May 15, 2015

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Retail tenant wins VCAT fight but gets nil damages and an adverse costs order

Sam Hopper:

Here is an interesting post about a retail leasing case by my friend Paul Duggan.

The case illustrates problems that can be caused by a tenant’s unconventional corporate structure.

The case also has a useful list of considerations for the Tribunal in determining whether a party’s conduct was vexatious for the purposes of costs under s 92 of the RLA 2003.

Originally posted on Paul Duggan:

VCAT’s no costs presumption is more elastic in some parts of the tribunal than in others.

In building cases, the losers commonly pay the winners’ costs. In retail tenancies disputes the losers very rarely do. But the winner paying the loser’s costs? Calderbanks and their equivalents aside, it is almost unheard of  anywhere at VCAT or beyond it.

So imagine the winner’s chagrin in the retail tenancies case of 24 Hour Fitness Pty Ltd v W & B Investment Group Pty Ltd [2015] VCAT 596 when it won the liability stoush, produced an expert report seeking just over $3m in damages and then received nothing but an order to pay the ostensible loser’s costs.

The case is an illustration of one of the hazards of compartmentalising a single business within separate corporate vehicles.

24 Hour Fitness Pty Ltd was the tenant. A gym operated on the premises. Unremarkably, the landlord understood that…

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May 8, 2015

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More on outgoings …

There has been a lot of debate in the leasing community over the effect of the President’s opinion discussed in my earlier post here.

A copy of the President’s opinion is now available on AustLii here.

Here are my thoughts on a few things that have emerged from the last fortnight’s discussions.

Summary of the opinion

In summary, the main points in the President’s opinion are:

  1. if a land owner is required to undertake work or do a thing under the Building Act or associated regulations (including essential safety measures), the cost of undertaking that work or doing that thing must be born by the landlord;
  2. whether the act of compliance with the Building Act or associated regulations can be delegated to a tenant (although still at the landlord’s cost) is a matter of statutory interpretation;  and
  3. the landlord is responsible for the cost of complying with s 52 of the RLA 2003.

Allens Linkaters have posted a useful summary of the decision here.

Another excellent summary has been prepared by Madgwicks here.

Both summaries are excellent and I recommend them to readers.

Gross leases?

There has been a lot of talk about landlords switching to ‘gross leases’.  Allens Linklaters end their summary by suggesting that landlord should consider moving to gross leases in Victoria.

The President’s opinion does not substantially affect a landlord’s ability to recover outgoings for consumables (water, electricity, gas, etc), council rates and other items, so a gross lease may be going too far.

However, I agree that landlords should consider bargaining on leases for which the landlord pays repair and maintenance cost.

How to determine whether outgoings are recoverable?

The President found that all compliance costs under the Building Act and the associated regulations must be born by the landlord (whether or not the act of compliance can be delegated).

The President also suggested a formula for determining whether outgoings are recoverable under a retail premises lease (see paragraphs [60] to [64] of the opinion).

Here is a checklist of questions and answers that practitioners might want to use to determine whether a particular expense is a recoverable outgoing based on the President’s opinion (with a few extra considerations added by me):

  1. Does the text of the lease deed allow recovery?  Yes.
  2. Is the outgoing an ESM or other requirement placed on the landlord under the Building Act or Regs?  No.
  3. Is it a retail lease?  No, then stop here and recover the expense.  Yes, then continue.
  4. Has s 39 of the RLA 2003 been complied with? Yes.
  5. Have the requirements of the Retail Leases Regulations 2013 (Vic) been complied with (as required under s 39(1)(b) of the RLA 2003 )? Yes.
  6. Is it a capital cost under s 41 of the RLA 2003?  No.
  7. It is an amount in respect of depreciation under s 42 of the RLA 2003? No.
  8. Is it a contribution to a sinking fund under s 43 of the RLA 2003? No.
  9. Is it interest on the landlord’s borrowings under s 44 of the RLA 2003? No.
  10. Is it rent under the head lease or rent or other costs associated with other land under s 45 of the RLA 2003? No.
  11. Has an estimate been provided under s 46 of the RLA 2003?  Yes.
  12. Is it a legal or other expense under s 51(1) of the RLA 2003?  No.
  13. Is it a cost of repair and maintenance under s 52(2) of the RLA 2003?  No.
  14. If yes to 13, is the cost excluded by s 52(3) of the RLA 2003?  Yes.

Other considerations may affect the landlord’s ability to recover outgoings, which will need to be considered on a case-by-case basis.

Can the act of compliance be delegated?

Whether the act of compliance can be delegated is a matter of statutory construction.

I expect that it will be too costly and too uncertain to undertake a legal analysis of each liability and it may be more practical to assume that the task is non-delegable unless a significant issue arises over a particular act.

Recovery of outgoings by tenants

Tenants may have substantial claims for outgoings that have been wrongly paid.

Tenants should be looking at their outgoings history to determine whether they have paid significant:

  1. ESM or other Building Act compliance costs; and
  2. s 52(2) repair and maintenance costs.

At the same times, retail tenants should consider whether they have paid:

  1. capital costs;
  2. legal or other costs;  and
  3. land tax.

