July 16, 2014

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Landlords’ ability to sue retail tenants’ guarantors at VCAT to be clarified

A vexing issue in the retail tenancies list at VCAT has been whether and when a landlord can sue a retail tenant’s guarantor at the Tribunal.

This issue was addressed by the Cavanough J in Tucci v Victorian Civil and Administrative Tribunal & Anor [2010] VSC 425, in which the Court held that a landlord could sue a tenant’s guarantor in the Tribunal under the consumer and trader provisions of the Fair Trading Act 1999 (Vic).  

However, while the decision was a very useful one, identifying the Tribunal’s jurisdiction through this circuitous route has always been a source confusion in the legal and retail communities.

The Courts Legislation Miscellaneous Amendments Bill 2014 (Vic) has been tabled before Parliament and contains a proposed amendment to the Retail Leases Act 2003 (Vic) that expands the definition of ‘retail tenancy dispute‘ to include a claim by a landlord against a guarantor. 

The second reading speech states that:

The bill will also amend the Retail Leases Act 2003 to allow the tribunal to make orders against a guarantor or indemnifier of a tenant’s obligations under a retail premises lease and will allow a guarantor or indemnifier to refer a retail tenancy dispute to the small business commissioner for mediation. These amendments will allow parties involved in retail tenancy disputes to have their issues comprehensively addressed by mediation and, should it be necessary, at the tribunal, without the expense of a separate court proceeding.

The Tribunal’s jurisdiction is not exclusive.  At this stage, landlords will still be able to sue guarantors in a court if they elect to do so.

The second reading speech for the bill took place on 24 June 2014.

June 25, 2014

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Small Business Commissioner makes application for advisory opinion on the effect of s 251 of the Building Act and the costs of repair and maintenance under s 52 of the RLA

A hot issue for retail and commercial leasing practitioners over the last few years has been whether s 251 of the Building Act 1993 (Vic) prevents a landlord from recovering from its tenant as an outgoing under the lease the cost of essential safety measures or other steps required to comply with obligations under the Building Act.

A related issue is whether a landlord can recover the costs of repair and maintenance as an outgoing under s 52 of the RLA 2003.

In an interesting new development, the Small Business Commissioner has applied to the President of the VCAT for an advisory opinion on this issue.

The questions on which the Commissioner has sought advice are set out on the OSBC’s website as follows:

The matters referred to VCAT essentially seek to clarify:

  • the responsibilities of a landlord or tenant under a commercial lease concerning compliance with essential safety measures requirements under the Building Act 1993 and Building Regulations 2006;
  • who should pay for the costs of essential safety measures compliance under the Building Act 1993; and
  • who should pay for the costs of repairs and maintenance obligations under the Retail Leases Act 2003.

This is the first time the Commissioner has used his new power under the Small Business Commissioner Act 2003 (Vic) to seek an advisory opinion from the Tribunal.

The OSBC’s website also says that:

His Honour Justice Greg Garde AO RFD, President VCAT, has directed by Orders made at VCAT on 20 June 2014, that relevant peak industry bodies and government entities and other interested persons should have an opportunity to make, in the first instance, submissions in writing in relation to the matters referred to VCAT.  Any submissions in writing are directed to be provided to the VSBC and the VCAT’s Principal Registrar by 4:00pm on Wednesday, 27 August 2014.

Submissions should be forwarded to the VCAT at GPO Box 5408, Melbourne VIC 3001 or electronically at thomas.patereskos@supremecourt.vic.gov.au and to the VSBC at GPO Box 4509, Melbourne VIC 3001 or electronically at enquiries@vsbc.vic.gov.au .

Written notice of any application seeking the Tribunal’s leave to make oral submissions in addition to any written submissions previously made shall be provided in writing to the VSBC and the VCAT’s Principal Registrar on or before 4:00pm on Tuesday 1 October 2014.

For more information, refer to the OSBC’s website here.

