Rent Review Caps: Supreme Court Gives the Green Light

Negotiating commercial leases can be challenging, particularly when the law isn’t crystal clear. One common sticking point is how rent increases are calculated. A recent Victorian Supreme Court decision has confirmed that rent increase caps in retail leases are valid under the Retail Leases Act 2003 (Vic) (RLA)—a welcome clarification for both landlords and tenants.

What was the issue?

Following a change in ownership of a shopping centre, a dispute emerged about whether a lease clause that capped rent increases was valid. The lease set rent increases based on the Consumer Price Index (CPI), but included a ceiling along these lines:

"In no case is rent varied by CPI to be more than the previous year's rent increased by 6%."

This raised the question: Does applying both CPI and a cap amount to an invalid "mixed method" of rent review under the RLA?

What does the RLA say?

Section 35(2) of the RLA requires that leases specify only one method for reviewing rent (e.g. CPI or market rent—not both). The dispute centered on whether adding a cap to a CPI-based formula breached this rule.

What did the Supreme Court decide?

The Court confirmed that rent caps are lawful, even when rent is otherwise calculated using CPI. Key takeaways from the decision:

- The RLA does not prohibit landlords and tenants from agreeing to a maximum cap on rent increases.

- The "no mixed methods" rule shouldn’t penalise tenants who negotiate for more certainty.

- While landlords can use ‘collars’ to stop rent from falling, the law doesn’t prevent tenants from negotiating caps to avoid steep increases.

- The RLA is designed to balance commercial fairness between parties—not favour landlords or tenants.

What this means for you

For Landlords:

- You can confidently include rent caps as part of lease negotiations.

- There’s now greater legal certainty about how capped CPI reviews will be treated under the RLA.

For Tenants:

- Rent caps are a legitimate tool to protect against unpredictable or excessive rent hikes.

- You’re on solid ground proposing a cap as part of lease terms—especially in volatile economic conditions.