Tenants should also consider whether the landlord has complied with the requirements of s 39 of the RLA and the Retail Leases Regulations 2013 (Vic).

However, landlords should not be hasty to repay any amounts claimed. There are a number of issues to be considered in any recovery action, including:

  1. whether it is commercially viable to make a claim (depending on the sums involved);
  2. whether the tenant can set-off the claim against their rent (the presence of a clause in the lease prohibiting set-off will be significant);
  3. the effect of the statute of limitations;
  4. the effect of delay in making the claim and whether the landlord has materially changed its circumstances in reliance on the payment;
  5. the extent of any benefit received by the tenant for the payments made (see Ovidio Carrideo Nominees Pty Ltd v The Dog Depot Pty Ltd [2006] VSCA 6 and Richmond Football Club Limited v Verraty Pty Ltd (ACN 076 360 079) (Retail Tenancies) [2011] VCAT 2104).  An interesting question arises if the rent was expressly bargained for and set on the assumption that the tenant would undertake work that affected by the opinion;
  6. whether the lease or agreement to lease was agreed to on a mistaken understanding of the law;
  7. the possibility of amendments to either or both statutes; and
  8. the possibility that the President’s opinion will not be adopted by a subsequent court or Tribunal (especially on appeal).

The validity and weight of these considerations, and whether they provide a defence or defences to landlords, will be tested in the fullness of time.

The resolution of some issues will also depend on the particular circumstances of the landlord and the tenant.

Tenants and their lawyers considering making a claim for the recovery of outgoings paid, and landlords and their lawyers facing those claims, should consider obtaining specialist advice.

Status of the opinion

There has also been recent discussion of the extent to which the President’s opinion creates a binding precedent.

While it does not create a binding precedent in the strict sense, it effectively has the status of a Supreme Court decision for most purposes because:

  1. it is the decision of a Justice of the Supreme Court and President of VCAT exercising statutory power in a case argued by counsel, including two contradictors;
  2. the opinion vindicates the decisions of Deputy President Macnamara in Chen v Panmure and Café Dansk and Senior Member Riegler in McIntyre v Kucminska;
  3. the President refers to providing an ‘answer to the questions definitively’ (at [16]), so did not view the opinion as a mere guideline;
  4. the decision in relation to the recovery of s 52(2) costs is broadly similar to the published views of Croft J that were followed in Chen v Panmure; and
  5. consequently, it is likely to be followed by VCAT members at first instance and a Judge hearing an appeal is likely to view the opinion as persuasive. A Judge on appeal is not strictly bound by the decision of another single Judge in any event, so the opinion should be treated as having the same standing as a decision from a single Judge in the Supreme Court.

Implications for renegotiating leases and for valuers determining rent

The parties should approach their negotiations on the footing that s 52 RLA 2003 costs and the costs of ESMs and other requirements of the Building Act and regulations are not recoverable and set the rent accordingly.

If they cannot agree, the valuer reviewing the rent should consider whether the rent should be ‘grossed up‘ on the assumption that compliance costs cannot be recovered.

Other obligations under the Building Act and Regulations

It is also important to remember that s 251 of the Building Act applies to all obligations placed on the owner under the Building Act or the Regulations.

Although the President’s opinion does not address this directly, the prohibition on recovery may extend to the cost of compliance with a Building Order or Building Notice.

May 1, 2015

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Landlords’ ability to recover outgoings curtailed

Justice Garde, the President of VCAT, today handed down his advice to the Small Business Commissioner about the operation of s 251 of the Building Act 1993 (Vic) and s 52 of the Retail Leases Act 2003 (Vic).

A copy of his Honour’s opinions and reasons are available here: Small Business Commissioner reference for advisory opinion (Building and Property) – [2015] VCAT 478.

The orders, which operate as a summary of the findings, are contained in the first four pages of the decision.

In short, in the President’s opinion:

  1. both s 52 of the RLA 2003 and s 251of the Building Act prevent a landlord from passing on compliance costs;  and
  2. whether the landlord can require the tenant to undertake Building Act compliance work will depend on the wording of the provision creating the obligation.

The orders themselves take over three pages and the President’s reasons take almost 40.  Much will be written about the details of the decision in the coming weeks.

The debate leading up to this opinion has a long history. For background, refer to earlier posts here, here, here, here and here.

The resolution of the issues has been described to me as one of the most important current issue in the law of landlord and tenant.  The main issue is that rent is generally set on the basis that landlords can recover certain outgoings from their tenants.  This decision suggests that an amount of outgoings in fact cannot be recovered.  However, the decision only applies to costs of compliance with the Building Act and s 52 of the RLA 2003.  How large those sums are and, as a result, the true significance of the opinion remains to be seen.

Also, the legal effect of the opinion is not clear.  The opinion does not arise from a contested case in the usual sense, so would not normally be considered to create a precedent.  However, the opinion followed vigorous submissions from two contradictors, so it is likely to be considered highly persuasive by a court or Tribunal considering the same issues (probably more persuasive than an extra-judicial article).  The opinion is, however, expected to carry significant weight in commercial negotiations.