For background to the issue about s 251 of the Building Act, see an earlier post here and the links within that post.

For background on the issue about the recover of the costs of repair and maintenance under s 52 of the RLA, see here.

Thanks again to Jamie Bedelis of Moray & Agnew for alerting me to the note on the OSBC’s website.

June 25, 2014

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When is a lease for business-to-business services governed by the Retail Leases Act 2003 (Vic)?

A number of Supreme Court decisions have confirmed that the supply of services business-to-business governed by the RLA 2003, provided that the second business is the ‘ultimate consumer‘ of the services.

However, the cases also suggest that:

  1. the nature of the premises and the degree to which the premises is ‘open to the public’ may also influence whether the premises will be considered retail premises under the Act; and
  2. we are yet to see the extent to which those elements influence a determination of whether the premises is a retail premises.

Background to the ultimate consumer test

A lease is a governed by the RLA 2003 if it is a lease of a retail premises.  Section 4 of the RLA defined a retail premises as (relevantly):

(1)  In this Act, retail premises means premises, not including any area intended for use as a residence, that under the terms of the lease relating to the premises are used, or are to be used, wholly or predominantly for—

(a)   the sale or hire of goods by retail or the retail provision of services; or

There are some exceptions in s 4 that are not relevant to this note. The scope of the permitted use is also important, but is not relevant to this note.

It is now generally accepted that the Courts and the Tribunal will determine whether the sale of goods or the provision of services is retail by reference to the ‘ultimate consumer test’. The usual formulation of that test is the following from Nathan J in Wellington v Norwich Union Life Insurance Society Ltd - [1991] 1 VR 333:

The essential feature of retailing, is to my mind, the provision of an item or service to the ultimate consumer for fee or reward. The end user may be a member of the public, but not necessarily so. In support of this conclusion, I call in aid not only commonsense but the Macquarie Australian Dictionary which defines retail as being a sale to an ultimate consumer, usually in small quantities. When the verb is used in the transitive form, it is to sell directly to the consumer.

Accordingly, it is generally accepted that the end user does not need to be a member of the public, provided that they are the ultimate consumer of the relevant services.

As a result, and perhaps contrary to general expectations in the marketplace, leases conducting the following businesses have been held to be retail premises:

  1. a patent attorney, where the patent attorney’s advice is provided to an intermediary before being provided to the ultimate client (see Wellington v Norwich Union Life Insurance Society Ltd - [1991] 1 VR 333; see also Fitzroy Dental Pty Ltd v Metropole Management Pty Ltd [2013] VSC 344 at [16]);
  2. a logistics business consisting of shipping/transport and storage/warehousing (see Global Tiger Logistics Pty Ltd v Chapel Street Trust (unreported, VCAT, Member L Rowland, 8 November 2012)); and
  3. a convention centre where the convention space was supplied by the tenant to convention organisers who ‘on-supplied’ the space to delegates attending the convention (see Fitzroy Dental Pty Ltd v Metropole Management Pty Ltd [2013] VSC 344).

These findings suggest that all providers of services are probably providing retail services. In Global Tiger Logistics Pty Ltd v Chapel Street Trust (unreported, VCAT, Member L Rowland, 8 November 2012), Member Rowland held that:

[17]   Given the ultimate consumer test I find it difficult to conceive of any sale of a service which would be other than retail. I find that the provision of logistic services is a retail activity, as it is a sale of services to an ultimate consumer within the meaning of the ultimate consumer test. The test does not distinguish between a commercial or private consumer.

The decision in Fitzroy Dental has also led my friend and colleague Robert Hay to conclude that most tenants who provide services engage in ‘retail provision of services’ (see Robert’s blog post here).

Justice Croft in Fitzroy Dental stressed the need to consider the services provided and determine who is the ‘ultimate consumer’ of those services. However the proposition remains that many, and perhaps most, service providers will be conducting a retail business for the purposes of the RLA 2003.

