The Coffee Shop Owner’s Surprise
Jackson ran a charming little café on a busy corner in Brisbane’s CBD. When he first signed the lease, the rent was $4,000 per month — reasonable for the foot traffic and location. But three years later, after the pandemic hit and footfall plummeted, he was shocked to find his rent still increasing year after year, with no option to negotiate it down.
Why? The answer was buried in the lease: a Ratchet Clause.
What Is a Ratchet Clause?
A ratchet clause is a lease provision that prevents rent from decreasing, even when market conditions or inflation (CPI) go down. It typically appears in clauses like:
“Rent will increase annually by CPI or 3%, whichever is higher.”
The catch? Even if CPI is negative, the rent can never go backwards. Like a ratchet gear, it only moves in one direction — up.
Retail vs Commercial Lease: What the Law Says in Queensland
In Queensland, the law treats retail and commercial leases differently when it comes to ratchet clauses:
- Retail leases (e.g. shops, restaurants, and other public-facing businesses) are prohibited from including ratchet clauses under the Retail Shop Leases Act.
- Commercial leases (e.g. office spaces, warehouses, clinics) do not have this restriction, so landlords and tenants may freely include ratchet clauses if both agree.
There’s also a key legal precedent from 2011: leases entered into before that year, which include an option to renew, may be treated differently under transitional rules.
Why It Matters: The Legal and Financial Risks
Ratchet clauses can significantly impact a tenant’s long-term financial health, especially during economic downturns. Without proper legal review, business owners may unknowingly lock themselves into an upward-only rent structure, with no flexibility when times get tough.
How Ensure Legal Can Help You Manage the Risk
Ensure Legal, a Brisbane-based property law firm, understands the nuances between retail and commercial leases — and how clauses like the ratchet clause can tip the scales.
In leasing, the fine print is everything. Let us help you protect your rights before problems arise.
Before accepting a rent review mechanism, request a commercial lease review to identify ratchet wording, review formulas and negotiation risks.