Lawyers acting for tenants should ask whether they have paid significant outgoings to their landlords for the costs of the landlord’s compliance with s 52 of the RLA and/or the Building Act and consider whether recovery action is feasible.

The ability to recover compliance costs may also be relevant to tenants who are facing re-entry for rent arrears.  A tenant in rent arrears may be able to use claim for recovery of compliance costs as part of a counterclaim and set-off against rent arrears, even if the sums claimed are not high enough to otherwise justify the costs of litigation.

Lawyers reviewing leases should also consider the decision when reviewing the repair and maintenance and outgoings provisions.

April 29, 2015

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Epping Hotel Pty Ltd v Serene Hotels Pty Ltd decision – the profits method and consideration of supplementary report approved

Justice Croft in the Supreme Court yesterday overturned the controversial decision in Serene Hotels Pty Ltd v Epping Hotels Pty Ltd (Retail Tenancies) [2014] VCAT 97.

The decision at first instance had two important aspects:

  1. it suggested that the ‘profits method’ of determining the rent was prohibited by s 37(2) of the Retail Leases Act 2003 (Vic), at least in the context of a gaming venue; and
  2. the Tribunal found that it was entitled to disregard a supplementary report by the specialist retail valuer elaborating on his reasons.

The decision at first instance is discussed in more detail in an earlier post here.

In his Honour’s decision handed down yesterday, a copy of which is available at Epping Hotels Pty Ltd v Serene Hotels Pty Ltd [2015] VSC 104, the Court found that:

  1. the ‘profits method’ did not offend s 37(2) of the RLA 2003; and
  2. the Tribunal erred by refusing to consider the supplementary report.

The argument in relation to the profits method was based on whether the methodology offended the requirements to disregard the value of the tenant’s fittings and fixtures and to assume that the retail premises was unoccupied and available for rent. It did not consider other aspects of the profits method that have been controversial in the past, particularly the mechanism for disregarding the value of the tenant’s goodwill. However, his Honour rehearsed a large amount of caselaw supporting the use of the profits method generally and did not criticise the treatment of tenant’s goodwill in the determination.

His Honour also made some other interesting observations.

First, there is an ongoing question over whether s 148 of the VCAT Act allows the Court to hear an appeal from the Tribunal only on a pure question of law or whether it extends to a mixed question of fact and law. The Court of Appeal recently declined to resolve the issue (see See Cosmopolitan Hotel (Vic) Pty Ltd v Crown Melbourne Ltd [2014] VSCA 353 at [52], [171]).

On this issue, Justice Croft made the following remarks (footnotes omitted):

67.    For the sake of completeness, I note a possible argument that Question 2 raises a mixed question of fact and law. This possibility was raised in passing by the parties but taken no further. This leads me to observe, simply, that it is suggested that the question of whether s 148(1) of the VCAT Act allows appeals on mixed questions of fact and law is unsettled. Had it been necessary to decide this point, I would have been disinclined to curtail the operation of s 148(1) of the VCAT Act by finding that mixed questions of fact and law cannot form grounds of appeal. As the authorities indicate, there is no “bright line” between questions of law and questions of fact and in many cases these questions will not be pure in their elements — law or fact. In the context of the provisions of s 148(1) of the VCAT Act, I do not regard such authorities as transcending the clear language and purpose of these provisions, which is to provide an effective appeal mechanism to this Court to correct errors of law — whether or not arising out of a mixed question of fact and law — without crossing the line into something in the nature of a merits appeal which would, as indicated previously, be at odds with Parliament’s intention to establish a specialist tribunal. Moreover, the purpose of s 148(1) of the VCAT Act in providing an effective appeal mechanism with respect to questions of law is likely to be subverted if mixed questions are excluded and wasted time and expense flows from the need to search for a non-existent “bright line” for the purpose of isolating “pure” questions of law.

Secondly, s 37(2) of the RLA 2003 and the text of the lease together set out all assumptions that the valuer must make and the things that the valuer must have regard to or disregard (Croft J refers to this combination as the valuer’s ‘charter’).

I often see rental determinations in which the determining valuer has simply recited the text of the valuer’s charter and confirmed compliance, but has not elaborated on the consideration given to one or more of the items.

It is common for a party trying to impugn a determination to say that the valuer has not given due consideration to elements of the valuer’s charter and has merely ‘paid lip service’ to them, relying on the following passage from Salem Enterprises Pty Ltd v CSJ Food Enterprises Pty Ltd [2008] VCAT 320 (emphasis added):

26.   Relatedly there is the further matter of compliance with s 37(6). The provisions of s 37(2)(b) are also mandatory in my view. Why specify them, unless not? Yet in furtherance of the issue concerning s 37(2)(b) I am unable to detect where [the determining valuer] says he had regard to s 37(2)(b). Merely to recite it is to pay it lip service . His determination in paragraph 8 (his “Basis of Determination”) does not specifically mention this. Why should I regard this as something so unimportant it can be overlooked as a mere error of process? In my view I cannot so overlook it. I do not consider it a mere technicality – to be disregarded as if it counts for nothing.