The nature of the premises and whether they are ‘open to the public’

In the early decision of 536 Swanston Street Pty Ltd v Harbrut Pty Ltd (1988) V ConvR 54-323, Kaye J said (emphasis added):

I have been referred to several definitions by authorities of what is described as retail shop and retail trade. Perhaps the most succinct statement from which assistance is to be derived is from that made by Viscount Dunedin in his speech in Turpin v Middlesbrough Assessment Committee and Kaye & Eyre Brothers, Limited, [1931] AC p.451 at p.474. His Lordship then said, referring to buildings, that they were buildings to which the public can resort for the purpose of having particular wants supplied and services rendered to them.

It is, in my view, clear that the demised premises fall within that description of being available to members of the public for the purposes of having their food and drink requirements supplied and services of discotheque entertainment provided to them. Accordingly, in my view, the demised premises are retail premises within the meaning of the Act.

The ultimate consumer test from the later decision of Wellington v Norwich Union Life Insurance Society Ltd - [1991] 1 VR 333 (set out above) does not make reference to the premises being ‘open to the public’ and the text of the decision seems to suggest that this requirement has been overshadowed.

However, in the recent case of Stringer v Gilandos [2012] VSC 361 (discussed here), Croft J made the following remarks:

[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 Fitzroy Dental Pty Ltd v Metropole Management Pty Ltd [2013] VSC 344, his Honour went further and spent a substantial portion of his judgment considering the nature of the premises and the extent to which it is ‘open to the public’ (see paragraphs [29] to [42]), making the following informative comments after considering the evidence:

[30] Nevertheless, the Plaintiffs submit, in opposition to the application, that the evidence establishes that the Premises do not have the hallmarks of being open to the public. The Plaintiffs submit that because the Premises are used predominately as a conference centre, it is only open when booked for the purposes of a conference and, when operating as a conference centre, is only provided to conference attendees – not the members of the public as a whole. There is, however, no evidence that conference attendance is in any way limited to any section or class of the public. The Plaintiff also submits that the café/restaurant in the Premises is only used for the purposes of providing refreshment to conference attendees as an adjunct to a booked conference; and so is not a café/restaurant in the usual sense.

[32] In significant respects the evidence of the parties is not in conflict. The differences between the parties arise in relation to the consequences of the factual position with respect to the operation of the Act. In particular, the Plaintiffs do not say that the Premises is not being used for its permitted use under the Lease, rather that it is not open for business very much – on the basis of their observations from the street or by sight from their own premises across the street, outside the premises, at various, unspecified times. Additionally, the parties agree that a member of the public could not “walk in off the street” at any time – much as one might otherwise walk into a convenience store or a café/diner of the kind one sees around the suburbs and country towns – or in American films.

[33]   For the reasons I have indicated I am not satisfied that there is any basis in the provisions of the Act or the authorities for constraining the concept of “open to the public” with respect to premises to the extent that the Plaintiffs would have it constrained. True it is that it would be very difficult to imagine a situation where commercial premises which were accessible on a “walk in off the street” basis could, in the absence of specified and unusual circumstances, be said not to be “open to the public”. It does not, in my view, follow that the converse position indicates that premises are not “open to the public”.

[34]   In the present circumstances I am satisfied that the Premises is “open to the public”. There is no evidence to suggest that any person or class of persons is prohibited or otherwise prevented from being able to utilise the conference and function services provided by the Defendants at the Premises. The use of the conference and function services, and those provided by the café/restaurant (which is licenced), are available and open to any member of the public subject to booking the conference or function facilities and the payment of a fee. The fact that the Premises may not be “open” for the provision of services during usual ordinary business, such as apply to ordinary retail shops or restaurants and bars, does not detract in any way from the Premises being “open to the public” in the relevant sense. It appears from the evidence that booking requests for the Premises and booking arrangements are made to and at the Adjoining Premises. This does not, however, detract from the use of the Premises itself in accordance with the Lease and so the position with respect to the application of the Act is not affected.

