GOUGER STREET PTY LTD v DIAKOU NOMINEES PTY LTD [2024] SASCA 17

On Appeal from SUPREME COURT OF SOUTH AUSTRALIA (THE HONOURABLE JUSTICE BLEBY) SCCIV-15-420 Appellant: GOUGER STREET PTY LTD Counsel: MR B ROBERTS KC WITH MR A DAL CIN - Solicitor: CLELANDS LAWYERS Respondent: DIAKOU NOMINEES PTY LTD Counsel: MR T COX KC WITH MR T MCFARLANE - Solicitor: CCK LAWYERS Second Respondent: KELLY & CO Counsel: NOT REQUIRED - Solicitor: FINLAYSONS Hearing Date/s: 19/10/2023 File No/s: CIV-23-006316 A SUPREME COURT OF SOUTH AUSTRALIA (Court of Appeal: Civil) DISCLAIMER - Every effort has been made to comply with suppression orders or statutory provisions prohibiting publication that may apply to this judgment. The onus remains on any person using material in the judgment to ensure that the intended use of that material does not breach any such order or provision. Further enquiries may be directed to the Registry of the Court in which it was generated. GOUGER STREET PTY LTD v DIAKOU NOMINEES PTY LTD [2024] SASCA 17 Judgment of the Court of Appeal (The Honourable President Livesey, the Honourable Justice Doyle and the Honourable Justice Blue) 29 February 2024 STATUTES - ACTS OF PARLIAMENT - INTERPRETATION - INTERPRETATION ACTS AND PROVISIONS - PRESERVATION OF RIGHTS, LIABILITIES AND LEGAL PROCEEDINGS ON AMENDMENT, REPEAL, LAPSING ETC OF ACT OR PROVISION STATUTES - ACTS OF PARLIAMENT - OPERATION AND EFFECT OF ACTS - RETROSPECTIVE OPERATION - AS REGARDS VESTED RIGHTS, PAST TRANSACTIONS OR NEW RIGHTS OR LIABILITIES LANDLORD AND TENANT - TERMINATION OF THE TENANCY - FRUSTRATION: APPLICATION OF DOCTRINE TO LEASES Appeal against the decision of a judge of the Supreme Court deciding preliminary issues raised in the course of a dispute relating to the Lease of the Talbot Hotel in Gouger Street, Adelaide. The appellant (Gouger) is the lessee of the Talbot Hotel in Gouger Street, Adelaide (the Premises), pursuant to a written memorandum of lease dated 1 September 2006 (the Lease). The respondent (Diakou) is the proprietor of the Talbot Hotel and the lessor under the Lease. When the Lease was entered into, the Retail and Commercial Leases Act 1995 (SA) (the RCLA) did not apply to it because the rent exceeded the prescribed threshold level of rent above which the RCLA does not apply. However, an increase in the threshold level of rent under the RCLA had the effect that, from 4 April 2011, the RCLA applied to the Lease and any renewal thereof. In consequence, the rent review provisions of the Lease, which were to be applied on a yearly basis, and upon the -- 1 of 27 -- exercise of the rights of renewal, became subject to the proscriptions in s 22 of the RCLA that render rent review provisions void in certain circumstances. The parties fell into dispute, with Diakou contending inter alia that, by reason of s 22, the rent review provisions in cl 4.10 of the Lease were void in their entirety and that, as a consequence, the rights of renewal in cl 4.9 of the Lease were defeated. The dispute between the parties became the subject of litigation, and proceeded on a trial of certain preliminary issues, with the primary judge determining Issues 1, 2 and 3 in favour of Diakou. Gouger appeals from the decision of the primary judge on these issues, contending that the primary judge erred. In particular, Gouger contends that his Honour should have held that s 22 of the RCLA only rendered the rent review provisions in cl 4.10 partially void and did not, in any event, operate to defeat the rights of renewal under cl 4.9 of the Lease. Held, (per the Court), allowing the appeal to the extent that it involved a challenge to the primary judge’s answer to Issue 2: 1. In respect of Issue 1, the effect of the application of the RCLA to the Lease is that cl 4.10 is wholly void and of no effect; 2. In respect of Issue 2, the invalidity of cl 4.10 does not operate to prevent there being any grant of a further five-year lease on 1 September 2011; and 3. In respect of Issue 3, as this issue would only arise in circumstances of the partial invalidity of cl 4.10, it does not arise for this Court’s consideration. Landlord and Tenant (Covenants) Act 1995 (UK); Retail and Commercial Leases Act 1995 (SA) ss 4, 5, 22; Retail and Commercial Leases Variation Regulations 2010 (SA); Retail Leases Act 1994 (NSW) s 18, referred to. Alcan (NT) Alumina Pty Ltd v Commissioner of Territory Revenue (Northern Territory) (2009) 239 CLR 27; Booker Industries Pty Ltd v Wilson Parking (Qld) Pty Ltd (1982) 149 CLR 600; Connor Hunter (a firm) v Keencrest Pty Ltd [2009] QCA 156; Crown Melbourne Ltd v Cosmopolitan Hotel (Vic) Pty Ltd (2016) 260 CLR 1; Diakou Nominees Pty Ltd v Gouger Street [2017] SASC 72; Diakou Nominees Pty Ltd v Gouger Street Pty Ltd [2023] SASC 66; Forza v Autocash Pty Ltd [2022] SASC 133; Mercantile Credits Ltd v The Shell Company of Australia Ltd (1976) 136 CLR 326; Mushroom Composters Pty Ltd v IS & DE Robertson Pty Ltd [2015] NSWCA 1; Placer Development Ltd v The Commonwealth (1929) 121 CLR 353; Pozetu Pty Ltd v Alexander James Pty Ltd [2016] NSWCA 208; Tindall Cobham 1 Limited v Adda Hotels [2014] EWCA Civ 1215; WST Pty Ltd v GRE Pty Ltd (2012) 115 SASR 216, considered. -- 2 of 27 -- GOUGER STREET PTY LTD v DIAKOU NOMINEES PTY LTD [2024] SASCA 17 Court of Appeal – Civil: Livesey P, Doyle JA and Blue AJA 1 THE COURT: The appellant (Gouger) is the lessee of the Talbot Hotel on Gouger Street, Adelaide (the Premises), pursuant to a written memorandum of lease dated 1 September 2006 (the Lease). The respondent (Diakou) is the proprietor of the Talbot Hotel and the lessor under the Lease. 2 When the Lease was entered into, the Retail and Commercial Leases Act 1995 (SA) (the RCLA) did not apply to it because the rent exceeded the prescribed threshold level of rent above which the RCLA does not apply. However, an increase in the threshold level of rent under the RCLA had the effect that, from 4 April 2011, the RCLA applied to the Lease and any renewal thereof. In consequence, the rent review provisions of the Lease, which were to be applied on a yearly basis, and upon the exercise of the rights of renewal, became subject to the proscriptions in s 22 of the RCLA that render rent review provisions void in certain circumstances. 3 The parties fell into dispute, with Diakou contending inter alia that, by reason of s 22, the rent review provisions in cl 4.10 of the Lease were void in their entirety and that, as a consequence, the rights of renewal in cl 4.9 of the Lease were defeated. The dispute between the parties became the subject of litigation, and proceeded before the primary judge on a trial of certain preliminary issues. The contentions just mentioned were the subject of Issues 1, 2 and 3, and were determined by the primary judge in favour of Diakou. 4 Gouger appeals from the decision of the primary judge on these issues, contending that the primary judge erred. In particular, Gouger contends that his Honour should have held that s 22 of the RCLA only rendered the rent review provisions in cl 4.10 partially void and did not, in any event, operate to defeat the rights of renewal under cl 4.9 of the Lease. Background 5 On 1 September 2006, Diakou as Lessor, and the Talbot Hotel Group Pty Ltd as Lessee, entered into the Lease. The lease was for a term of five years, but with six rights of renewal under cl 4.9, each for a further five-year term. The first right of renewal was in cl 4.9(a), which relevantly provided: 4.9 Renewal (a) First Right of Renewal On the first written request of the Lessee made not less than six nor more than nine months before the expiration of the Term set out on page 1 of this Lease and PROVIDED THAT there shall not at the time of such request be any existing breach or non-observance of any of the covenants and conditions herein contained and on the Lessee’s part to be observed and performed the -- 3 of 27 -- [2024] SASCA 17 The Court 2 Lessor will at the expense of the Lessee grant to the Lessee an extension of the Lease for the further term in Item 7 of the Schedule (if any) [being 5 years commencing on 1 September 2011] and upon the same terms and conditions as are herein contained save for the exclusion of this clause 4.9(a) … 6 Clauses 4(b) to 4(f) contained equivalently expressed second to sixth rights of renewal. 7 As specified on page 2 of the memorandum of lease, the rent under the Lease was expressed to be $250,500 per annum plus GST. However, in accordance with cl 2.1, this was subject to review as provided for in cl 4.10: 2.1 Rent The Lessee will during the whole of the Term pay to the Lessor or as the Lessor may in writing otherwise direct without any abatements or deductions whatsoever the annual rent hereby reserved at the times and in the manner described on page 2 of this Lease, subject always to review as provided for in clause 4.10. 8 Clause 4.10 of the Lease provided for rent reviews in the following terms: 4.10 Review of Annual Rent Notwithstanding anything herein appearing to the contrary, or any agreement between the Lessor and Lessee otherwise, the annual rent hereby reserved shall be reviewed as at the date and in the years specified in Item 9 of the Schedule (each of such dates being called the “Review Date”) and shall be determined in accordance with the following provisions: (a) On each fifth anniversary of the Commencement Date the annual rent shall be the “current market rent” for the Premises determined in accordance with the following paragraphs or shall be the rent prior to the review date increased by 4%, which ever is greater: … (b) On 1 November 2006 and each anniversary of the Commencement Date (other than the review dates referred to in clause 4.10(a)) the annual rental shall be determined in accordance with the following paragraphs or shall be the rental payable during the year immediately preceding the review date increased by 3% per annum, which ever is greater: … (c) Under no circumstances shall the rent payable following any rent review be less than the rent payable immediately prior to such rent review. 