Landlords are quietly rewriting rent review clauses in their favour. Special Counsel Imran Mir explains the traps SME tenants keep signing without realising.
For the better part of a decade, commercial lease negotiations followed a predictable rhythm. In a low-inflation environment, annual rent increases were often straightforward, typically settling on a fixed percentage of around 3% to 4%. Rent reviews became a relatively routine component of a business’s overhead structure, providing a degree of certainty for both tenant cash flow and landlord yield.
However, as we move through 2026, the economic landscape has shifted significantly. Despite the Reserve Bank of Australia’s continued efforts, inflationary pressures have remained persistent, while interest rates continue to sit at levels not seen for many years. In response, landlords are increasingly revisiting the way rent review clauses are structured in commercial leases.
The traditional fixed annual increase is gradually being replaced by more aggressive review mechanisms, including hybrid formulas designed to protect landlords against inflationary risk while shifting much of the volatility onto tenants.
For business owners, understanding these clauses is no longer simply an accounting issue – it is a critical commercial and legal consideration.
The New Breed of Rent Reviews
In recent months, we have observed a noticeable departure from the traditional fixed-review model. Landlords are increasingly proposing formulas such as:
- “CPI + 2%”; or
- “the greater of Market Rent, CPI, or a fixed percentage increase”.
At first glance, linking rent to the Consumer Price Index (CPI) may appear commercially reasonable, as it allows rental income to move in line with inflation. However, when combined with ratchet-style protections, these clauses can become heavily one-sided.
In many non-retail commercial leases – including office, warehouse and industrial leasing – ratchet mechanisms are generally permissible. By contrast, in retail leasing, legislation in several Australian jurisdictions restricts or prohibits certain ratchet-style market rent review provisions.
A ratchet clause effectively ensures that rent cannot decrease following a review, even where market conditions soften.
The commercial risk for tenants is obvious. During periods of elevated inflation, rent may increase sharply due to short-term economic conditions. If the market later weakens, inflation stabilises, or surrounding rents decline, the tenant may nevertheless remain locked into an inflated rental position that no longer reflects market reality.
The Legal Minefield of “Greater Of” Clauses
One of the more aggressive formulations now appearing in leases is the “Greater Of” review clause, often drafted along the following lines: “The Rent shall be the greater of Market Rent, CPI, or a fixed 4% increase.”
From a landlord’s perspective, the attraction is clear. If the market strengthens, the landlord receives market rent. If inflation rises, the landlord captures the CPI increase. If both remain subdued, the landlord still receives the fixed minimum increase.
For tenants, however, the clause can create a one-way ratchet of escalating occupancy costs.
Importantly, these clauses can significantly reduce a tenant’s ability to benefit from market corrections, incentives being offered to competing tenants, or broader economic downturns. Over a five or ten-year lease term, the financial consequences can become substantial.
The Cap and Collar Strategy
When clients present leases containing aggressive inflation-linked review clauses, the initial reaction is often to remove them entirely. While that remains the preferred outcome for many tenants, the practical reality of the current market is that landlords are increasingly resistant to abandoning inflation protection mechanisms altogether.
In many cases, a more commercially effective solution is to negotiate a “Cap and Collar” structure.
This approach seeks to balance the landlord’s desire for income protection with the tenant’s need for cost certainty and protection against volatility.
The Cap: Protecting the Tenant’s Ceiling
Where a CPI-linked review is unavoidable, tenants should seek a Cap on annual increases. For example, even if CPI rises to 6% or 7%, the lease may provide that annual rent increases cannot exceed 4.5%.
This allows tenants to forecast their maximum exposure and reduces the risk of sudden and unsustainable rent escalation.
The Collar: Protecting the Landlord’s Floor
To make the Cap commercially acceptable, landlords will often seek a Collar — being a minimum guaranteed annual increase, such as 2%.
This ensures the landlord maintains baseline rental growth, even during periods of low inflation or weaker market conditions.
A properly negotiated Cap and Collar mechanism can transform an otherwise volatile and heavily one-sided rent review clause into a more balanced commercial arrangement.
Negotiating a Genuine Market Review
Another important protection for tenants is ensuring that Market Rent Reviews genuinely reflect prevailing market conditions.
We are increasingly seeing attempts to define “Market Rent” in ways that exclude incentives being offered to new tenants within the same building or precinct.
For example, if a landlord is offering:
- rent-free periods;
- fit-out contributions; or
- other leasing incentives
to attract new tenants, those incentives form part of the true economic value of the market and should be considered when determining market rent.
When reviewing these clauses, it is important to ensure that valuers are required to assess the net effective rent, taking into account prevailing incentives and commercial leasing conditions at the relevant time.
Strategy Over Speed
Business owners are often eager to secure desirable premises and may rush through the Heads of Agreement stage. However, once commercial terms are agreed in principle, it can become significantly more difficult to renegotiate rent review mechanisms during the formal lease drafting process.
Before signing any Heads of Agreement or lease documentation, tenants should carefully consider:
- Can the rent decrease if the market declines?
- Is there a cap on CPI-linked increases?
- Does the lease contain a “Greater Of” clause?
- How is “Market Rent” defined?
- Are tenant incentives being properly considered?
A commercial lease is often one of the largest long-term financial commitments a business will undertake.
In the current economic climate, inflation protection clauses and ratchet-style mechanisms are becoming increasingly common. While landlords understandably seek to protect asset returns, tenants should ensure that rent review structures remain commercially balanced and sustainable over the life of the lease.
Carefully negotiated review mechanisms – including properly structured Cap and Collar provisions – can provide certainty for both parties while reducing the risk of long-term financial strain.
The key is not simply agreeing to the premises, but ensuring the lease itself remains workable long after the ink has dried.
Imran Mir is the Special Counsel at Owen Hodge Lawyers
Keep up to date with our stories on LinkedIn, Twitter, Facebook and Instagram.