We must wait for further decisions before we know the extent to which the nature of the premises or whether it is ‘open to the public’ affect the determination of whether a particular premises is a retail premises under the RLA 2003.

However, it is not difficult to imagine a case in which services are provided to the ultimate consumer from a premises that is neither ‘open to the public’ nor presents as a traditional shop in any meaningful way. For example:

  1. a warehouse or cold storage facility leased by a tenant who provides storage and transport services to other businesses. Often the premises will be locked and the consumer will have no real access to the storage space;  and
  2. a service provider whose business is conducted solely over the internet and the telephone.

Although Member Rowland considered a logistics business in Global Toger Logistics, the decision pre-dated Croft J’s decision in Fitzroy Dental and it appears that arguments about the nature of the premises and whether they were ‘open to the public’ were not put to the Tribunal.

What to do now?

It is prudent for the time being, so far as possible, to treat leases as governed by the RLA where the business conducted on the premises is predominantly the provision of services business-to-business.

For example, practitioners should consider advising their clients to:

  1. negotiate commercial terms for any lease of premises where the tenant provides business-to-business services on terms that are consistent with the RLA 2003. For example, landlords should consider excluding land tax from recoverable outgoings in the their leases in exchange for a proportionate increase in rent;
  2. comply with procedural requirements under the RLA, such as giving an estimate of outgoings in accordance with s.46 of the RLA and providing six to twelve months’ notice of the last date to exercise the option in accordance with s.28 of the RLA;  and
  3. when faced with a dispute, issue proceedings in VCAT, rather than the courts.  VCAT has a general landlord and tenant jurisdiction under consumer protection legislation (see Zeus & Ra Pty Ltd v Nicolaou [2003] VSCA 11; see also Tucci v Victorian Civil and Administrative Tribunal [2010] VSC 425).

This may not be possible commercially, in which case practitioners should advise their clients:

  1. that there may be an arguable case that a lease to a tenant that supplies services business-to-business is not a retail premises if:

(a)   the premises is not open to the public in any meaningful way; and/or

(b)   the nature of the premises suggests overwhelmingly that it is not a traditional shop; and

  1. the above notwithstanding, there is a significant risk that such a lease would be treated as a retail premises lease.

Thanks to Jamie Bedelis at Moray & Agnew for his input into this note.

June 23, 2014

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More on Calderbank offers in the retail tenancies list

A significant issue in retail tenancy disputes is the impact of the no-cost rule and the leverage that it gives to an arguable but weak, or even a hopeless case.

In a recent case, discussed here, the Tribunal suggested that a letter to the other side setting out the reasons why their case is hopeless may support a subsequent application for costs at the end of the proceeding.

In the case of T.B.T (Victoria) Pty Ltd v Trombone Investments Pty Ltd (Retail Tenancies) [2014] VCAT 25, handed down earlier this year, the Tribunal considered an application for costs after a litigant in person made an untenable application.

Member Kincaid considered the following to be relevant to the decision to award costs:

  1. the nature of the application by the litigant in person and the grounds relied on to support it;
  2. whether the litigant has any evidence to support the application;
  3. whether the litigant, contrary to an opportunity provided to him by the Tribunal to base his application on an alternative ground or grounds, chose to rely on a ground that was hopeless;
  4. the extent to which the litigant is given notice by the respondent to the application of the submissions proposed to be relied on in opposition to the application; and
  5. whether and, if so, to what extent the litigant is put on notice by the respondent to the application of the hopelessness of the application.

The Tribunal was considering a costs order against an unrepresented litigant. However, the same consideration would also apply if the litigant has lawyers.

Costs were awarded on an indemnity basis, largely because the unrepresented respondent made baseless allegations of dishonesty against the applicant. The Tribunal acknowledged that allowances should be made for unrepresented litigants, but was willing to look past that for the purposes of this case.