9 The words omitted from cl 4.10(a) included a lengthy definition of “current market rent” and the process for its determination; and the words omitted from cl 4.10(b) provided a formula for determining the rent based on changes to the Consumer Price Index (CPI). -- 4 of 27 -- [2024] SASCA 17 The Court 3 10 In short, cl 4.10 provided for rent to be reviewed every year (with the new rent to be the existing rent adjusted for CPI or increased by 3 per cent, whichever is greater (cl 4.10(b)), and then upon every fifth year, and hence coinciding with the dates of any renewals of the Lease (with the new rent to be the current market value or an increase of 4 per cent, whichever is greater (cl 4.10(a)). 11 As at the date of entry into the Lease, s 4(2)(a) of the RCLA provided that the Act did not apply to a retail shop lease if the rent payable under the lease exceeded $250,000. As the rent expressed in the lease exceeded this amount, the RCLA did not apply to the Lease. 12 On 8 July 2007, the Talbot Hotel Group assigned the Lease to Schillvest Pty Ltd. 13 On 4 April 2011, the Retail and Commercial Leases Variation Regulations 2010 (SA) commenced operation. One effect of this was to prescribe the amount of $400,000 as the threshold level of rent for the purposes of s 4(2)(a) of the RCLA, with the result that, from that date, the RCLA applied to a retail shop lease unless the rent payable under the lease exceeded $400,000 per annum. The rent payable under the Lease has not ever exceeded $400,000. 14 In the lead up to 1 September 2011, Schillvest exercised (or purported to exercise) the first right of renewal. The Lease was thereby ostensibly renewed for a five-year term commencing 1 September 2011. This gave rise to a new lease, albeit “upon the same terms and conditions” as the initial Lease (cl 4.9(a)). Where it is necessary in these reasons to distinguish between them, we shall refer to the initial Lease and this new lease as the 2006 Lease and the 2011 Lease respectively. 15 Diakou and Schillvest at that stage ‘agreed to disagree’ as to whether the RCLA applied to the 2011 Lease. 16 On 13 June 2012, receivers and managers were appointed to Schillvest. On 2 July 2013, the receivers and managers assigned the Lease to Gouger. This occurred by way of a Deed of Assignment of Lease between Schillvest, Diakou and Gouger. This Deed reserved the respective positions of Diakou and Gouger as to whether the RCLA applied to the 2011 Lease.1 17 Gouger commenced occupation of the Talbot Hotel on 2 July 2013, and is the current occupant of the Talbot Hotel. 18 On 9 September 2014, acting at the request of Gouger and Diakou, Mr Pledge of Knight Frank performed a market rent review of the Talbot Hotel. He determined that the current market rent as of 1 September 2011, valued in 1 By a later Deed of Assignment dated 18 December 2014, Schillvest assigned to Gouger its chose in action to claim from Diakou the amount of land tax and rent it claimed to have overpaid between 4 April 2011 and 1 September 2011 under the 2006 Lease. Diakou was not a party to this Deed, and claims it is ineffective. -- 5 of 27 -- [2024] SASCA 17 The Court 4 accordance with cl 4.10(a), was $215,000 (excluding GST) per annum. This was less than the rent being paid by Schillvest as of 31 August 2011 and, of course, less than the rent would have been if it were increased by 4 per cent. 19 By an Extension of Lease executed on behalf of Gouger and Diakou, the 2011 Lease was (purportedly) renewed for a further five-year term commencing on 1 September 2016, resulting in the 2016 Lease. 20 On its face, cl 4.10(a) applied to determine the rent review, as 1 September 2016 was the five-year anniversary of the commencement date for the 2011 Lease. In late 2017, Diakou and Gouger agreed to engage a valuer to perform a market rent review for the period beginning 1 September 2016. Mr Nobes of McGees Property determined the current market rent as at 1 September 2016 to be $245,000 (excluding GST) per annum. 21 Proceedings in this Court were issued in 2015. It is not necessary to describe the full range and detail of the numerous matters in dispute between the parties. 22 Relevantly to the present appeal, Stanley J determined in 2017 that the RCLA applied to the Lease.2 In particular, it applied to the 2006 Lease from the commencement of the amendments to the RCLA on 4 April 2011, and to the 2011 Lease from its commencement on 1 September 2011. It follows that s 22 of the RCLA applied to the September 2011 rent review under cl 4.10(a). Section 22 of the RCLA – set out in full later in these reasons – regulates adjustments of base rent under leases to which the legislation applies and, in particular, under ss 22(3) and (4), operates to render rent review provisions void in certain circumstances. 23 On 23 June 2022, the proceedings were listed for a preliminary trial, limited to Issues 1, 2, 3, 4, 8 and 9 specified in a document entitled Agreed List of Issues and Contentions: Issue 1: Is the effect of the application of the RCLA to the 2006 Lease that cl 4.10 is wholly void and of no effect? Issue 2: If cl 4.10 became wholly void, was the effect that there was no grant of a further five-year lease on 1 September 2011 because there was no agreement between the Lessor and the Lessee as to a mechanism for fixing rent payable under the 2011 Lease? Issue 3: If cl 4.10 became void to a limited extent, was the effect that there was no grant of a further five-year lease on 1 September 2011 because there could be no grant of a further lease ‘on the same terms and conditions herein contained’? Issue 4: If cl 4.10 became void in whole or in part, was the effect that the 2006 Lease was frustrated and discharged with effect from 31 August 2011? 2 Diakou Nominees Pty Ltd v Gouger Street [2017] SASC 72. -- 6 of 27 -- [2024] SASCA 17 The Court 5 Issue 8: Did Schillvest assign to Gouger Street its rights (if any) to recover overpayments of rent (if any) and land tax by the operation of the Deed of Assignment of Lease dated July 2013 between Schillvest, Gouger Street and Diakou? Issue 9: Did Schillvest assign to Gouger Street its rights (if any) to recover overpayments of rent (if any) and land tax by the operation of the Deed of Assignment dated 18 December 2014 between Schillvest and Gouger Street? 24 Having heard the preliminary trial, the primary judge determined these issues as follows:3 Issue 1: The effect of the application of the RCLA to the 2006 Lease is that cl 4.10 is wholly void and of no effect. Issue 2: The effect of cl 4.10 being wholly void is that there was no agreement between the Lessor and Lessee as to a mechanism for fixing rent payable under the 2011 Lease. It would follow from this that there was no grant of a further five- year lease on 1 September 2011. However, that conclusion is subject, at least, to the determination of Issues 5 and 6. Issue 3: Issue 3 does not arise. Issue 4: The effect of cl 4.10 being void did not have the effect that the 2006 Lease was frustrated and discharged. Neither did it have the effect that any contract to renew the 2006 Lease was frustrated. Issue 8: Schillvest did not assign to Gouger Street its rights (if any) to recover overpayments of rent (if any) by the operation of the Deed of Assignment of Lease dated July 2013 between Schillvest, Gouger Street and Diakou. Issue 9: Schillvest did assign to Gouger Street its rights (if any) to recover overpayments of rent (if any) and land tax by the operation of the Deed of Assignment dated 18 December 2014 between Schillvest and Gouger Street. 25 The present appeal is concerned only with Issues 1, 2 and 3. Each relates to the operation of ss 22(3) and (4) of the RCLA. It is convenient to commence with some observations in relation to s 22, and an overview of the primary judge’s reasoning, before directly addressing the arguments on appeal. Section 22 of the RCLA 26 Section 22 of the RCLA relates to changes in rent under leases to which the legislation applies, and is in the following terms: 22—Restrictions on adjustment of base rent (1) In this section— 3 Diakou Nominees Pty Ltd v Gouger Street Pty Ltd [2023] SASC 66 (Reasons) at [270]. The primary judge also determined a further preliminary issue, holding that Diakou was not prevented by issue estoppel from contending that the 2011 Lease was not validly entered into. -- 7 of 27 -- [2024] SASCA 17 The Court 6 base rent means rent, or that component of rent, that comprises a specified amount (whether or not there is provision for the amount to change). Note— Turnover rent (rent determined by reference to the lessee’s turnover) is not base rent because turnover rent is not a specified amount of money (it varies according to the lessee’s turnover). (2) A retail shop lease must not provide for a change to base rent less than 12 months after the lease is entered into and must not provide for a change to that rent less than 12 months after any previous change to that rent, but this subsection does not apply to a change to base rent by a specified amount or specified percentage. For example, subsection (2) prevents a lease providing for an increase to current market rent more than once in 12 months. It does not prevent a lease providing for the rent to increase by $100 every six months. Nor does it prevent a lease providing for the rent to be increased