Finally some good news for retail landlords!

12 February 2018

Coming off the High Court’s recent refusal to grant the landlord special leave to appeal the decision in the case of ‘CB Cold Storage’, which confirmed the extensive breadth of the ‘ultimate consumer test’, there may finally be some good news for retail landlords.

Significantly, VCAT in the January 2018 case of William Buck (Vic) Pty Ltd v Motta Holdings Pty Ltd has found that it may be possible for an ‘exit’ from the Retail Leases Act 2003 (Vic) (RLA) to occur, if, during the term of the lease, a statutory exemption applies.

This means that leases which start under the jurisdiction of the RLA, could cease to be under that jurisdiction if one of the statutory exemptions apply during the lease term.

What are the statutory exemptions?

Currently the RLA does not apply where:

  1. The total occupancy costs exceed $1 million;
  2. The tenant or its parent company is a public listed company (i.e. listed on a stock exchange within or outside Australia);
  3. The tenant operates the premises as the agent of the landlord; or
  4. Where a Ministerial determination has been made which excludes the lease or the premises from the operation of the RLA; i.e. certain leases that are:
    • for premises above the 3rd storey of an office building;
    • for more than 15 years and where the lease imposes an obligation to carry out substantial works or pay for those works or which disentitles a person from removing those items at the end of the lease;
    • for barrister’s chambers;
    • located entirely within the Melbourne markets; or
    • entered into by Council, charities, for the practicing of religion, returned services personnel, or for promoting community, cultural or sporting activities.
Does the $1 million occupancy cost exemption exclude GST?

The William Buck case considered whether the $1 million occupancy cost exemption includes or excludes GST.

It was held that when considering the $1 million occupancy cost exclusion, occupancy costs included GST payable under the lease on rent and outgoings but only prior to 22 April 2013.

Why is there a cut-off of 22 April 2013?

This is because the Retail Leases Regulations 2003 that established the $1 million threshold were replaced by the Retail Leases Regulations 2013 which commenced operation on 22 April 2013. The current Regulations provide that the ‘occupancy costs’ are to be calculated as $1 million exclusive of GST.

Given the 22 April 2013 cut-off, even if a landlord has a claim that a lease should not have been under the jurisdiction of the RLA because ‘occupancy costs’ calculated with GST exceeded $1million, such a landlord is likely to be statute-barred if more than 6 years has elapsed from the date that the action accrued.

Late exit from the RLA

The RLA prevents a late entry into the Act as it provides that ‘this Act applies to a lease of premises only if the premises are retail premises at the time the lease was entered into’.

The example given in the William Buck case was that if occupancy costs exceeded $1million at the time the lease was entered into, but subsequently fell below that threshold, the RLA would not ‘start’ to apply to that lease as it did not apply ‘when the lease was entered into’.

Although arguably these comments were not essential to the decision, the case of William Buck is significant in that Senior Member Riegler suggests that the RLA does not ‘prevent the reverse scenario’ allowing a late exit from the RLA, if one of the statutory exemptions apply during the lease term.

The ‘reverse’ of the above example was given, ie if the occupancy costs were under the $1 million threshold when the lease was entered into, meaning that the RLA applied at that time. If they subsequently increased above that threshold, the premises would no longer fall within the definition of ‘retail premises’ under the RLA.

This could be good news for retail landlords as it could mean that leases which are treated by all parties as being under the operation of the RLA, could cease to be under the jurisdiction of the RLA.

Consequences for the landlord

If the RLA ceases to apply to a lease what does it mean for landlords?

  1. It would allow a landlord to recover land tax from the tenant;
  2. It would mean that ‘ratchet’ provisions which were previously void could apply. That would mean that a landlord could insert a provision into a market rent review clause stating that the market rent (when reviewed or determined) cannot fall below that of the preceding year;
  3. It would allow multiple means of rent review, for example ‘the higher of 5% and CPI’;
  4. It would also mean that the lease is not under the jurisdiction of VCAT (which is a ‘no costs’ jurisdiction) . A landlord would not be limited to VCAT’s and the Victorian Small Business Commissioner’s form of dispute resolution;
  5. It may mean that some types of maintenance costs and all legal costs are recoverable from the tenant;
  6. It may mean that less stringent maintenance, fitout, relocation and demolition provisions apply;
  7. The landlord would have less disclosure requirements, including in relation to outgoings;
  8. The landlord could broaden the scope of outgoings and could fully recover those costs, including its management costs (which would not be capped at CPI increases);
  9. On assignment (if the lease states as such), the tenant and guarantor would not be released. In addition, the landlord could broaden the scope of its assignment and subletting criteria and not be limited by the strict statutory time-frames and conditions under the RLA to provide its consent; and
  10. The term of the lease could be less than 5 years.

A retail landlord may be able to seek payment of monies previously restricted by operation of the RLA.

Could this give retail landlords the ‘out’ from the RLA that they are looking for, particularly in light of the confirmed reach of the ‘ultimate consumer test’ in the case of CB Cold Storage?

What do retail landlords need to do?

Importantly, retail landlords when presented with a change in the tenant, including where asked to sign a ‘simple consent letter’ changing the nature (i.e. the control) of the tenant, should provide it to us for review.

Landlords should ensure that their lease precedents and the lease documents that they enter into are broad enough so as to preclude the restrictions imposed by the RLA if the RLA ceases to apply.

Retail landlords should immediately notify us if the circumstances surrounding either a retail tenant or retail premises change. We can then advise you whether this change may allow an ‘exit’ from the operation of the RLA. It may have far reaching implications!

This article was written by Nicole Maxwell, Partner.

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