Practitioners acting for litigants faced with an untenable application, and who want to maximise their client’s prospects of obtaining a costs order, should ensure that they:

  1. write to the other side at the earliest stage setting out why the application is hopeless and inviting its withdrawal;
  2. provide detailed submissions to the other side as early as possible; and
  3. so far as possible, ensure that each of the above is in the clearest terms, including extracts of authorities and legislation where appropriate, particularly if the other side is unrepresented.

It is also prudent to put the other side on notice of your intention to make an application for costs and to rely on the decision in TBT (Victoria) Pty Ltd v Trombone Investments Pty Ltd (Retail Tenancies) [2014] VCAT 25, providing a copy if possible.

February 12, 2014

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A significant VCAT decision for rental determinations under the RLA

In the VCAT decision of Serene Hotels Pty Ltd v Epping Hotels Pty Ltd handed down last Friday, Member Farrelly at VCAT considered an application to set aside a determination of the rent at a hotel with gaming facilities and held that:

  1. a specialist retail valuer is not entitled to use the profits method to determine rent, at least at a gaming venue;
  2. a specialist retail valuer may have regard to future matters if they were known generally in the market at the time of the rental determination;  and
  3. a supplementary report prepared by the valuer may be admissible in some circumstances.

Each of these issues is potentially significant for practitioners advising clients during a rent review under the Retail Leases Act 2003 (Vic), particularly point 1 above.

Legislation

Section 37(2) of the Retail Leases Act 2003 (Vic) governs current market rent reviews in retail premises leases in Victoria.   It states that:

(2)            The current market rent is taken to be the rent obtainable at the time of the review in a free and open market between a willing landlord and willing tenant in an arm’s length transaction having regard to these matters—

(a)   the provisions of the lease;

(b)    the rent that would reasonably be expected to be paid for the premises if they were unoccupied and offered for lease for the same, or a substantially similar, use to which the premises may be put under the lease;

(c)   the landlord’s outgoings to the extent to which the tenant is liable to contribute to those outgoings;

(d)   rent concessions and other benefits offered to prospective tenants of unoccupied retail premises

but the current market rent is not to take into account the value of goodwill created by the tenant’s occupation or the value of the tenant’s fixtures and fittings.

Use of the profits method

The valuer in this case determined the current market rent for a hotel and gaming venue by using the profits method.

When using the profits method, the valuer:

  1. looks at the EBITDAR (or earnings before interest, taxation, depreciation, amortisation and rent) for the business;
  2. considers whether those earnings are sustainable or would be exceeded by an average, competent tenant;
  3. determines the percentage of EBITDAR that is paid by tenants of comparable property;  and
  4. applies that percentage to the figures at hand to determine the rent for the property in that case.

The profits method is generally used by valuers determining rent for hotels, licensed premises and gaming venues.

Then tenant submitted that, in breach of s 37(2) of the RLA 2003, the valuer took into account the tenant’s goodwill and its fixtures and fittings by using the profits method.  In particular, the tenant argued that it was impossible to have regard to the tenant’s turnover figures without also having regard to the value of the tenant’s gaming machines and entitlements.

The landlord argued that:

  1. a tenant of a hotel benefits from a degree of locational goodwill because the tenant does not lease a bare shell.  In this case, the tenant of unoccupied premises would still have leased the Epping Hotel;
  2. the market for pub leases has regard to the potential profitability of the pub, rather than other issues such as the square of floor space;
  3. valuers habitually use the profits method to determine rent for hotels and gaming venues;  and
  4. in line with established valuation practice, the valuer looked at the tenant’s turnover figures and concluded that those figures were sustainable by an average, competent manager of a new tenant.  By doing so, the valuer excluded any special effects of the tenant’s goodwill or its fittings and fixtures from the rental determination.