to current market rent after 12 months and then to be increased by two per cent every six months after that. (3) A provision of a retail shop lease is void to the extent that it— (a) reserves or has the effect of reserving to one party a discretion to decide which of two or more methods of calculating a change to base rent is to apply on a particular occasion; or (b) provides for a method of calculating a change to the base rent but reserves or has the effect of reserving to one party a discretion to decide whether or not the base rent is to be changed in accordance with that method on a particular occasion; or (c) provides for base rent to change on a particular occasion in accordance with whichever of two or more methods of calculating the change would result in the higher or highest rent. (4) If a retail shop lease provides for a change to base rent in a way that may result in a decrease of rent1, a provision of the lease is void to the extent it prevents or enables the lessor or any other person to prevent the decrease. Example— 1 A provision for the rent to change to current market rent. 27 It is readily apparent that s 22, like many provisions within the RCLA, is beneficial or remedial in nature, designed to protect the interests of lessees who are often in a weaker bargaining position than lessors in the case of the commercial leases to which the Act applies.4 The construction of s 22 is to be approached having regard to this purpose. 4 WST Pty Ltd v GRE Pty Ltd (2012) 115 SASR 216 at [10] (Gray J, Anderson and Peek JJ agreeing); Diakou Nominees Pty Ltd v Gouger Street [2017] SASC 72 at [49] (Stanley J). -- 8 of 27 -- [2024] SASCA 17 The Court 7 28 More particularly, it is apparent that s 22 is intended to protect lessees from certain types of rent review provisions that might otherwise operate to the unfair advantage of the lessor, and the corresponding disadvantage of the lessee. 29 Section 22(2) operates to prevent – and hence protect lessees from – frequent changes in rent where the amount or percentage of that change has not been specified. In particular, it proscribes any provision in a lease for a change in rent any sooner than 12 months after entry into the lease, and every 12 months thereafter, except where the change is by a specified amount or percentage. 30 Section 22(3) operates to render a rent review provision void to the extent that it provides a party (typically the lessor) with a discretion as to which of two or more methods of calculating a change in rent is to apply on a particular occasion (s 22(3)(a)), or a discretion as to whether the rent is to be changed in accordance with a given method on a particular occasion (s 22(3)(b)) (a ‘discretionary method clause’). It also operates to render void a rent review provision to the extent that it provides for a change in rent to be in accordance with whichever of two or more methods would result in the higher or highest rent (s 22(3)(c)) (a ‘highest method clause’). 31 Section 22(4) operates to render void a provision of a lease that prevents a rent review from resulting in a decrease in rent, often referred to as a ‘ratchet clause’. 32 The present matter involves a close consideration of the operation of ss 22(3) and (4), and the potential overlap and interaction between them. 33 It is common ground that each of cll 4.10(a) and (b) of the Lease attracts the operation of s 22(3)(c) of the RCLA.5 Each of these clauses provides for base rent to be reviewed and adjusted on a particular occasion in accordance with whichever of the two specified methods of calculating the adjusted rent would result in the higher rent. Each is a proscribed highest method clause. 34 It is also common ground that cl 4.10(c) attracts the operation of s 22(4) of the RCLA in that it purports to prevent the rent from decreasing upon a rent review.6 It is a ratchet clause. 35 It may be observed in passing that, were cll 4.10(a) and (b) to apply according to their terms, they could not result in any decrease in rent, because they contain a floor of a 4 per cent increase and 3 per cent increase respectively. Whilst cl 4.10(c) would thus not have any practical work to do,7 it does nevertheless on its terms attract the operation of s 22(4). 5 Reasons at [105]. 6 Reasons at [105]. 7 Cf if cll 4.10(a) and (b) were, in accordance with Gouger’s submissions, held partially void, leaving rent to be determined according to market rent, or adjusted by CPI, thereby giving rise to the potential for a decrease in rent. -- 9 of 27 -- [2024] SASCA 17 The Court 8 36 It is a different question whether cll 4.10(a) and (b), in addition to attracting the operation of s 22(3)(c), also attract the operation of s 22(4). Whilst Gouger contended, and the primary judge was prepared to accept,8 that these clauses also attract the operation of s 22(4), Diakou contested this proposition. It will be necessary to return to this issue later in these reasons. 37 Significantly, when they apply, both ss 22(3) and (4) operate to render the provisions of a lease void “to the extent” that they have the proscribed effect. This is consistent with s 5 of the RCLA, which states that the Act operates despite the provisions of a lease (s 5(1)), and that a provision of a lease is void to the extent that it is inconsistent with the Act (s 5(2)). 38 Precisely what this means in the context of cll 4.10(a) and (b) of the Lease is the subject of Issue 1, and the first ground of appeal. 39 Diakou contended, and the primary judge held,9 that even if s 22(4) were to operate on cll 4.10(a) and (b) in a more limited way (so as to void only the reference to the alternative fixed percentage methodology and the words applying that methodology where it results in a higher rent), nevertheless s 22(3)(c) goes further than this. It operates to render void the provision for a mechanism that involves the higher of two methods, and hence voids the entirety of each of cll 4.10(a) and (b). 40 Gouger, on the other hand, contended that because the fields of operation, and underlying purpose, of ss 22(3)(c) and (4) are essentially the same, their remedial effect should be construed in a harmonious way. It argued that s 22(3) only renders a provision void to the extent that it has the proscribed effect, and that this requires only that the reference to the alternative fixed percentage methodology, and the words applying that methodology, where they result in a higher rent, be rendered void. It requires only the partial invalidity of cll 4.10(a) and (b); it does not require treating the reference to a market value or CPI adjusted rent in cll 4.10(a) and (b) as void. 41 If Diakou’s contention to the effect that cll 4.10(a) and (b) are wholly invalid is to be accepted, as it was by the primary judge, then an issue arises as to whether the renewed lease is invalid on the basis that the parties failed to agree the rent under that lease (Issue 2). Diakou contended, and the primary judge held,10 that the renewed lease was invalid for this reason. 42 On the other hand, if Gouger’s contention of partial invalidity is to be accepted, then Issue 2 does not arise. There would be no difficulty with the renewed leases taking effect, with the rent in each case being the market rent determined under cl 4.10(a) (Issue 3). 8 Reasons at [106]-[107]. 9 Reasons at [108]-[109]. 10 Reasons at [131]. -- 10 of 27 -- [2024] SASCA 17 The Court 9 Issue 1: whether s 22 of the RCLA rendered the rent review provisions partially or wholly void The arguments below 43 At trial, Gouger argued that ss 22(3) and 22(4) of the RCLA operate in different ways; that they have different modes of operation. Focusing upon the words “on a particular occasion” that appear in each of the limbs of s 22(3), but not s 22(4), Gouger argued that s 22(3) only operates to void, or invalidate, the operation of a rent review provision on the particular occasion of a given rent review. The primary judge described this as an approach involving occasional or operative invalidation.11 44 Thus, in approaching the operation of s 22(3)(c) on the occasion of the September 2011 rent review, cl 10.4(a) attracted the operation of that subsection because it provided for rent to be adjusted in accordance with the higher of two methods for calculating rent. Further, because the valuation that had been obtained meant that, on that occasion, the 4 per cent increase was the higher of the two methods, s 22(3)(c) operated to invalidate the part of the rent review provision that provided for the application of that methodology. However, it did not invalidate the part of the rent review provision that provided for an adjustment of rent in accordance with market rent. Further, because s 22(4) operated to render cl 4.10(c) void, there was nothing to prevent a decrease in rent in accordance with market rent. Accordingly, the rent fell to be reviewed in accordance with market value.12 45 In support of this approach of partial invalidity, which was said to flow from the statutory references to the relevant rent review provision being void “to the extent” that it had the proscribed effect, Gouger relied upon Tindall Cobham 1 Limited v Adda Hotels.13 That case concerned the application of s 25 of the Landlord and Tenant (Covenants) Act 1995 (UK), which rendered some covenants in certain hotel leases void “to the extent” that they had the proscribed effect. With respect to this form of language, Patten LJ said:14 Although the words “void to the extent that” indicate that Parliament did not intend to invalidate more of the relevant agreement than was necessary to safeguard the objectives of the Act in the context of the particular assignment under consideration, those words do not in my view preclude the Court from taking a balanced approach to invalidation which, whilst neutralising the offending parts of the contract, does not leave it emasculated and unworkable … It seems to be generally accepted that the Court will not sever the terms of a contract for this purpose unless the unenforceable provision is capable of being removed without the necessity of adding to or modifying the wording that remains; the remaining terms are supported by adequate consideration; and the removal of the unenforceable provisions does not alter the character of the contract … 11 Reasons at [59]. 