Australia: Victorian retail leases and land tax

Many of the provisions in the various retail acts in different States and Territories are similar. One difference between NSW and Victoria is that in NSW the Retail Leases Act does not apply when premises are greater than 1,000 square metres, where as in Victoria the test is whether the occupancy costs are more than $1,000,000 per annum. Another difference is that in NSW the landlord may not recovery Land Tax from a tenant under a lease subject to the Retail Leases Act. Both States prohibit ratchet clauses on rent reviews.

This case looks at the situation in Victoria if a lease starts out as being subject to the Retail Leases Act and then 'jumps out' – ie: it ceases to be retail premises. Can the landlord start recovering Land Tax?

Verraty Pty Ltd v Richmond Football Club Ltd [2019] VCAT 1073

History

The Richmond Football Club leased the site from Verraty. It is the site of the Wantirna Club, a club associated with the Richmond Tigers.

The lease commenced in 1998. It was extended by variation in 2004. Richmond exercised the option to renew that lease for a further 10 years in 2018.

As such, there are three relevant periods:

  1. 26 August 1998 – 29 January 2004 – under the original lease
  2. 30 January 2004 – 6 May 2018 – under the extension
  3. 7 May 2018 – 6 May 2028 – under the option lease

All leases included the following provisions:

  • Clause 5.2 – the tenant shall pay all State Land Tax; and
  • Clause 15(b)(i) – was a market rent review clause, to apply on 7 May 2018 and which included a provision such that the new rent shall not be less than a 4% increase.

(We'll refer to these provisions as the "Controversial Clauses".)

Both of these Controversial Clauses would be void if the lease was subject to the Retail Leases Act in Victoria.

When the first lease was entered into, the Retail Leases Act (RLA) applied, so section 94 of the RLA provided that the Controversial Clauses are void.

In May 2016, the occupancy costs for the next lease year exceeded $1,000,000 per annum.

At that point, does the RLA cease to apply? What happens to those Controversial Clauses that were void?

In May 2017, the occupancy costs for the next lease year went below $1,000,000 per annum again. Does the RLA apply again?

Claims

The landlord claimed that once the RLA ceased to apply, it can never re-apply.

The tenant (Richmond) claimed that once a clause is void, it cannot be brought back, even if the RLA ceases to apply.

Findings

Section 11(2) of the RLA is the relevant section:

"Except as provided by Part 10 (Dispute Resolution), 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."

The Tribunal found that section 11(2) makes it clear that 'late entry' is not permitted: if premises are not retail premises at the start, they cannot become retail premises mid-way through the lease. However, it remains possible to jump-out mid-way through the lease. And further, if premises were retail premises at the start, and for some reason jumped-out, they could then later jump-in again.

It all depends on whether the RLA applied at the start.

The Tribunal also found that if a provision in a lease is deemed void by the RLA, then as soon as the RLA ceases to apply, the provision is no longer void and comes back into the lease. Otherwise, there would be no point in a lease ceasing to be a retail premises lease.

Richmond argued that at the start of the lease, the RLA did apply and as a result the Controversial Clauses were struck out as though the parties had never agreed to them. The Tribunal found that the effect of the RLA was not to void or delete the clauses for all time, but only for so long as the RLA applied.

Application of findings

A curious fact in this case is why did occupancy costs exceed $1,000,000 one year and then (on the tenant's point of view) reduce the next year to below that threshold?

The answer is in the definition of occupancy costs in section 4(3) of the RLA.

The definition of 'occupancy costs' is the sum of the rent and the outgoings as estimated by the Landlord. Hence, if the landlord fails to provide an estimate, the occupancy costs are less.

In this case that is exactly what happened – the landlord only once gave an estimate of occupancy costs – just prior to May 2016.

The tenant argued that the following year, when no estimate was given, occupancy costs reduced below the threshold and so the RLA applied again.

The Tribunal did not agree. The requirement to give an estimate of occupancy costs was not in the lease, but only in the RLA. So when the RLA ceased to apply (May 2016), the landlord ceased to be obliged to give an estimate. As there was no requirement to give an estimate, the Tribunal found that occupancy costs were an aggregate of the rent and the occupancy costs that would be paid. Hence, the occupancy costs remained in excess of $1,000,000, the RLA did not apply, the tenant remained liable to pay State Land Tax and the market rent review contained a ratchet provision.

The Tribunal found that Richmond was required to pay the land Tax, approximately $60,000 per annum, and that the ratchet on the market rent review on 7 May 2018 applied, so the rent increased by 4%.

This case was heard in June 2019 and the decision made 18 July 2019. Later that year Richmond won the Premiership.

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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