The Tribunal rejected the landlord’s arguments and concluded that:

39.   In my view, it is very clear from the statements in the valuation report that the rent determination is founded on the Applicant’s own trading figures, and that the Valuer has taken into account the value of the Applicant’s fixtures and fittings. This is borne out in particular by the Valuer’s statement in the valuation report, referred to above, that “It is pertinent to note that the future application by the Tenant of its owned Fixtures & Fittings is included in the rental assessment process … “. Section 37(2) of the Act mandates that the Valuer not take into account the value of the Applicant’s fixtures and fittings.

40.   The Respondent submits that the methodology employed by the Valuer is consistent with the evident purpose of the Act to strike a fair balance between the interests of the Landlord and the Tenant and to secure a fair and reasonable estimate of the rent that would be paid if the premises were let on the open market. The Respondent says that it is reasonable that the Valuer consider the profits which a willing lessee would make in the future assuming average competent management of the same business by a hypothetical willing lessee. The Respondent says that this “profits method” of determining market rent – where the Valuer takes account of the profits generated by the sitting tenant – is common in the hotel industry and not prohibited by s37(2) of the Act.

41.   However reasonable the Valuer’s methodology may seem, and whether or not it is a method that has in the past been commonly adopted by valuers in the hotel industry, I do not accept that s37(2) of the Act allows the methodology employed by the Valuer. I am satisfied that the Valuer has, contrary to the requirement in s37(2) of the Act, taken into account the value of the Applicant’s fixtures and fittings, and in so doing the Valuer has fundamentally misconstrued his task. As such, I find that the parties are not bound by the rent determination.

This case is significant for the valuing profession generally, and those determining rent for licenced premises in particular.  It is also significant for legal practitioners advising landlords and tenants during rent reviews because:

  1. most licensed premises are governed by the RLA 2003 and most (if not all) current market rent reviews for those premises will have been conducted using the profits method.  This decision suggests that a significant number of determinations in the marketplace may be open to challenge in VCAT;  and
  2. the decision now raises a difficult question for specialist retail valuers engaged to determine the current market rent for licenced premises and gaming venues who are accustomed to determining rent by the profits method – should they continue to use the profits method or rely on another method to determine the rent?

Future matters

Section 37(2) requires the specialist retail valuer to determine the rent ‘at the time of the review’.

In this case, the valuer had regard to anticipated changes to the regulation of the gaming industry that would render gaming machines more profitable.   The valuer determined that:

  1. proposed changes to the regulation of the gaming industry were generally known and widely anticipated in the marketplace at the date of the review, even though they only took effect some time later;  and
  2. as a result, tenants would have been willing to pay a higher rent on the expectation of increased profits during the term of the lease.

The tenant argued that the determining valuer must determine the rent ‘at the time of the review’, so could not have regard to future matters.

The landlord argued that the determining valuer found that the proposed changes to the law were widely known at the review date and would have influenced the rent that a hypothetical tenant would have been willing to pay, so was a relevant consideration.

The Tribunal held that:

53.   One can think of many hypothetical examples where knowledge of a likely or possible future event will undoubtedly have a bearing on the rent obtainable in the open market between a willing Landlord and a willing Tenant.  That the forecast future event may or may not occur is beside the point. What is relevant is the effect that market knowledge of a possible future event, as assessed by a valuer, may have on the rent obtainable in an open market.  In my view, section 37(2) does not prohibit the consideration of possible future events.

Advisors acting for landlords or tenants approaching a current market rent review should consider making submissions to the determining valuer about future events that were widely anticipated at the time of the review and that may have had an impact on the rent that a tenant would have been willing to pay for the property at the time of the review.

Supplementary report

The specialist retail valuer is also required by s 37(2) to have regard to ‘rent concessions and other benefits offered to prospective tenants of unoccupied retail premises.’