12 Gouger’s argument acknowledged that, on another occasion, when an adjustment to market value would result in an increase of more than 4 per cent, s 22(3)(c) would operate differently to invalidate the market value limb of the rent review mechanism, but permit an increase of 4 per cent. 13 Tindall Cobham 1 Limited v Adda Hotels [2014] EWCA Civ 1215. 14 Tindall Cobham 1 Limited v Adda Hotels [2014] EWCA Civ 1215 at [46] (Patten LJ). -- 11 of 27 -- [2024] SASCA 17 The Court 10 46 Gouger also relied upon obiter observations in Connor Hunter (a firm) v Keencrest Pty Ltd15 in support of an approach involving partial invalidity of rent review provisions. The Queensland Court of Appeal in that case upheld the validity of the impugned rent review provisions, but Chesterman JA went on to observe:16 Although it is unnecessary to do so because of the conclusion I have just expressed, it may be said that the first respondent’s basis for contending that the rent review clauses are invalid would not yield the result for which it would hope. The basis is s 20 of the Act which provides that: “If a provision of this Act is inconsistent with a provision of a retail shop lease, the provision of this Act prevails, and the provision of the lease is void to the extent of the inconsistency.” The inconsistency identified by the first respondent is that the provisos to clause 2.3(a) and (d), and clause 16.2, are a separate basis for reviewing the rent so that the clauses offend s 27(4) or s 36(e). The inconsistency can be removed, in accordance with s 20, if the provisos are avoided. That is the extent necessary to remove the inconsistency. The clauses would be left with one basis for adjusting rent and would not offend the Act. The rent reviews that have occurred would be unaffected. 47 Gouger argued that its approach was consistent with these passages; that the partial invalidity for which it contended was consistent with the objects of the RCLA in protecting the interests of lessees, without emasculating the interests of Gouger by invalidating the entirety of cl 4.10(a) would. 48 Diakou, on the other hand, contended for a different approach to the construction and operation of s 22(3)(c). It challenged Gouger’s attempt to confine the operation of s 22(3)(c) to occasional invalidity, and to partial invalidity. It argued that s 22(3)(c) operated to render a rent review provision which had the proscribed effect void from the outset,17 and in the case of a provision in the terms of cl 4.10(a), wholly void. 49 Diakou argued that the reference in s 22(3)(c) to a provision of a lease that “provides for base rent to change on a particular occasion in accordance with whichever of two or more methods of calculating the change would result in the higher or highest rent” served merely to identify the rent review mechanism that was proscribed. As such, the reference to “a particular occasion” was merely part of the description of the contemplated operation of the proscribed methodology, rather than a basis for confining the operation of the subsection to occasional invalidity. 50 Further, because the effect of s 22(3)(c) is to proscribe a rent review mechanism that provides for the higher of two or more methods for calculating 15 Connor Hunter (a firm) v Keencrest Pty Ltd [2009] QCA 156. 16 Connor Hunter (a firm) v Keencrest Pty Ltd [2009] QCA 156 at [73]-[74] (Chesterman JA). 17 Or, in the present case, from the date the RCLA commenced to apply to the Lease, being 4 September 2011. -- 12 of 27 -- [2024] SASCA 17 The Court 11 rent, it should be construed as invalidating the entirety of that mechanism; not merely the limb or aspect of the mechanism that happens to provide for a higher rent on a particular occasion. 51 In support of its approach, Diakou relied upon references in the Second Reading Speech debate in Parliament to the effect that the Bill by which the relevant amendments were introduced was intended to prohibit all forms of ratchet clauses. It also relied upon the decision of the New South Wales Court of Appeal in Pozetu Pty Ltd v Alexander James Pty Ltd,18 and the recent decision of Kourakis CJ in Forza v Autocash Pty Ltd.19 The primary judge’s reasoning 52 The primary judge accepted that the RCLA was remedial, consumer protection legislation, designed to protect the interests of lessees where the annual rent falls below the relevant threshold, and that the construction of s 22 should be approached having regard to this purpose.20 53 In the course of canvassing the parties’ arguments, the primary judge acknowledged the potential support for partial invalidity that might be gleaned from the passages extracted above from the reasons for the decisions in Tindall Cobham 1 Limited v Adda Hotels and Connor Hunter (a firm) v Keencrest Pty Ltd.21 54 The primary judge was not assisted by the Second Reading Speech debate. He considered that general statements by members of Parliament to the effect that the relevant provisions were intended to prohibit ratchet clauses said nothing about how that prohibition was to be given effect.22 55 Nor was his Honour assisted by the decision of the New South Wales Court of Appeal in Pozetu Pty Ltd v Alexander James Pty Ltd. In that case, a provision of a retail shop lease (referred to as the Option Rental Provision) conferred on the lessee an option to renew the lease for five years from 1 September 2008. The rent payable from the commencement of the renewed lease was to be the greater of current market rent and 105 per cent of the rent in the last year of the original lease. Section 18(3)(c) of the Retail Leases Act 1994 (NSW) was in the same terms as s 22(3)(c). In an action claiming damages by reason of the lessee’s alleged repudiation of the lease, the lessor (Pozetu) contended that the Option Rental Provision contravened s 18(3)(c) and was void in its entirety. An Appeal Panel of the New South Wales Civil and Administrative Tribunal (NCAT) accepted this contention. 18 Pozetu Pty Ltd v Alexander James Pty Ltd [2016] NSWCA 208. 19 Forza v Autocash Pty Ltd [2022] SASC 133. 20 Reasons at [58]. 21 Reasons at [66]-[69]. 22 Reasons at [70]. -- 13 of 27 -- [2024] SASCA 17 The Court 12 56 The matter came before the Court of Appeal on an application for leave to appeal. Pozetu sought to change its position and argue that s 18(3)(c) did not invalidate the whole of the Option Rental Provision.23 Whilst the Court of Appeal did not permit Pozetu to change its position in this manner, and hence proceeded on the assumption the provision was void in its entirety, the Court expressly stated that it “should not be taken as expressing a view as to the merits of the argument Pozetu wished to advance”.24 57 The primary judge rejected Diakou’s submission that the Court of Appeal had “seemingly approved” of NCAT’s conclusion that the Option Rental Provision was void in its entirety. For the reasons set out, the Court of Appeal could not be said to have endorsed that conclusion.25 58 The primary judge did, however, consider that Diakou’s argument was supported by the reasons of Kourakis CJ in Forza v Autocash Pty Ltd.26 In that case, cl 14 of the lease provided for rent to be reviewed annually “by 5% or the most recent CPI (Adelaide) which ever is the greater”. Having accepted that s 22(3)(c) applied to this clause, Kourakis CJ rejected an argument of partial invalidity (which would have involved severing, or treating as void, the words “or the most recent CPI (Adelaide) which ever is greater”). In holding that the whole of that clause was void, Kourakis CJ emphasised that there was no foundation for ascertaining the objective intention of the parties as to which of the two alternatives in the rent review clause should be severed in the event of invalidity.27 59 In addressing more directly the parties’ arguments, the primary judge rejected Gouger’s contentions in support of an approach to s 22(3) that involved occasional or operative invalidity. His Honour considered that this approach was premised upon a strained reading of the text of that section. In his Honour’s view, s 22(3) did not on its terms purport to operate only on the particular occasion of a given rent review. Rather, it operated to render void at all times any provision meeting the descriptions in the three subsections.28 60 Having concluded that both ss 22(3) and (4) operate at all times on the provisions of a lease to which they apply, his Honour turned to consider the application of those subsections to cll 4.10(a), (b) and (c) of the Lease. After mentioning the obvious application of s 22(3)(c) to cll 4.10(a) and (b), and of s 22(4) to cl 4.10(c), the primary judge appeared to accept that s 22(4) also applied to cll 4.10(a) and (b). In particular, after observing that the effect of cll 4.10(a) and (b) was to prevent the market rent and CPI methods from applying when that would result in a decrease in the rent, he added that the effect of these clauses 23 Pozetu Pty Ltd v Alexander James Pty Ltd [2016] NSWCA 208 at [33] (Sackville AJA, McColl and Ward JJA agreeing). 