amount. Even when the cap applies, market rent remains the basis of the review. The cap represents a ceiling, not a floor, consistent with the lease’s express acknowledgement that rent may move in either direction.

On the landlord’s second argument, the Court drew an important distinction between altering a review formula (for example, ‘twice market rent’) and imposing a cap on the result after a compliant formula has already been applied. The latter does not offend section 35(2).

The Court also noted that the Act does not expressly prohibit a cap on review outcomes and that the legislative history reveals an intention to target ratchet clauses that prevent rent from falling, rather than caps that limit the extent of increases.

Key takeaways

The practical implications of this decision for parties to Victorian retail leases are significant.

Short of an application for special leave to appeal to the High Court of Australia, or legislative amendment, this decision brings clarity and certainty to the question of rent caps under Victorian retail leases.

1. Caps on rent increases are confirmed as permissible

Parties to a Victorian retail lease may negotiate and include contractual caps on rent increases in CPI and market rent review clauses without offending section 35(2) of the Act. Such caps do not constitute a second basis or formula and do not alter the specified method of review.

Tenants may confidently seek to impose rent caps under future leases and rely on negotiated caps already in place.

Landlords entering into new leases should carefully consider whether proposed caps adequately protect their interests over the full term, including option periods.

2. The distinction between method and outcome is critical

A cap operates on the outcome of a rent review after a compliant basis or formula has been applied; it does not alter the methodology by which the valuer or the formula determines the reviewed rent.

Landlords should be aware that this distinction may not protect clauses that modify the formula itself (for example, ‘half of CPI’ or ‘twice current market rent’), although the Court expressly reserved that question.

3. Caps must not prevent rent reductions

The caps in this case limited only increases. The express prohibition in section 35(3) on provisions that prevent rent reductions remains unaffected. Clauses that operate as a floor or ratchet preventing rent from decreasing at review will remain void.

4. Freedom to negotiate within the statutory framework

The decision reinforces that, subject to the Act’s requirements, parties retain the freedom to negotiate lease terms, including mechanisms that limit the extent of rent fluctuation, provided a single compliant basis or formula is specified. This is consistent with section 35(4), which confirms that the prohibition on provisions preventing rent reductions in section 35(3) does not apply to bases or formulae other than current market rent under section 35(2)(d).

Conclusion

This decision provides welcome clarity on a point of practical importance in Victorian retail leasing.

With rent review caps now confirmed as enforceable under the Act, their use is likely to increase in Victorian retail leases. Caps provide an effective way for tenants to protect themselves against sharp market increases in the current inflationary environment. The Court of Appeal’s confirmation that such caps are consistent with the Act removes a source of potential uncertainty for both landlords and tenants.

Parties to existing or prospective retail leases in Victoria should review their rent review provisions to ensure that any caps or limitations are drafted as ceilings on outcomes rather than modifications to the underlying basis or formula of review.

Authored by:

Alexandra Walker, Partner