In this case, the specialist retail valuer did not consider in his primary report rent concessions or other benefits offered to prospective tenants.   In the lead-up to trial, the tenant’s solicitor wrote to the determining valuer and requested a supplementary report, which was provided in a short note from the determining valuer.  A protracted argument ensued over the extent to which (if at all) a supplementary report from a valuer may be considered by the Tribunal.

The Tribunal concluded that:

61.   In my view there is no hard and fast rule as to whether parties, who have appointed an independent specialist valuer and received his valuation report, are bound to accept supplementary reports or material from the valuer.  It depends on the circumstances in each case.

62.   There is nothing in the Act or the lease to suggest that the Valuer is limited to providing one document on one occasion.

63.   However, having regard to the means by which the supplementary letter was obtained, the date the letter was provided and its contents, I find that it would be unfairly prejudicial to the Applicant to pay any regard to it.

64.  It is clear from the terms of the supplementary letter itself that the Valuer has provided the letter in response to a specific request from the Respondent, a request which, in my view, is a blatant prompt to the Valuer to provide further information in respect of a matter which is conspicuously absent in the valuation report.

65.   Further, the Respondent’s request to the Valuer was made some 8 months after the Valuer provided the valuation report to the parties and some 5 months after the Applicant commenced this proceeding. In my view, once the Applicant commenced this proceeding challenging the valuation report, it became untenable for the Valuer to provide any supplementary report.

66.   In all the circumstances, I am satisfied that the supplementary letter should be wholly disregarded.

It is quite common for determining valuers to fail to mention in their determination an issue considered insignificant.

Valuers should ensure that they have a checklist of items that they are required to consider in s 37(2) of the RLA and in the lease and ensure that each item is discussed in their reports (even if only to give reasons as to why it is not relevant).

Practioners may find themselves advising clients about determinations where an item is conspicuously absent from the determination.  If so, they should consider writing to the determining valuer at the earliest stage to elicit a supplementary report, preferably before a dispute has started.

I am not aware of a copy of the decision having been posted on AustLii at this stage.  A copy of the reasons is available here: Serene Holdings Pty Ltd v Epping Hotel Pty Ltd.

December 9, 2013

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Do tenants still need mortgagee’s consent to lease in light of the Willmott decision?

 

A few solicitors have asked whether, in light of the High Court’s decision in Willmott last week (discussed here), tenants still need to insist on the consent of their landlord’s mortgagee before taking a lease.

The answer is ‘yes‘.

The High Court’s decision in Willmott recognises that a landlord’s liquidator has the power to extinguish a lease.  It does not give the landlord’s mortgagee (or its receiver) that ability.

Mortgagee’s consent is still very important for at least two reasons.

Firstly, mortgagee’s consent to a lease operates to protect the tenant if there is a priorities dispute between the tenant and the landlord’s mortgagee.  It typically arises when (in Victoria, at least):
  1. the mortgage was granted before the lease;
  2. the landlord defaults;  and
  3. the mortgagee wants to sell the land free of the lease.

If events 2 and 3 happen, the landlord will usually have other financial problems and is likely to have a liquidator appointed at some stage.

However, a liquidator will not necessarily be appointed, particularly if the landlord is relatively small and there is not enough money in the company to justify the cost of a liquidation.  If so, there is no liquidator to disclaim the lease, the tenant faces a simple priorities dispute between it and the landlord’s mortgagee and the mortgagee’s consent is essential, if the mortgage pre-dates the lease or (in states other than Victoria) the lease is not registered.

Secondly, if a tenant tries to set aside a disclaimer by the landlord’s liquidator, it will need to show that the prejudice to it resulting from the disclaimer is ‘grossly disproportionate to‘ the prejudice to the landlord’s creditors if the disclaimer is set aside (see ss 568B and 568E of the Corporations Act).

If the liquidator proves that the mortgagee can sell the land free of the tenant’s rights (regardless of the disclaimer) it may be very difficult for the tenant to show that it has suffered any real prejudice and set aside the disclaimer.