24 Pozetu Pty Ltd v Alexander James Pty Ltd [2016] NSWCA 208 at [40] (Sackville AJA, McColl and Ward JJA agreeing). 25 Reasons at [76], [78]. 26 Forza v Autocash Pty Ltd [2022] SASC 133. 27 Forza v Autocash Pty Ltd [2022] SASC 133 at [82] (Kourakis CJ). 28 Reasons at [96]-[103]. -- 14 of 27 -- [2024] SASCA 17 The Court 13 “would seem to attract the operation of s 22(4).”29 His Honour thereafter proceeded on the basis that s 22(4) applied to cll 4.10(a) and (b).30 61 Having apparently accepted that ss 22(3)(c) and (4) both applied to cll 4.10(a) and (b), the primary judge turned to address the consequences of this conclusion. 62 In addressing the remedial effect of s 22(3)(c), his Honour had earlier observed that cll 4.10(a) and (b) both identified not only two different methods for calculating the change in rent, but also the mechanism for choosing between them (“which ever is greater”); and that Diakou’s argument in favour of cll 4.10(a) and (b) being wholly invalid drew its force from a recognition that s 22(3), and in particular s 22(3)(c), proscribed the mechanism for choosing between the two methods of calculation of the new rent.31 63 In accepting Diakou’s argument that s 22(3)(c) operated to render cll 4.10(a) and (b) void in their entirety, the primary judge emphasised that ss 22(3)(c) and (4) were expressed to regulate different things,32 and in particular that the former was intended to regulate particular types of mechanisms for determining the new rent:33 … That section renders void a provision of a lease to the extent that it provides for base rent to change on a particular occasion in accordance with the identified mechanism. That is, it renders void not just the method that results in the higher rent, but the provision for the rent to change in accordance with the prescribed mechanism. It may be broadly accepted, as Gouger Street submitted, that the mischief being addressed is the existence of methods of calculating rent, one of which results in a higher rent than the other with the higher rent being adopted. However, Parliament has chosen to address that mischief by invalidating not just the higher resulting rent, but the provision for base rent to change in accordance with the mechanism of stipulating two or more methods. 64 It followed that s 22(3)(c) operated to render the entire mechanism in cll 4.10(a) and (b) void, and not simply the aspect of these clauses providing for the adoption of a percentage increase to rent in the event that it resulted in a higher rent. In so holding, the primary judge added that there was nothing in the Lease to indicate which of the two methods of calculation had primacy, or was intended to apply in any event. Drawing support from the reasons of Kourakis CJ in Forza v Autocash Pty Ltd, the primary judge considered that this supported a conclusion that cll 4.10(a) and (b) were void in their entirety:34 Once that provision is identified as void, there is nothing in the Lease that provides for one or other of the methods to apply in any event. To conclude that the parties intended that one or the other method would apply in any event would require reading in words that have not been the subject of any agreement. The present situation is relevantly indistinguishable 29 Reasons at [106]. 30 Reasons at [107]. 31 Reasons at [79]. 32 Reasons at [105]. 33 Reasons at [108]-[109] (emphasis in original). 34 Reasons at [110] (omitting citations). -- 15 of 27 -- [2024] SASCA 17 The Court 14 from that considered by the Chief Justice in Forza v Autocash. Gouger Street has not identified any basis other than the terms of the Lease for identifying the objective intentions of the parties. Clauses 4.10(a) and 4.10(b) are, together with cl 4.10(c), void in their entirety. 65 The primary judge concluded this aspect of his reasoning by rejecting the contention that an approach to s 22(3)(c) which rendered the entirety of cll 4.10(a) and (b) void involved an impermissible emasculation of those clauses, contrary to the observations of Patten LJ in Tindall Cobham 1 Limited v Adda Hotels. His Honour explained that, while Parliament should not be taken to have intended to invalidate more than was necessary to give effect to the identified mischief, the mischief targeted by s 22(3)(c) was only addressed by invalidating the mechanism for reviewing rent that applied the higher of two methods for calculating rent, and not by merely severing the method that (on the particular occasion) produced the higher rent.35 The arguments on appeal 66 On appeal, Gouger pitched its argument in favour of partial invalidity quite differently. It abandoned its argument based upon occasional invalidity. 67 Its argument on appeal started from the premise that both ss 22(3) and (4) of the RCLA apply to cll 4.10(a) and (b) of the Lease. It then focussed upon what it contended is the close relationship between ss 22(3) and (4), and the significance of this for the remedial effect of the operation of these subsections. It described ss 22(3) and (4) as allied provisions that are both intended to address essentially the same mischief, namely to invalidate rent review provisions to the extent that they operate as ratchet clauses that prevent a decrease in rent. It contended that once the close relationship between ss 22(3) and (4) – and, indeed, what it contended is their almost complete overlap in operation – is appreciated, it is appropriate that they be construed in a harmonious way, with the same remedial effect. It is appropriate that they both be construed as only invalidating cll 4.10(a) and (b) “to the extent” that those clauses operate to prevent a decrease in rent. This remedial effect is achieved through the partial invalidity of cll 4.10(a) and (b); that is, by severing the references to an alternative of a fixed percentage increase and the words “which ever is greater”, and allowing the provision for the rent to be reviewed in accordance with market rent (cl 4.10(a)) or CPI (cl 4.10(b)) to stand. 68 Diakou responded by essentially repeating its submissions below. It contended that ss 22(3) and (4) are addressed to different forms of mischief. The former is directed to rent review provisions involving certain mechanisms for determining the adjusted rent (that is, discretionary method or highest method clauses), whereas the latter is directed to ratchet clauses (that is, clauses which prevent a decrease in rent). As such, there is no difficulty with ss 22(3) and (4) operating differently, and with differing remedial effect. In the present case, only 35 Reasons at [111]. -- 16 of 27 -- [2024] SASCA 17 The Court 15 the former applies to cll 4.10(a) and (b), but it applied to invalidate the entirety of the proscribed mechanisms for determining the change in rent under those clauses. Consideration 69 For the reasons which follow, Diakou’s approach to the construction of ss 22(3) and (4) is to be preferred. It properly reflects the different forms of mischief sought to be addressed by ss 22(3) and (4), and the implications of this for their application and remedial effect. 70 In addressing the parties’ competing approaches, it is convenient to commence by addressing whether, as Gouger contended, in addition to s 22(3)(c) applying to cll 4.10(a) and (b), s 22(4) also applies to these clauses. 71 In contending that s 22(4) applies to cll 4.10(a) and (b), Gouger commenced with the proposition that each of these clauses provides for rent to be adjusted in accordance with whichever of two methods would result in the higher rent. It then argued that the first method mentioned in each (market value or CPI) might result in a decrease in rent. However, the second method mentioned in each (a fixed percentage increase) will always result in an increase and hence, by reason of the concluding words (“which ever is greater”), the clauses operate to prevent a market value or CPI adjusted rent applying where it would result in a decrease in rent.36 In this way, Gouger argued that cll 4.10(a) and (b) both contain a first limb that provides for an adjustment (by reference to market value or CPI) that may result in a decrease in rent, but in combination with a second limb (fixed percentage increase) and the words “which ever is higher”, which prevent any decrease in rent. 72 As mentioned, it appears that the primary judge accepted Gouger’s argument that s 22(4) applies to cll 4.10(a) and (b).37 At the very least he was prepared to proceed on this basis. 73 Diakou contested this approach. Focusing upon the terms of s 22(4), it argued that that subsection only applies where a lease “provides for a change to base rent in a way that may result in a decrease of rent”; and that cll 4.10(a) and (b) do not provide for a “change” in rent that would result in a decrease in rent. Whilst one of the methods of calculation in each of these clauses (market rent in the case of cl 4.10(a), and CPI in the case of cl 4.10(b)) might result in a figure for rent that would represent a decrease in rent, this is merely a step in the application of an overall mechanism for determining the change in rent. The application of this overall mechanism prevents any decrease in rent. In other words, it is a condition of the application of s 22(4) that the lease provides for, or permits, a decrease in rent. It is not enough that part of a provision, or a step in the mechanism for calculating the change in rent, involves reference to a figure that would 36 Or, indeed, an increase of less than the specified fixed percentage. 