In the Epping Hotels case, Croft J found that (emphasis added):

78.   At paragraph 2.2 of the Rental Determination, under the heading “Basis of Determination”, the Valuer recites s 37(2) and states that these requirements were complied with in the preparation of the Rental Determination. The matters set out in sub-s (2)(d) are not mentioned elsewhere in the Valuation; however, this is consistent with the Valuer’s statement in the Supplementary Report that the rental evidence considered as part of the Valuation was not affected by concessions or other benefits offered to prospective tenants, rather than an indication that these matters were disregarded.

79.   Nevertheless, having regard to the requirement in s 37(6)(c) of the Act, that the valuation “specify the matters to which the valuer had regard in making the determination”, it may be that a general reference of the kind found in the Rental Determination may in some instances be insufficient. Nevertheless, in the present circumstances a reading of the Rental Determination as a whole would indicate to a reasonable reader that all relevant matters as required by the Act had been addressed. In any event, the fact that Epping requested the Supplementary Report and sought to have it considered by the Tribunal suggests that Epping considered the absence of a specific reference to the matters set out in sub-s (2)(d) might have been, at least, problematic. It is on this basis then that I proceed to determine the question of whether the Tribunal should have had regard to the Supplementary Report.

This suggests that reciting the terms of the valuer’s charter and confirming compliance may, in the right circumstances, be sufficient.

Thirdly, his Honour did not find that a supplementary report must be taken into account in all circumstances, providing the following caution:

100.   This is not to say that a tribunal or a court must have regard to supplementary correspondence, or material provided outside the timeframe set by s 37(7)(a), in every case. Indeed, there may be cases where the supplementary material is provided so late that to consider it would deprive a party of procedural fairness. This is, however, not such a case. …

The second and third points above give rise to the following comments for practitioners:

  1. valuers conducting a rental determination should ensure that their report describes the consideration given to every item in the valuer’s charter and avoid merely reciting its terms and confirming compliance;
  2. practitioners seeking to either impugn or defend a rental determination where the determining valuer has merely recited the terms of the valuer’s charter and confirmed compliance without elaborating on one or more item should consider:
    1. writing to the valuer at the earliest opportunity to request a supplementary report (if they are seeking to defend the report); and
    2. whether a reading of the determination as a whole would indicate to a reasonable reader that all relevant matters as required by the valuer’s charter had been addressed.

March 31, 2015

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New VSBC guideline on ‘What are “retail premises”?’

The Victorian Small Business Commissioner has recently re-published its guideline on the meaning of ‘retail premises’. A copy of the Commissioner’s new guideline is available here. The guideline discusses the following topics:

  1. Application of the Act
  2. Meaning of retail premises
  3. Guiding principles to determine ‘retail premises’
  4. Ministerial Determinations
  5. Lease or licence
  6. Application if lease term is less than a year
  7. Extended application – dispute resolution under the Act

The discussion about the ‘15 year’ determination is particularly interesting.  There has been a long-standing controversy over whether the word ‘or’ between sub-paragraphs (e) and (f) of the determination should be read as ‘and’. A copy of the 15 year determination is available here. The Commissioner’s guideline neatly summarises arguments in favour of the ‘or’ being treated as ‘and’ at paragraph 7.1.3. However, Croft and Hay in Retail Leases Victoria (looseleaf service) suggest a different view, stating that (at [30,080.15]):

It has been suggested that paras A (d), (e) and (f) are in some way interdependent as a result of some cross-referencing between them. However, as these paragraphs are clearly and expressly cast in the alternative throughout (the word “or” is used consistently) and, in terms of substance, each paragraph introduces a different, separate, circumstance for its application which is not, again in substance, dependent upon the circumstances addressed by the other paragraphs, it seems clear that they operate independently and any cross-referencing is merely a drafting device, for economy of words (and see Pearce and Geddes, Statutory Interpretation in Australia , 6th ed, LexisNexis, Sydney, 2006, at [2.12], in relation to the circumstances where “and” and “or” may be “modified”).

We are not aware of any decisions that consider the operation of this determination. Consequently, while the Commissioner’s guideline provides useful support for the proposition that the ‘or’ at the end of sub-paragraph A(e) of the determination should be read as ‘and’, the debate remains a live one.

Sam Hopper and Lisa Rennie

March 30, 2015

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Continuing problems with specialist retail valuers’ ‘no liability’ clauses

A continuing source of tension, particularly in the retail tenancies jurisdiction, is that valuers appointed to determine the market rent routinely refuse to accept an appointment unless the parties sign a particularly broad form of release, including releasing the valuer from a claim in negligence. The standard form of release and indemnity is taken from the VSBC guidelines on current market rent reviews under the RLA 2003, which states that:

 RELEASE

The landlord and the tenant jointly and severally agree to release and forever discharge the valuer from all claims, suits, actions, damages, demands, costs and expenses of every description whatsoever (whether at common law, in equity or under any statute and including a claim in negligence) and however so arising which the landlord and tenant (whether collectively, or individually) may have had, may now have or but for this clause may have at any time against the valuer for or in respect of or arising out of or in connection with or in consequence of the appointment of the valuer as a determining valuer in respect of a rent review for the property or arising out of or in connection with that determination.

