Australia: Reconfirming retail: Court overturns VCAT decision on leases falling out of the Retail Leases Act

In July this year, the Victorian Civil and Administrative Tribunal (VCAT) held that a retail premises lease could 'jump out' of the Retail Leases Act 2003 (Vic) (RLA) if occupancy costs exceeded the $1 million threshold during the term of the lease (discussed in a previous article here).

In the proceedings before VCAT, the Tribunal held that the subject lease ceased to be a "retail premises lease" approximately two years prior to its expiry. Accordingly, VCAT found that the landlord was entitled to be reimbursed for land tax payments and to receive rent for a renewed term at the current rent plus 4 per cent, rather than the market rent.

This decision was recently overturned on appeal to the Supreme Court of Victoria in the case of Richmond Football Club Pty Ltd v Verraty Pty Ltd [2019] VSC 597.

Amongst other things, the Court was asked to consider whether, on a proper construction of the RLA, a lease to which the RLA applied when the lease was entered into ceased to be a lease to which the RLA applied if during the term of the lease, the premises ceased to be retail premises within the meaning of section 4.

On appeal, the tenant contended that once it is determined whether or not the RLA applies to a lease, that position does not change during the term of the lease or the renewed term, regardless of whether or not the circumstances with respect to the lease change such that, were the exclusionary or excepting provisions applicable at the time of such changes, the application of the RLA would be different. That is to say, there can be no 'jumping' in or out of the operation of the RLA.

In considering the parties' submissions on the appeal, Justice Croft stated that:

"the 'main purpose' of the RLA was to enable parties, both the prospective landlord and prospective tenant, to know and understand their obligations under a proposed leasing arrangement for the term of that lease so they could make the commercial decision whether to enter into the lease in the first place or to renew the lease for a further term."

In concluding that the Tribunal erred in finding that a retail premises lease could 'jump out' of the RLA during its term, Croft J held that:

"...once a lease is subject to the provisions of the RLA, the provisions of that legislation prescribe many contractual provisions of the lease that will affect the rights of the parties and their obligations throughout the term of the lease... An interpretation that allows or requires the provisions of a lease to change from time to time or provides for temporal variations in statutory obligations or requirements attaching to that lease would hardly be supposed to promote certainty or fairness within the main purpose of the Act... an interpretation which fixes the contractual terms and associated obligations with respect to a lease upon its entry or renewal provides both certainty and fairness."

His Honour considered that the position contended by the landlord (that the lease could cease to be a retail premises lease during its term) would give rise to issues of great significance for both parties, particularly with respect to rent review provisions and liability to pay land tax, as well as other obligations imposed or avoided by the RLA, including those regarding refurbishment, relocation and demolition (sections 53 to 56), damage and refurbishing (sections 57 and 58) and liability for repairs generally (section 52).

In relation to rent review under section 35 of the RLA, Croft J stated that:

"it is clearly a most unsatisfactory state of affairs for parties not to know whether any agreed rent review provisions in a lease are subject to... restriction or not"

and that the position contended by the landlord would:

"produce an impossible situation for both landlords and tenants."

Accordingly, his Honour held that once the RLA applies to a lease, its provisions apply for the remainder of its term.

The Court was not asked to consider what the position would be in the event of a renewal of lease. However, Croft J commented that the position with respect to the provisions of a renewed lease would depend, in general terms, on the wording of the renewal clause in the lease to be renewed, read alongside section 27 of the RLA which contemplates the renewed lease being a retail premises lease.

His Honour noted that if the parties contemplated the possibility of the RLA not applying at the time of the renewal when the lease was first entered into, they may insert express terms into the lease to the effect that the provisions contained in any renewed term are to be those contained in the original lease, unaffected by the operation of the RLA. The Court considered there would be no problem with the application of section 94 of the RLA on this basis because the renewal would not be a 'retail premises lease' attracting the operation of section 94.

For now at least, the 'jumping' games are over – Justice Croft's decision means that if the RLA applies at the start of a lease, it will apply for the remainder of the term (and possibly any renewed term) regardless of whether any of the exceptions in section 4(2) arise during the term of the lease.

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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