37 Reasons at [106]-[107]. -- 17 of 27 -- [2024] SASCA 17 The Court 16 represent a decrease in rent, when the relevant provision or mechanism as a whole could not result in a decrease in rent. 74 On Diakou’s argument, s 22(4) is addressed to circumstances in which a rent review provision permits a decrease in rent, but the lease separately purports to prevent that decrease. It is not addressed to circumstances in which part of a provision might contemplate a figure which would be a decrease in rent if applied, but where the rent review provision or mechanism as a whole could not result in a decrease in rent. 75 By way of response, Gouger contended that Diakou’s argument involves an impermissible elevation of form over substance. It contended that the substance of the operation of each of cll 4.10(a) and (b) is to provide for a change in rent by reference to a methodology (market rent or CPI) that might produce a decrease in rent, but with the specification of an alternative methodology (a fixed percentage) which prevents any decrease in rent. The fact that the alternative methodologies go further and ensure a minimum increase in rent (4 per cent and 3 per cent respectively) does not deprive them of their status as provisions which operate to prevent a decrease in rent. 76 Gouger’s contentions do not have adequate regard to the terms of s 22(4) of the RCLA. Having proper regard to the terms of that section, the approach contended for by Diakou is to be preferred. 77 Consider, for example, a rent review clause that is equivalent to cl 4.10(b) but expressed in the reverse order; that is, a clause which provides for rent to be reviewed by reference to a fixed percentage increase or CPI, whichever is higher. Whilst this would be the same in its substantive effect as cl 4.10(b), it would be a stretch to describe it as a clause which provides “for a change to base rent in a way that may result in a decrease in rent”, but which then operates to prevent that decrease. 78 We note in this respect that in Forza v Autocash Pty Ltd38 the rent review clause provided for rent to be increased by 5 per cent or CPI, whichever is higher. Whilst Kourakis CJ held that s 22(3)(c) of the RCLA applied, there was no suggestion in his Honour’s reasons that s 22(4) also applied. 79 It may be accepted that the application of s 22(4) is not confined to stand- alone clauses that operate to prevent a decrease in rent, such as cl 4.10(c) in the present case. Its application may extend to a rent review clause with a proviso to that effect; that is, a rent review clause that provides, for example, for rent to be reviewed by reference to market value but with a proviso that the rent is not permitted to decrease. Its application might also extend to a rent review clause with a proviso that stipulates a minimum increase; that is, a rent review clause that provides, for example, for rent to be reviewed by reference to market value but 38 Forza v Autocash Pty Ltd [2022] SASC 133. -- 18 of 27 -- [2024] SASCA 17 The Court 17 with a proviso that disapplies that method of calculating rent in the event that it would fall below a certain percentage or dollar increase. 80 However, s 22(4) does not apply to a rent review clause which, properly characterised, involves a mechanism for determining the adjusted rent which itself builds in a choice between two methods of calculating the adjustment, without either of those methods being the primary or default method, and even if that inbuilt choice operates to prevent the rent from decreasing. We could characterise cll 4.10(a) and (b) of the Lease in this way. 81 On this view of the scope of s 22(4), ss 22(3) and (4) have different fields of operation. Section 22(3) operates to invalidate a rent review mechanism to the extent it provides for multiple methods of review, and either permits a discretion as to which is to apply,39 or provides that the one which produces the higher or highest rent is to apply. Section 22(4), on the other hand, operates where the mechanism for review permits a decrease in rent, but a proviso or separate clause disapplies that mechanism where it would have that effect. 82 There is no difficulty with an approach to ss 22(3) and (4) which gives them different but complementary fields of operation, addressing different but complementary forms of mischief. Indeed, in circumstances where they exist alongside one another in s 22, this is a more natural construction of s 22(4) than the construction of s 22(4) contended for by Gouger, being a construction which would lead to a very significant overlap between their fields of operation. 83 For these reasons, s 22(4) does not apply to cll 4.10(a) or (b) of the Lease. 84 This conclusion removes a central plank of Gouger’s argument on appeal to the effect that s 22(3)(c) operates only to render cll 4.10(a) and (b) partially void, leaving those clauses valid to the extent that they provide for rent to be adjusted to market rent (cl 4.10(a)) or to be adjusted by CPI (cl 4.10(b)). It undermines Gouger’s argument to the extent that it depends upon a submission that, because ss 22(3) and (4) are allied provisions which substantially overlap in their application – including in the circumstances of cll 4.10(a) and (b) in the present case – they should be construed harmoniously, and as having the same remedial effect; and that this remedial effect is confined to partial invalidity because that is all that is necessary to ensure that those clauses do not operate to permit a decrease in rent. 85 However, even if s 22(4) were to be construed as applying to cll 4.10(a) and (b), it would not follow that the operation of s 22(3)(c) would be confined to the partial invalidity contended for by Gouger. Even if s 22(4) were to be construed in the broader way contended for by Gouger, it would remain the case that ss 22(3) and (4) are addressed to different forms of mischief. The former is addressed to mechanisms for review which might unfairly advantage the lessor (that is, 39 Or as to whether there is to be any review at all (s 22(3)(b)). -- 19 of 27 -- [2024] SASCA 17 The Court 18 discretionary method clauses (ss 22(3)(a) and (b)) and highest method clauses (s 22(3)(c))). The latter is addressed to provisions which operate to prevent a decrease in rent. Regardless of whether they are construed as overlapping in their operation, we agree with the primary judge’s reasoning to the effect that the differing forms of mischief to which they are addressed informs the remedial effect of their application. In particular, s 22(3) operates to invalidate a provision “to the extent” that it provides for a proscribed mechanism, and s 22(4) operates to invalidate a provision “to the extent” that it prevents a decrease in rent. Given the different forms of mischief to which they are addressed, there is no disharmony in construing ss 22(3) and (4) as having different remedial consequences. 86 Applied to the present case, s 22(3)(c) operates to invalidate cll 4.10(a) and (b) “to the extent” that they provide for a mechanism which automatically selects the higher of two methods. This requires the invalidation of cll 4.10(a) and (b) in their entirety. The terms of s 22(3)(c), and the mischief to which it is addressed, require invalidation of the proscribed mechanism for review, and not merely one or other limb of that mechanism. 87 Further, there is no difficulty in giving effect to s 23(3)(c) in this way even if s 22(4) would, if it applied to cll 4.10(a) and (b), operate in a more limited way. Put another way, there is no difficulty in recognising that s 22(3)(c) wholly invalidates a rent review provision, even if s 22(4), assuming it operated, would only require partial invalidity. If both proscriptions (ss 22(3)(c) and 22(4)) apply at the same time, with different remedial consequences (entire invalidity and partial invalidity), there is no difficulty with the proscription with greater remedial effect (s 22(3)(c)) being afforded that remedial effect. 88 An understanding of the significance of the different forms of mischief sought to be addressed by ss 22(3) and (4) exposes the central flaw in Gouger’s argument. Gouger’s argument depends upon an approach that treats the sole mischief addressed by these subsections as ratchet clauses, or clauses which prevent a decrease in rent. This involves too general or simplistic an approach, that does not have proper regard to the differing terms, and intended operation, of these subsections. 89 It is true that there were general references in the Second Reading Speech debate to the effect that the relevant provisions were intended to prohibit ratchet clauses. However, as the primary judge explained, the existence of general statements by members of Parliament to the effect that the relevant provisions were intended to prohibit ratchet clauses says nothing about how that prohibition was to be given effect. This can only be determined through a close examination of the legislative text. As these reasons demonstrate, a close examination of that text reveals that, although s 22(4) is squarely directed to the proscription of ratchet clauses, s 22(3) has a different but complementary field of operation. 90 We have mentioned earlier the primary judge’s reference to Forza v Autocash Pty Ltd, and in particular Kourakis CJ’s reasoning to the effect that the rent review -- 20 of 27 -- [2024] SASCA 17 The Court 19 clause in that case was wholly void. Gouger makes two submissions in relation to this case. 91 The first involves an attempt to distinguish, or at least diminish the significance of, that decision on the basis that Kourakis CJ’s reasoning does not disclose any reference to s 22(4) of the RCLA. Gouger submits that it can be inferred that it was not argued in that case that s 22(4) applied to the rent review clause in that case, and hence that his Honour may not have appreciated the potential significance of the operation of s 22(4) to the remedial effect of s 22(3)(c). 