A ratchet clause is a provision that specifies there can be no negative growth in rent, ensuring the stability of the landlord’s rental income.
Standard leases typically outline the method of annual rent adjustment for tenants. For example, the rent may increase by a net growth of 3% each year or be adjusted based on the higher of the Consumer Price Index (CPI) or a fixed percentage. This is considered a ratchet clause. In Queensland, ratchet clauses are not permitted in retail leases.
However, if the lease is a commercial lease and not a retail lease, there is no restriction against using a ratchet clause. (Note: This is based on a 2011 case; leases that commenced before 2011 with renewal clauses are exceptions.)
