Australia: VCAT Advisory Opinion limits the cost of essential safety measures to commercial and retail tenants

Last Updated: 20 July 2015
Article by Bill Hazlett

To help Victorian leaseholders and landlords avoid disputes, new guidance has been issued about the limits on maintenance and repair costs a landlord can pass on to tenants.

On 1 May 2015, Justice Garde, a Supreme Court Judge and the President of Victorian Civil and Administrative Tribunal (VCAT/Tribunal) provided an Advisory Opinion to the Victorian Small Business Commissioner (VSBC).1

The Advisory Opinion, being the first of its kind, provides some clarity on the operation of the Building Act 1993 (Building Act), the Building Regulations 2006 (Building Regulations) and the Retail Leases Act 2003 (RLA) and the ability of landlords to pass on the costs of essential safety measures (ESM's) to commercial and retail tenants.

BACKGROUND & KEY FINDINGS

Whether a landlord can pass on the costs of their maintenance and repair obligations, including ESM's, has been subject of considerable debate. Two articles published in the Law Institute Journal as well as two decisions by the Tribunal have considered the question.

So the VSBC in May 2014 applied to VCAT requesting answers to five related questions. In accepting VSBC's reference, the Tribunal agreed the referral was 'in the public interest' and confirmed 'the need for clarification of the rights and obligations of landlords and tenants under these leases'.

In short, the opinion found:

  1. A landlord must bear the cost of compliance with ESM obligations;
  2. A landlord cannot pass on certain maintenance and repair costs to a tenant; and
  3. A landlord can require a tenant to do some types of ESM work, but if so, the tenant can recover the cost from the landlord.

LEGISLATION

The Advisory Opinion focused on:

Section 251 of the Building Act –
251. Occupier or registered mortgagee may carry out work

If the owner of a building or land is required under this Act or the regulations to carry out any work or do any other thing and the owner does not carry out the work or do the thing, the occupier of that building or land or any registered mortgagee of the land or the land on which the building is situated, may carry out the work or do the thing.

  1. An occupier may—
    1. recover any expenses necessarily incurred under subsection (1) from the owner as a debt due to the occupier; or
    2. deduct those expenses from or set them off against any rent due or to become due to the owner.
  1. This section applies despite any covenant or agreement to the contrary.

Section 52 of the RLA –
52. Landlord's liability for repairs

  1. A retail premises lease is taken to provide as set out in this section.
  2. The landlord is responsible for maintaining in a condition consistent with the condition of the premises when the retail premises lease was entered into—
    1. the structure of, and fixtures in, the retail premises; and
    2. plant and equipment at the retail premises; and
    3. the appliances, fittings and fixtures provided under the lease by the landlord relating to the gas, electricity, water, drainage or other services.
  1. However, the landlord is not responsible for maintaining those things if
    1. the need for the repair arises out of misuse by the tenant; or
    2. the tenant is entitled or required to remove the thing at the end of the lease.
  1. The tenant may arrange for urgent repairs (for which the landlord is responsible under this section or under the terms and conditions of the lease) to be carried out to those things if—
    1. the repairs are necessary to fix or remedy a fault or damage that has or causes a substantial effect on or to the tenant's business at the premises; and
    2. the tenant is unable to get the landlord or the landlord's agent to carry out the repairs despite having taken reasonable steps to arrange for the landlord or agent to do so.
  1. If the tenant carries out those repairs—
    1. the tenant must give the landlord written notice of the repairs and the cost within 14 days after the repairs are carried out; and
    2. the landlord is liable to reimburse the tenant for the reasonable cost of the repairs and may not recover that cost or any part of it as an outgoing.

THE ADVISORY OPINION

The Tribunal divided ESM's into two main types of obligations and says:
Obligations which are imposed upon and must be met by the landlord, like the installation of smoke alarms, sprinkler systems, emergency lifts, fire hydrants and reels, and ventilation systems—

  1. Any term of a lease which seeks to transfer either the obligation to observe the ESM's or the cost of compliance with ESM's (other than clearing egress pathways) will be void.
  2. Where the landlord does not meet its obligations, a tenant may carry out the work and recover the expenses from the landlord or set them off against rent.

Obligations where a landlord 'must ensure' that a specific result is achieved or a standard is attained, but not necessarily by the landlord's personal performance –

  1. An agreement where a tenant under a lease must assist the landlord in achieving the specified result or standard is not prohibited.
  2. Any term of a lease which seeks to transfer either the obligation or the cost of doing the work will be void.

OTHER KEY FINDINGS OF THE ADVISORY OPINION INCLUDE:

  1. Identifying inconsistencies between lease provisions and the Building Act or RLA;
  2. In determining whether an inconsistency exists between a lease provision and a statutory provision, the Tribunal expressed preference for the test adopted by the High Court in Caltex Oil (Aust) Pty Ltd v Best2 . This recognises that where there is a conflict between a contractual provision (the lease) and the purpose or policy of a statute, the inconsistent lease provision is void.

The ability of a landlord to recover ESM outgoings from a tenant under a retail lease is limited by a number of provisions in the RLA, namely to circumstances where:

  1. Section 251 of the Building Act does not apply;
  2. Section 52(1) of the RLA does not apply, that is, the outgoing is for maintenance or repairs which do not relate to the structure of the premises or the fixtures, plant and equipment of the retail premises including those for gas, electricity, water, drainage or other services;
  3. The cost incurred is not a capital cost of the building (under section 41 of the RLA);
  4. The lease specifies the outgoing and how it will be determined, apportioned and recovered (section 39 of the RLA and in compliance with the RLA Regulations).

SEEK ADVICE

Given that the VCAT Advisory Opinion is the first of its kind, its precise legal effect remains unknown. We expect the Opinion to be persuasive in the future but we may not have final answers until the questions are dealt with in the Supreme Court or a legislation change. The key findings of the Advisory Opinion are also likely to become a factor for consideration when parties negotiate maintenance, repair and outgoing provisions in commercial and retail leases.

Tenants may wish to consider recovering payments they have made which, according to the opinion, they need not have.

Landlords should review and consider the extent to which their leases impose ESM and repair and maintenance obligations on tenants. Gross leases may be an option.

Hunt & Hunt has prepared specific ESM's clauses to insert into leases and can provide advice on a landlord's or tenant's obligations in current or prospective lease agreements. We can provide clauses which cater for the possibility of legislative changes in this area.

Footnotes

1 Small Business Commissioner reference for advisory opinion (Building and Property) [2015] VCAT 478.
2 (1990) 170 CLR 516.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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Authors
Bill Hazlett
 
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