92 It is true that Kourakis CJ’s reasons do not mention s 22(4). It may be that his Honour considered and rejected the application of s 22(4), not least because the rent review clause in that case was expressed in terms (5 per cent or CPI, whichever is greater) which were less likely to attract s 22(4) than cll 4.10(a) and (b) in the present case.40 But even if Kourakis CJ did not consider and reject the application of s 22(4), this does not matter. Certainly his Honour’s reasoning is not inconsistent with our conclusion that s 22(4) does not apply to cll 4.10(a) and (b) in the present case, and does not, in any event, inform the remedial effect of the operation of s 22(3)(c). 93 The second involves a criticism of Kourakis CJ’s reference to the objective intention of the parties – and in particular the absence of any basis for discerning which of the two methods for calculating rent the parties intended would apply in the case of invalidity – in support of his conclusion that s 22(3)(c) operated to render the rent review clause void in its entirety.41 94 It may be accepted that the parties’ objective intention (in particular, as to whether they intended a particular method for calculating rent to be the primary or default method) may inform the proper characterisation of the relevant rent review provision(s). As explained earlier, this in turn may inform the determination of whether, for example, s 22(4) applies in a given case. However, having concluded that s 22(3)(c) applies in the present case, it is difficult to see how consideration of the parties’ intention assists in determining the remedial effect of the operation of that subsection. The remedial effect turns upon the extent to which Parliament intended to invalidate the relevant provision, rather than any consideration of the parties’ intention. The only remaining relevance of the parties’ intention is in determining the validity or enforceability of whatever remains after s 22(3)(c) has been given its intended remedial effect – this being a matter to be addressed in our consideration of Issue 2. 40 Because, as mentioned earlier, by mentioning the fixed percentage increase first, it is difficult to see how the clause can be said to provide for a change in base rent that may result in a decrease, but which then prevents that decrease. 41 Forza v Autocash Pty Ltd [2022] SASC 133 at [82], referred to by the primary judge in his Reasons at [84]. -- 21 of 27 -- [2024] SASCA 17 The Court 20 95 However, even accepting this limitation upon the significance of the parties’ intention, this does not impugn the reasoning ultimately adopted by the primary judge in this case. The primary judge’s ultimate focus was upon Parliament’s intention to proscribe – and thus render void – the rent review mechanism itself, and not simply one of the limbs, or methods for calculating rent, contained within that mechanism. It is this aspect of the primary judge’s reasoning which we have upheld. 96 For these reasons, we agree with the primary judge’s determination of Issue 1, namely that the effect of the application of the RCLA to the Lease is that cl 4.10 is wholly void and of no effect. We reject Gouger’s challenge to this determination. Issue 2: whether the purported renewal of the Lease was ineffective The primary judge’s reasoning 97 Having determined that the effect of the application of the RCLA to the Lease is that cl 4.10 is wholly void and of no effect, the primary judge was required to consider whether this meant that the purported renewal of the Lease was ineffective on the basis that there was no agreement as to the rent to apply under the renewed lease (that is, the 2011 Lease) (Issue 2). The primary judge upheld Diakou’s argument to the effect that the purported renewal of the Lease was ineffective by reason of the failure to agree any mechanism for determining the rent to be paid under the renewed lease. 98 As the primary judge explained, while a right of renewal is an incident of a lease, its exercise results in the grant of a new lease.42 Prior to the exercise of the irrevocable offer contained in cl 4.9(a) of the Lease – the terms of which have been set out earlier in these reasons – there was no contract for a further term.43 However, once the lessee at the time (Schillvest) exercised the option, there arose a contract requiring Diakou to grant the 2011 Lease “upon the same terms and conditions” as the 2006 Lease.44 99 The primary judge noted Diakou’s argument that these “terms and conditions” included cl 4.10, and that because this clause was wholly void, it followed that there was no agreement as to the rent payable under the renewed lease, and therefore no enforceable renewed lease.45 100 Diakou relied in this respect upon the reasoning of the New South Wales Court of Appeal in Pozetu Pty Ltd v Alexander James Pty Ltd.46 On the premise 42 Reasons at [113], citing Mercantile Credits Ltd v The Shell Company of Australia Ltd (1976) 136 CLR 326 at 344-345 (Gibbs J). 43 Reasons at [115], citing Alcan (NT) Alumina Pty Ltd v Commissioner of Territory Revenue (Northern Territory)(2009) 239 CLR 27 at [8] (French CJ). 44 Reasons at [115], citing Booker Industries Pty Ltd v Wilson Parking (Qld) Pty Ltd (1982) 149 CLR 600 at 606 (Gibbs CJ, Murphy and Wilson JJ). 45 Reasons at [116]-[117]. 46 Pozetu Pty Ltd v Alexander James Pty Ltd [2016] NSWCA 208. -- 22 of 27 -- [2024] SASCA 17 The Court 21 that the rent review provision in that case was wholly invalid, the Court held that the parties had failed to reach a concluded agreement on all the essential terms of the renewed lease. As Sackville AJA explained:47 If the parties never reached agreement as to a fundamental term of the renewed lease, they could not have concluded a final and binding agreement to enter into a new lease for a term of five years. As three members of the High Court recently observed:48 “On basic principles, there can be no enforceable agreement to renew a lease, breach of which sounds in damages, unless at least the essential terms of such a lease have been agreed upon.” It is an essential term of a lease that the parties have agreed on the rental payable by the lessee or on a mechanism for determining the rental payable by the lessor.49 If the parties to a purported renewal of a lease have not agreed on the rent payable under the lease or on a mechanism for ascertaining the rental, no new lease comes into existence either at law or in equity. It necessarily follows that if a lessee purports to exercise an option to renew a lease but there is no agreement between the lessor and lessee as to the rental payable under the renewed lease, no new lease comes into existence, either in law or in equity. If the lessee remains in possession and pays rent a tenancy at will determinable on one month’s notice comes into force pursuant to s 127(1) of the Conveyancing Act, but that occurs independently of the purported exercise of the option to renew. As Mr Lynch accepted in argument, if there is no agreement between the parties as to the rental payable under the renewed lease, the exercise of the option to renew cannot result in an agreement for a lease enforceable as a contract. The reason is that an agreement does not result in a binding contract unless the parties have agreed on all terms essential as a matter of law to the creation of the contract sought to be enforced.50 101 The primary judge rejected Gouger’s attempt to distinguish Pozetu Pty Ltd v Alexander James Pty Ltd, and declined to otherwise depart from the reasoning in that case.51 102 The primary judge rejected Gouger’s argument that the consequence of cl 4.10 being wholly void was merely that the existing rent under the 2006 Lease applied on the basis that it constituted one of “the same terms and conditions” on which the Lease was to be renewed. He explained that the reference in cl 4.9(a) to the Lease being renewed upon “the same terms and conditions” extended to all clauses of 2006 Lease, including cl 4.10.52 On his Honour’s reasoning it followed 47 Pozetu Pty Ltd v Alexander James Pty Ltd [2016] NSWCA 208 at [45]-[47] (Sackville AJA, McColl and Ward JJA agreeing). 48 Crown Melbourne Ltd v Cosmopolitan Hotel (Vic) Pty Ltd (2016) 260 CLR 1 at [31] (French CJ, Kiefel and Bel JJ). 49 Placer Development Ltd v The Commonwealth (1969) 121 CLR 353 at 360-361 (Taylor and Owen JJ); Booker Industries Pty Ltd v Wilson Parking (Qld) Pty Ltd (1982) 149 CLR 600 at 604 (Gibbs CJ, Murphy and Wilson JJ); Crown Melbourne Ltd v Cosmopolitan Hotel (Vic) Pty Ltd (2016) 260 CLR 1 at [199] (Nettle J) and authorities cited there. 50 Mushroom Composters Pty Ltd v IS & DE Robertson Pty Ltd [2015] NSWCA 1 at [61]-[63] (Sackville AJA, Macfarlan and Gleeson JJA agreeing). 51 Reasons at [118]-[122]. 52 Reasons at [122]. -- 23 of 27 -- [2024] SASCA 17 The Court 22 that, upon cl 4.10 being void, there was no agreement as to the rent or the mechanism for determining rent for the renewed lease:53 Gouger Street’s argument relies, with respect, on an unduly semantic reading of cl 4.9(a). In the event of cl 4.10 being void, to conclude that the existing rent under the 2006 Lease remains as an existing term and condition fails to give effect to the agreement the subject of cl 4.9(a). Clause 4.9(a) does not incorporate an agreement that the old rent will continue to apply if cl 4.10 happens to be void. It expresses an agreement by the parties to incorporate all terms and conditions contained in the lease. The subsequent voidness of cl 4.10 means that one of the terms agreed to be included in the new lease is void. This conclusion is assisted by, although not dependent upon, the express exclusion of the renewal of cl 4.9(a) itself. On renewal, cl 4.9(a) obviously enough becomes redundant. Yet the parties saw fit [to] exclude it expressly. They did not address the possibility of non-application of any other clause. The only available conclusion, in my view, is that the agreement contained in cl 4.9(a) included an agreement to incorporate cl 4.10. On cl 4.10 being void, there was no agreement as to rent or the mechanism for determining rent on the renewed lease. 