INDEMNITY

The landlord and the tenant jointly and severally indemnify and keep indemnified the valuer against any and all liabilities, claims, actions, suits, proceedings, demands, losses, damages, costs, fees, expenses incurred for or in respect of or arising out of or in connection with or in consequence of the appointment of the valuer as a determining valuer in respect of a rent review for the Property or arising out of or in connection with the determination of current market rent. Without limiting and in addition to the clause above, the landlord and the tenant jointly and severally agree to indemnify the valuer from:

(a) any costs incurred for legal advice reasonably obtained by the valuer in connection with or in furtherance of the determination of the current market rent;

(b) any common law or statutory liability that relates to that determination, including liability for negligence;

(c) all liability for legal costs and expenses incurred on a solicitor and/or own client basis for any proceedings the valuer may be obliged to defend or required to appear in respect of or arising out of or in connection with or in consequence of the appointment of the valuer as a determining valuer in respect of a rent review for the leased property or arising out of or in connection with that determination.

Valuers include these clauses because the grounds for setting aside a determination are extremely narrow (see Legal & General Life of Aust Ltd v A Hudson Pty Ltd (1985) 1 NSWLR 314).  This means that the valuer him- or herself is the next target for the disgruntled party in a controversial determination. The Court of Appeal considered whether a release and indemnity was appropriate when engaging an expert under a dispute resolution clause in 1144 Nepean Highway Pty Ltd v Abnote Australasia Pty Ltd [2009] VSCA 308. In that case, Dr Croft SC (as he was then), Michael Redfern and others had each refused to take instructions to act as expert in the determination if a release was not signed.  The Court of Appeal found that there was an implied term that the landlord and tenant would act reasonably to give effect to the agreement, that the expert’s immunity was reasonable and that the parties must sign it. Although the context is slightly different, the principle behind that decision is applicable to the appointment of a valuer and parties can probably seek an order for specific performance if the other side refuses to sign a release to the valuer determining the rent. Warranties implied by the ACL add a further complication.  Provided the valuer charges less than $40,000, there seems to be an implied warranty that the services will be provided with due skill and care (see s 60).  This warranty cannot be excluded by contract (see s 64).  I am not aware of any decisions at VCAT or in a Court considering this as a cause of action against a valuer. As things stand, landlords and tenants have no real alternative to signing a valuer’s terms of engagement, but practitioners should advise their clients of a possible claim against the valuer under the ACL implied warranties if the determination is defective.

Practitioners should also be aware of s 64A(2) of the ACL. The section says this:

(2)  A term of a contract for the supply by a person of services other than services of a kind ordinarily acquired for personal, domestic or household use or consumption is not void under section 64 merely because the term limits the person‘s liability for failure to comply with a guarantee to:

(a) the supplying of the services again; or

(b) the payment of the cost of having the services supplied again.

The standard clause does not limit liability in the way prescribed by s 64A(2) and I have not yet seen a release and indemnity from a valuer that does. Also, s 64A(3) and (4) says that:

(3) This section does not apply in relation to a term of a contract if the person to whom the goods or services were supplied establishes that it is not fair or reasonable for the person who supplied the goods or services to rely on that term of the contract.

(4) In determining for the purposes of subsection (3) whether or not reliance on a term of a contract is fair or reasonable, a court is to have regard to all the circumstances of the case, and in particular to the following matters:

(a) the strength of the bargaining positions of the person who supplied the goods or services and the person to whom the goods or services were supplied (the buyer) relative to each other, taking into account, among other things, the availability of equivalent goods or services and suitable alternative sources of supply; …

It seems to me that there would be a good argument that such an exclusion is not fair and reasonable in circumstances where:

(a) the parties do not chose the valuer;

(b) the parties have no ability to negotiate the valuer’s terms;  and

(c) there is limited scope for challenging the determination.

Practitioners acting for a valuer and advising them on an exclusion of liability clause, consider advising them to use a clause that limits liability in the way suggested by s 64A(2) of the ACL possibly in the alternative to the standard form release and indemnity.  It does not provide complete protection to the valuer, but is the best the valuer could expect in the circumstances.

We would like to extend our thanks to Piquet Kruzas at South East Lawyers for alerting us to s 64A. 

Sam Hopper and Lisa Rennie

February 18, 2015

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Lessor’s purpose for demolishing leased building is irrelevant

Sam Hopper:

Here is an interesting and useful blog post from Robert Hay about demolition clauses in retail leases. Lawyers advising tenants should alert them to a demolition clause in a retail premises lease. These are often overlooked or underestimated by tenants. In particular, provided that the proposed demolition is carried out within reasonable time, the tenant is only entitled to be compensated for the value of its fitout, and not for the value of its goodwill or other losses to the business caused by the demolition notice (see s 56(4)(b) of the RLA here).

