The NSW Court of Appeal gave retail landlords an early Christmas present when it handed down its decision in Trust Company of Australia Ltd v Skiwing Pty Ltd  NSWCA 387 on 21 December 2006.
In 1999, Skiwing negotiated with Trust Company of Australia Limited (Landlord) to take a 'net' seven- year lease (Lease) of Café Tiffany's in the Imperial Arcade (Centre) commencing on 1 May 2000 . The disclosure statement provided with the letter of offer did not provide a breakdown of the Centre's outgoings.
The Lease defined 'outgoings' as the aggregate of the costs and expenses incurred by the Landlord in the conduct, management and maintenance of the Centre, excluding rent and contributions to promotional expenses (Outgoings).
Skiwing applied to the Administrative Decisions Tribunal (ADT) seeking, amongst other things, a declaration under section 12 of the Retail Leases Act 1994 (Act) that the provisions in the Lease requiring it to pay the Outgoings were void as, the Outgoings were in fact 'service costs' that the Landlord had not disclosed. Section 12 provides:
"A provision of a retail shop lease that requires the Tenant to pay or contribute towards the cost of any finishes, fixtures, fittings, equipment or services is void unless the liability to make the payment or contribution was disclosed in a disclosure statement given to the Tenant in accordance with this Part."
Hearing 1: The ADT
At first instance, the ADT found that the term 'services' in section 12 did not include "the various activities that relate to the operation of the Centre the cost of which is covered by the Landlord's outgoings" and accordingly rejected Skiwing's application for a declaration.
Hearing 2: The ADT Appeal Panel
Skiwing appealed the ADT's decision to the ADT Appeal Panel (ADTAP). In a determination that sent retail Landlords scuttling to check their disclosure statements, the ADTAP held that an item "in the nature of a service that the landlord itself provides" that was included in a definition of 'outgoings' in a lease was not an 'outgoing' under the Act, but rather a 'service' within the scope of section 12. The proceedings were remitted to the ADT for reconsideration and quantification of the Skiwing's liability to contribute to the Outgoings.
Hearing 3: Back in the ADT
The ADT determined that the majority of Outgoings were the costs of 'services' (as would appear to be the case in many 'net' retail leases) and that Skiwing would only be liable for municipal rates, water rates, land tax, insurances, toilet requisites and waste removal costs, as these costs could not be classed as "services provided by the landlord itself or outsourced to contractors". The dissatisfied Landlord appealed against this decision to the ADTAP.
Hearing 4: Back to the ADTAP
The ADTAP heard the Landlord's appeal in December 2005 and on this occasion decided that the costs of 'services' and 'outgoings' were different but overlapping categories, and that some items may be both a 'service cost' and an 'outgoing'. A tenant could accordingly seek a declaration that a provision in a lease requiring it to pay an 'outgoing' was void under section 12 if its landlord had failed to disclose the 'outgoing' in the disclosure statement and if the 'outgoing' could be categorised as a 'service cost'. The ADTAP justified this expansion of the existing remedies for non-disclosure available to tenants by asserting that it was consistent with the Act's remedial nature and that cases of 'complete' or 'substantial' failure to disclose outgoings would, given that the checklist of categories of outgoings set out in the standard disclosure statement are in common use by landlords, be relatively rare.
Hearing 5: The Court of Appeal
The Landlord appealed to the Court of Appeal, asserting the ADTAP's construction of the term 'services' in section 12 of the Act was wrong. The Court reasoned that:
"it would be anomalous if the use of the word "services" picked up an obligation to contribute to services provided generally within a shopping centre, avoiding responsibility for payment of a contribution to such outgoings absent pre-lease disclosure, but made no such provision in relation to outgoings which were not the provision of services"
The Court of Appeal held the term 'services' in section 12 is to be understood exclusively in terms of the fit-out of the subject retail shop. 'Outgoings', in contrast, relate to the operation of the building as a whole and are ongoing expenses. The Court remitted the matter to the ADT to be decided on this basis. Given the Outgoings relate to the Centre as a whole and (largely) have the character of ongoing expenses it would appear that Skiwing's application for a declaration under section12 now has poor prospects.
Relief for Retail Landlords
The Court of Appeal's decision clears up uncertainty as to the meaning of the terms 'services' and 'outgoings' in the Act. It should give rise to a sigh of relief from retail landlords, particularly any who had not adopted the practice of using the outgoings 'checklist' in the standard disclosure statement.
by Robert Riddell and Daniel Fitzpatrick
t (02) 9931 4940
t (02) 9931 4725
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