103 The primary judge acknowledged Gouger’s submission that an approach to s 22 that rendered the lessee’s rights of renewal ineffective would be contrary to the remedial nature of the RCLA. However, his Honour did not consider that this assisted in the construction of s 22. In his Honour’s view, the conclusion that Gouger’s rights of renewal were ineffective was as much a function of the terms of the Lease as it was the construction of s 22.54 104 The primary judge concluded that a consequence of cl 4.10 being wholly void was that there was no agreement between the lessor and lessee as to a mechanism for fixing the rent payable under the 2011 Lease. Subject to the further issues which were to be addressed separately in the proceedings, this meant that there was no grant of a further five-year lease on 1 September 2011.55 Consideration 105 Issue 2 falls to be considered on the premise that s 22 of the RCLA operates to render cll 4.10(a), (b) and (c) void in their entirety. Whilst the chapeau to cl 4.10 of the Lease provides for the rent to be periodically reviewed in accordance with subclauses (a), (b) and (c), those subclauses are void in their entirety. 106 The invalidation of the mechanisms for reviewing rent does not invalidate the Lease. Under cl 2.1 of the Lease (set out earlier in these reasons), the parties agreed that during the term of the Lease, the lessee will pay to the lessor “the annual rent hereby reserved … on page 2 of this Lease, subject always to review as provided for in clause 4.10”. Page 2 of the memorandum of lease included reference to rent in the amount of $250,500 per annum plus GST. 53 Reasons at [123]-[124]. 54 Reasons at [128]-[130]. 55 Reasons at [131]. -- 24 of 27 -- [2024] SASCA 17 The Court 23 107 Although the parties plainly intended that the rent under the Lease would be periodically reviewed through the mechanisms provided for in cl 4.10, the invalidation of those mechanisms does not invalidate the Lease. Whilst the words “subject always to review as provided for in clause 4.10” would have no practical work to do by reason of the invalidation of cll 4.10(a), (b) and (c), it cannot be said that the parties failed to reach any agreement at all about the rent payable under the Lease. In agreeing that the rent would be the rent stipulated on page 2 of the memorandum of lease as (validly) reviewed from time to time, the parties must be taken to have agreed that the stipulated rent would continue to be payable in the absence of any (valid) rent review. Or, in the particular circumstances of the present case, the parties must be taken to have agreed to continue to pay the stipulated rent as adjusted in accordance with any (valid) rent reviews that occurred prior to the 4 April 2011 amendment to the RCLA and consequential invalidation of the mechanisms for review in cl 4.10. 108 In our view, similar reasoning applies in relation to the renewed leases from 2016 onwards. 109 Upon the lessee’s exercise of its option to renew under cl 4.9(a) of the Lease, the 2011 Lease came into effect “upon the same terms and conditions as are herein contained save for the exclusion of this cl 4.9(a)”. The rationale for excluding cl 4.9(a) is obvious, it being the clause conferring the option to renew that has been exercised. However, the 2011 Lease otherwise included the terms in the 2006 Lease, including cll 2.1 and 4.10. 110 It appears that the primary judge may have overlooked the significance of the inclusion of cl 2.1 within the renewed 2011 Lease, most likely because it does not seem to have been emphasised by Gouger in its submissions. Through the inclusion of cl 2.1 in the 2011 Lease, the parties have agreed that the rent under that lease will be the rent specified in the memorandum of lease, subject to any adjustments made pursuant to cl 4.10 prior to its invalidation. In other words, the parties have agreed that the rent under the 2011 Lease will be the prevailing rent under the 2006 Lease immediately prior to the exercise of the option to renew. 111 It is true that the parties agreed, through the inclusion of cl 4.10 in the 2006 and 2011 Leases, that the rent would be periodically reviewed, including at the commencement of the 2011 Lease. In that sense, the invalidation of the mechanisms for those reviews would result in the 2011 Lease operating differently from what the parties are likely to have expected. However, the invalidation of the mechanisms for those reviews did not result in there being no agreement as to rent, or otherwise fundamentally alter the nature of the parties’ bargain. The rent had been agreed under cl 2.1. There is no essential term missing from the parties’ agreement. 112 Diakou sought to avoid this conclusion by arguing that cl 4.10(a) was not simply a mechanism for reviewing rent that happened to be applicable at the starting date for the renewed 2011 Lease. Rather it was a clause that set the starting -- 25 of 27 -- [2024] SASCA 17 The Court 24 rent for the 2011 Lease, and its invalidation meant that the parties had not agreed any starting rent for the 2011 Lease. 113 We do not accept that cl 4.10(a) is properly characterised as a rent-setting provision, in the sense that Diakou’s counsel used that term. Read contextually with cl 2.1 and the chapeau to cl 4.10, as it must be, cl 4.10(a) is a rent review provision. The rent, even under the renewed 2011 Lease, was set by cl 2.1, albeit subject to any adjustment that might be made pursuant to a cl 4.10 rent review. As such, the invalidity of cl 4.10(a) does not operate to negate agreement as to rent under the 2011 Lease. Under cl 2.1 the parties agreed the rent. Only the mechanism for review has failed. 114 Understanding this distinction between a failure to agree upon rent at all, and a failure to agree upon a mechanism for reviewing rent, is the key to distinguishing the reasoning of the New South Wales in Pozetu Pty Ltd v Alexander James Pty Ltd.56 In that case, the initial lease provided for annual rent reviews (involving a 5 per cent increase) and a right of renewal after five years. Whilst the initial lease provided that the renewed lease would be on the same terms as the initial lease, that was subject to several express exceptions, including the rent. Clause 4.6.1 provided that the rent under the renewed lease would be “the new rent”, which was stated in item 13 of the schedule in Annexure A to the initial lease to be the: Greater of: (a) Current Market Rent; and (b) 105% of the rent in the last year of the previous term. 115 It was held that this mechanism for determining rent was void because it contravened s 18(3)(c) of the Retail Leases Act 1984 (NSW), being the equivalent of s 22(3)(c) of the RCLA.57 116 The difficulty with the renewed lease in that case was that it did not include any equivalent of cl 2.1 in the present case. There was no agreement or other mechanism for determining the rent in the event of the invalidity of the impugned mechanism. There was no provision which rendered the rent under the initial lease applicable in default of the impugned mechanism. Rather, the impugned mechanism was the only means for determining the starting rent under the renewed lease. It was the rent-setting clause under the renewed lease. 117 It was thus only in circumstances where the rent-setting mechanism under the renewed lease was held invalid that the Court of Appeal held that the renewed lease was ineffective for want of any agreement in relation to rent. The present 56 Pozetu Pty Ltd v Alexander James Pty Ltd [2016] NSWCA 208. 57 Noting that the appellant lessor was not permitted to rely upon an argument that s 18(3)(c) of the Retail Leases Act did not apply to the impugned mechanism because it was a provision for determining the initial rent under the renewed lease, rather than a rent review provision: Pozetu Pty Ltd v Alexander James Pty Ltd [2016] NSWCA 208 at [36]-[40] (Sackville AJA, McColl and Ward JJA agreeing). -- 26 of 27 -- [2024] SASCA 17 The Court 25 case is readily distinguishable. In the present case, it is only the mechanisms for reviewing rent that are invalid; the parties validly agreed that the rent under the initial and renewed leases would be the rent specified under cl 2.1. 118 For these reasons, we would answer Issue 2 differently from the way in which it was answered by the primary judge. The invalidity of cl 4.10 does not operate to prevent there being any grant of a further five-year lease on 1 September 2011. Issue 3: effect of partial invalidity 119 As this issue would only arise in circumstances of the partial invalidity of cl 4.10, it does not arise for this Court’s consideration. Conclusion 120 For the reasons given, the appeal should be allowed to the extent that it involved a challenge to the primary judge’s answer to Issue 2. 121 It follows that we would set aside Order 2 of the orders made on 22 May 2023, and substitute an answer to Issue 2 in the following terms: Notwithstanding that cl 4.10 became wholly void, there was a grant of a further five-year lease on 1 September 2011 on the terms of the 2006 Lease at the rent payable under the 2006 Lease immediately prior to its expiry, with no provision for rent review. -- 27 of 27 --