Originally posted on The Property Law Blog:

Leases commonly permit a landlord to terminate a lease if the landlord intends to demolish the building located on the leased premises. Section 56 of the Retail Leases Act 2003 (Vic) implies terms into a retail premises lease that provides for the termination of lease on the grounds that the building is to be demolished. Section 56(2) of the Act says:

The landlord cannot terminate the lease  on that ground unless the landlord has—

(a)        provided the tenant with details of the proposed demolition that are sufficient to indicate a genuine proposal to demolish the building within a reasonably practicable time after the lease is to be terminated; and

(b)       given the tenant at least 6 months’ written notice of the termination date.

Tenants often claim that a proposal is not a “genuine proposal” because the landlord intends to demolish the building so that the new building constructed on the…

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February 5, 2015

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Small Business Commissioner’s application for advice heard, Justice Garde has reserved

Those following the debate on the operation of s 52 of the RLA and s 251 of the Building Act 1993 (Vic) may be aware that the Victorian Small Business Commissioner made an application to the President of VCAT seeking an opinion on the landlord’s ability to pass on the act and/or cost of compliance with those sections (for more details, see here).

Justice Garde, sitting as the President of VCAT, heard the application today.  Oral submissions were made on behalf of the Real Estate Institute of Victoria and the Shopping Centre Council of Australia. Various other parties filed written submissions.

The President has reserved.  I will provide an update when the advice and reasons are published.

January 27, 2015

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Is a student accommodation business a retail premises lease under the Retail Leases Act 2003 (Vic)?

In the recent decision of Wang v Orion Holdings Australia Pty Ltd (Building and Property) [2014] VCAT 812, VCAT held that premises let as student accommodation was a retail premises, even though most guests stayed for six months.

In Stringer and Ors v Gilandos Pty Ltd [2012] VSC 361, discussed here, Croft J held that a lease of a serviced apartment complex was a retail premises lease.  However, his Honour gave the following caution:

68 I should, however, sound a note of caution in relation to this finding by emphasising that whether or not premises described as “serviced apartments” is to be characterised as “retail premises” depends upon the particular circumstances, including the nature of the premises, the manner in which occupancy is provided and the nature of that occupancy.[citation omitted] As I have said, the term or description, “serviced apartments”, is not a term of art. Rather, it is a term or description of premises which connotes a range of possibilities. At one end of the range one would find premises managed and occupied in a manner indistinguishable from a motel or hotel and at the other end premises indistinguishable from long term residential accommodation, separately let but with the attribute of being serviced. In the former case it would be expected that the Acts would apply on the basis that the premises are “retail premises” and in the latter case they would not, any more than they would to any block of residential units. In between there are a range of possibilities each of which may have different consequences in terms of the application of the Acts.

In Wang v Orion Holdings at [67] to [79], Senior Member Farrelly considered whether a lease of student accommodation was a retail premises lease.

Relying on the decision in Stringer, the landlord argued that the lease was not retail because most guests occupied their rooms for 6 months.

However, despite these apparently extended stays, Senior Member Farrelly found that the tenant was operating a retail business, partly because she was also:

  • providing personal advice and assistance on a range of daily issues to Chinese students;
  • selling meals;
  • providing tutoring services; and
  • letting rooms for short periods to visiting academics and others.

This represents the high water mark of medium to long stay accommodation businesses characterised as retail premises under the Retail Leases Act 2003 (Vic) (RLA).

The decision was considered in an application for leave to appeal.  However, although this issue was argued in the application, the Court refused to grant leave to appeal without needing to consider this point.

Practitioners should be aware of the decision when advising landlords and tenants of their obligations under leases in which the tenant provides medium term accommodation facilities, as a characterisation of the business as retail premises under the RLA may significantly alter their rights.

Practitioners should also bear in mind that every case turns on its own facts, and should have reference to Croft J’s decision in  Stringer and Ors v Gilandos Pty Ltd [2012] VSC 361, discussed here.

The Court’s reasons in refusing leave to appeal are not available on AustLii.  A copy of the Court’s reasons can be found at: Orion Holdings Pty Ltd v Wang (unreported, 4 September 2014, Supreme Court of Victoria, Mukhtar AsJ).

Sam Hopper and Thomas Steains

November 10, 2014

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Part 2 – Standard of repair under s 52 of the Retail Leases Act 2003 (Vic)

A number of VCAT decisions in recent years have found that:

  1. s 52(2) of the Retail Leases Act 2003 (Vic) creates a ‘baseline’ standard of repair that the landlord cannot contract out of;
  2. but that the parties can agree to put and maintain the premises in a higher standard than that required by s 52(2).

For a discussion of the earlier decisions, see here.

Whether the decisions are correct has been doubted in some quarters.

