Australia: A win for retail landlords – VCAT opinion narrows the application of the Retail Leases Act

Last Updated: 23 February 2018
Article by Richard Skopal and Nick McConnell

Most Read Contributor in Australia, September 2018

Some major developments in the retail leasing space over the past few years have led to some favourable results for tenants. In 2015, the Victorian Civil and Administrative Tribunal's (VCAT) released the advisory opinion that landlords cannot pass on costs associated with essential safety measures to tenants.

In 2017, the Victorian Supreme Court expanded the operation of the 'ultimate consumer test', which the landlord sought to appeal to the High Court (and which appeal was refused).

Now, a recent opinion from VCAT in William Buck (Vic) Pty Ltd v Motta Holdings Pty Ltd [2018] 15 has the potential of narrowing the application of the Retail Leases Act 2003 (Vic) (RLA), serving as some good news for retail landlords.

Late exit from the RLA

The key issue that Senior Member Riegler had to decide was whether GST should be taken into account when calculating occupancy costs for leases entered into before 22 April 2013. While the VCAT held that GST was to be included for purposes of determining total occupancy costs, that decision is of limited application due to Retail Leases Regulations 2003 stating that any lease from 22 April 2013 is to exclude GST from total occupancy costs.

While there is a potential that some landlords may attempt to recover unpaid land tax accrued prior to 2013 in a similar scenario to the William Buck case, the Statute of Limitations will mean many potential claims will be statute barred.

However, the more noteworthy comments from the decision are those relating to late exit from the RLA.

In his judgment, Senior Member Riegler's expressed his view that premises which fall within the definition of a retail premises at the commencement of the lease, can subsequently fall outside the application of the RLA during the term of the lease.

In particular, the tribunal member considered the wording of subsection 11(2) of the RLA. This subsection provides that:

"... this Act only applies to a lease of premises if the premises are retail premises (as defined in section 4) at the time the lease is entered into or renewed."

In interpreting this provision, the tribunal member said that a plain reading of the provision does not prevent late exit from the RLA, as the word 'only' would need to be positioned differently in the subsection as follows:

"... this Act applies to a lease of premises only if the premises are retail premises at the time the lease was entered into or renewed".

While the opinion is not legally binding, it remains relevant as it is likely to persuade other VCAT members until such time it is affirmed or rejected by a superior authority. In effect, this means that if a statutory exemption to the application of the RLA is triggered during the term of a 'retail' lease, the lease could then 'exit' the RLA regime.

As such, all landlords and tenants should be wary of this decision during lease negotiations, particularly in situations where:

  • occupancy costs at the commencement of a lease fall just below the $1 million threshold (excluding GST) but will increase above $1 million during the term of the lease as a result of rent reviews
  • the lease may be assigned from a retail tenant to an entity which is listed on a stock exchange (or is a subsidiary of such an entity)
  • the permitted use of the premises is changed during the term of the lease (by variation or assignment) to a use which does not satisfy the definition of a 'retail premises'.

Potential impact

This decision may have far-reaching implications to landlords as an exit from the operation of the RLA may:

  • allow a landlord to recover land tax from a tenant
  • allow a landlord to implement a ratchet provision in a market rent review or allow multiple means of a rent review (such as the higher of a fixed percentage and CPI)
  • affect whether proceedings from any dispute can be heard in court or are limited to VCAT
  • limit the landlord's disclosure obligations in relation to outgoings
  • mean that a tenant and a guarantor are not released upon the assignment of a lease
  • allow a landlord to impose harsher relocation, demolition and maintenance provisions on a tenant.

These factors should be considered when negotiating and entering into a lease in Victoria.

This publication does not deal with every important topic or change in law and is not intended to be relied upon as a substitute for legal or other advice that may be relevant to the reader's specific circumstances. If you have found this publication of interest and would like to know more or wish to obtain legal advice relevant to your circumstances please contact one of the named individuals listed.

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