A recent VCAT decision followed that line of reasoning and the landlord sought leave to appeal to the Supreme Court. Associate Justice Mukhtar held last Friday that the correctness of the decision is not attended by sufficient to warrant the grant of leave to appeal.

While this is not necessarily the end of the matter, practitioners advising clients on repair and maintenance obligations under retail premises leases should be aware of the line of earlier decisions and the recent approval of those decisions by Mukhtar AsJ.

The background to the cases is set out below.

Decision at first instance

In Di & Li Australia Pty Ltd v Jin Dun Pty Ltd (Retail Tenancies) [2014] VCAT 349 (31 March 2014):

  1. the tenant operated a service station from the leased premises;
  2. the first term of the tenant’s lease ran from 31 August 2007 to 30 August 2012;
  3. in around October 2010, a defect in the petrol tanks was discovered that caused water to enter the tanks;
  4. the lease was then renewed for a further term commencing on 31 August 2012.

Section 52(2) of the RLA states that:

(2) The landlord is responsible for maintaining in a condition consistent with the condition of the premises when the retail premises lease was entered into

(a) the structure of, and fixtures in, the retail premises; and

(b) plant and equipment at the retail premises; and

(c) the appliances, fittings and fixtures provided under the lease by the landlord relating to the gas, electricity, water, drainage or other services.

Section 94(1) of the RLA states that:

94 The Act prevails over retail premises leases, agreements etc.

(1) A provision of a retail premises lease or of an agreement (whether or not the agreement is between parties to a retail premises lease) is void to the extent that it is contrary to or inconsistent with anything in this Act (including anything that the lease is taken to include or provide because of a provision of this Act).

The lease stated that:

6.4 The landlord must keep the structure (including the external faces and roof) of the building and the landlord’s installations in a condition consistent with their condition at the start of the lease, …

However, the lease also contained the following definition:

Start of the lease the first day of the term but, if this lease is renewable under an option in an earlier lease (whether or not this lease is on terms that are materially different to those contemplated by the earlier lease), the starting date of the first lease to contain an option for renewal.

The landlord argued that, by operation of both ss 52(2) and 94 of the RLA:

  1. it was only required to maintain the premises in a condition consistent with the condition of the premises when the lease was renewed; and
  2. the definition of ‘Start of the lease’ was inconsistent with the RLA and void.

The necessary consequence of the argument is that the landlord would not be responsible for repairing the leaks to the petrol tanks.

The landlord relied on the decision of Deputy President Macnamara in Ross-Hunt  Pty Ltd v Cianjan Pty Ltd (Retail Tenancies) [2009] VCAT 829 (4 May 2009), in which the Tribunal held that:

[32] Since until 1 August 2007  Ross-Hunt  was in possession and was paying rent ‘under’ the previous lease term and not the now current lease term neither paragraphs (b) and (c) of Section 7 can have the effect of bringing the date upon which the relevant lease was entered into forward until before 1 August. Had the parties executed a new lease for the new term it may be that paragraph (c) would have had some operation and would have brought forward the date upon which the current lease could be regarded as having been entered into. Since no such new lease deed was executed paragraph (c) has no operation. The result then is that for the purposes of applying Section 52 the relevant lease is the current lease and it was entered into on 1 August 2007.

[33] Mr Strang sought to avoid this conclusion by arguing that the Retail Leases Act in general and Section 52 in particular should be regarded as ‘beneficial’ legislation and therefore given the benevolent construction in favour of the tenant. He referred to the well known authorities on ‘beneficial’ legislation. In my view this is not the appropriate approach to construing a provision such as Section 52. The Retail Leases Act and cognate legislation regulates the rights and liabilities between one another of landlords and tenants; it is a zero sum game. A right given to a tenant is an obligation imposed on the landlord. An immunity given to a landlord is a right removed from the tenant. The policy of a statute such as the Retail Leases Act is to draw what Parliament regards as a proper balance between the rights and liabilities of landlords and tenants in the particular area regulated by the Retail Leases Act. There is no broad outer area from which ‘beneficial’ principles can be drawn. The only way in which it can be determined exactly how the balance between the rights and liabilities of landlords and tenants has been struck by Parliament is to analyse in accordance with normal statutory maxims the words which Parliament has used. Carrying out that process leads me to the view that Mr Williams’ construction of Section 52 should be adopted. Hence it is only if it can be demonstrated on the balance of probabilities that there has been a deterioration of the state of these air-conditioning appliance since 1 August that the applicant  Ross-Hunt  will be entitled to any relief under Section 52.

The tenant, however, relied on the decisions Computer and Parts Land and Savers Inc v Herosy, discussed here, arguing that s 52(2) created a ‘baseline’ obligation, and that the parties are able to agree to put and maintain the premises in a higher or better condition.

Senior Member Riegler followed the decisions in Compueter and Parts Land and Savers Inc v Herosy, and held that the landlord was obliged to repair the tanks (see paras [9] to [22]).

Leave to appeal

In Jin Dun Pty Ltd v Di & Li Australia Pty Ltd [2014] VSC 562 (7 November 2014), Mukhtar AsJ considered the various arguments and the extract from Ross-Hunt above, then made the following findings:

[28] Great care must be taken with that general statement. It was there to dispel the proposition that a beneficent construction of s 52 ought to lead to the conclusion that despite the words of the statute, the relevant lease is not the current lease but the originating lease. In the present case, the Tribunal accepted that the relevant lease had to be the renewal lease. The difference in this case was that clause 6.4 of the original lease had the effect of placing into the renewed lease an obligation on the landlord not different in kind but which was referable to the condition of the installations at the start of the first lease. Ross-Hunt was unconcerned with s 94 of the Act and the issue in the present case.

[29] Despite that, on this application, Mr Mackay’s submission was:

By passing s 52 in combination with s 94, Parliament has laid down a compulsory and uniform standard of maintenance for all retail leases in Victoria. If it were possible to ‘extend’ the obligation in s 52 in ways that operated favourably to tenants by imposing a different and more expansive maintenance obligation in the express terms of the lease, then the ‘proper balance’ referred to by the learned Deputy President [in Ross-Hunt] would be altered, as an extension of a tenant’s rights commensurately increases the burden assumed by a landlord. The legislature has effected a compromise between these competing interests and has prohibited the parties to a particular lease from altering that compromise by forming a contradictory agreement.

[30] As is evident in the Tribunal’s reasons, the approach to that question can be an adoption from the field of public law which analyses inconsistency according to whether it is direct or indirect.[1] In essence, the technique of statutory construction looks to see whether the clause here would alter, impair or detract from the operation of section 52(2), or whether it is capable of concurrent operation in a supplementary or cumulative way. It will be detraction if section 52 was intended to be a complete and exclusive statement of the limits within which the terms of a lease concerning repairs are to be confined. The landlord’s submission was in effect that a ‘direct collision’ has occurred here because the clause puts a greater obligation (as far as timing is concerned) than that for which s 52(2) provides and the reasoning in Ross-Hunt is a sound basis for concluding a confinement or exclusivity to that section.

[31] The question is whether the enlargement of the landlord’s responsibility ― enlargement only in the sense of pushing back the comparator to the commencement of the original lease ― is contrary to or inconsistent with the comparator under s 52(2) and therefore forbidden under s 94.

[32] As matter of comparison, the clause is ‘inconsistent’ in one sense: a strict literal sense. But the enquiry does not stop there, as the landlord’s argument seems to do. The question is whether the different clause alters, impairs or detracts from the operation of section 52(2). The Tribunal in this case concluded that s 52 does not prohibit the parties from agreeing to extend the landlord’s obligations to repair or maintain its installations.[2] The Tribunal held in essence that s 52 does not limit a landlord’s obligations but rather imposes a minimum obligation on the landlord, and it was not ‘contrary or inconsistent’ for the landlord to agree to a greater obligation.

[33] I think it is clear textually that section 52 (2) is not a restriction on the responsibility of the landlord. That is not to beg the question. It is to look at the words and see, without obscurity, that it is not couched in the language of a restriction of responsibility. The words state a responsibility for something. And, as the Tribunal observed, the only restriction or limitation is one that qualifies that responsibility under sub section (3). If it is not a restriction on liability, then the enlargement of the timing of liability cannot be said to alter, impair or detract from the operation of s 52(2).

[34] Other factors fortify this view. First, the responsibility under the provision is there for the benefit of the tenant. If the landlord is willing to enlarge the statutory benefit, then to my mind, that does not negate or impair the statute. The two can operate consistently. It is in that sense I think the Tribunal’s view that the section imposes a minimum obligation can be endorsed. That is, nothing in the statute curtails the landlord’s freedom to agree to give more. If the statute had intended to go that far, there would need to be clear words to reveal such an intention.

[35] Thirdly, I think the consequences of the landlord’s contention in this demonstrate how an alternative construction can produce capricious results. A lease is a contract, like any other. A breach, which was conceded here by the landlord, sounds in damages. The damages here, from a breach in the initial term, were proven to have inured beyond the expiration of the first term as the breach had ongoing business effect on profits. On the modern purposive approach to statutory interpretation which looks to context in its widest sense (see CIC Insurance Ltd v Bankstown Football Club Ltd[3]) I cannot accept it as being faithful to the apparent objects of this legislation that having agreed to clause 6.4, the landlord can use s 52(2) to deprive justly the tenant of damages for that loss because of the fortuitous renewal of the lease.

Conclusion

It is not known whether the landlord will appeal Mukhtar AsJ’s decision.

The upshot of the decision is that, at this stage, it appears to be the law in Victoria that the parties to a retail premises lease are able to agree to put or maintain the retail premises to a higher standard than is required by that section.

Practitioners should be aware of this decision and its predecessors when advising clients of their repair and maintenance obligations under a retail premises lease.

[1] See amongst many authorities, Bow Ye Investments Pty Ltd v DPP [2009} VSCA 149 at 20, [70] ff.

[2] See reasons at 20-21.

[3] (1997) 187 CLR 384 at 408.

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