Similar considerations would apply to a tenant’s financier looking to take a mortgage or charge over the tenant’s lease.

December 4, 2013

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Willmott appeal dismissed – landlord’s Liquidators may disclaim leases

 

The High Court today found that Liquidators of a landlord company can use the disclaimer power in the Corporations Act to extinguish leases granted by that company.

A summary of the decision is available here.

The decision upholds a decision of the Victorian Court of Appeal that has created significant consternation among those acting for tenants.  The implications are likely to be far-reaching.

Those acting for tenants should be advising their clients:

  1. of the risk that a liquidator appointed to their landlord may use the disclaimer power to extinguish their leases;  and
  2. that if this occurs, the tenant may apply to set aside that disclaimer under ss 568B and 568E of the Corporations Act.  This may present a high hurdle for tenants.

The majority left open the question of whether leave to disclaim must be sought by the Liquidator prior to disclaiming a lease.

I will post more on this issue and about setting aside disclaimer after I have had a chance to digest the Court’s reasons.

October 22, 2013

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Is a franchisee’s outlet licence a retail premises lease?

In an interesting recent decision from the Supreme Court,[1] Croft J held that an arbitration clause in a retail leases does not oust the Tribunal’s jurisdiction.

A detailed discussion of this issue can be found on Robert Hay’s blog here and here.

The Court also referred to a finding at first instance that the franchisee’s outlet licence is in fact a sub-lease.  This creates an interesting issue for practitioners acting for franchisees, franchisors and their landlords.

A common arrangement for a franchise in Victoria involves the franchisor:

  1. taking a head lease from the land owner;  and
  2. granting a franchise agreement and an ‘outlet licence’ to the franchisee.

In these arrangements, the franchisee is ordinarily not treated as a tenant of a retail premises lease.

However, it is well established that an agreement in substance creating a lease will be treated by the courts as a lease, even though the parties choose to call it a licence.

This was considered by the Tribunal at paragraphs [13] to [41] of the decision at first instance in Ireland v Subway Systems Australia Pty Ltd & Anor Retail Tenancies [2012] VCAT 1061, in which Senior Member Riegler quoted the colourful words of Lord Templeton in Street v Mountford:[2]

The manufacture of a five pronged implement for manual digging results in a fork even if the manufacturer, unfamiliar with the English language, insists that he intended to make and has made a spade.

After considering the text of the agreement, the surrounding circumstances and other relevant authorities, the Tribunal concluded that the outlet licence in fact granted exclusive possession to the franchisee and was a sub-lease.

If, as the Tribunal’s decision suggests, a franchisee’s outlet licence can be regarded as, in substance, a sub-lease, the consequences could be significant.

For example:

  1. the Retail Leases Act 2003 (Vic) will almost always apply to the franchisee’s outlet licence.  That means, for example, that the franchisee is entitled to a disclosure statement, an estimate of outgoings and a five year minimum term and that s 52 of the RLA governs the franchisor’s repair and maintenance obligations;
  2. there is an interesting question over whether the head lease to the franchisor is a retail premises lease for the purposes of the RLA;  and
  3. it is controversial whether a licensee (as opposed to a tenant) has standing to seek relief from forfeiture if the licence is terminated.  However, if the franchisee is in fact a sub-tenant, then there is no doubt that it has standing to seek relief from forfeiture.

What, then, happens if the terms of the franchise agreement are inconsistent provisions of the RLA?

In the Subway case, Croft J refers this problem and to the fact that the franchise agreement in that case was with another entity within the franchisor’s group of companies.  However, while expressing a view that the RLA may render specific provisions of a franchise agreement void if those provisions were inconsistent with specific provisions of the RLA, his Honour did not need to finally resolve this question (see paragraphs [61] to [67]).

The point for practitioners to note at this stage is that a franchisee’s outlet licence may well be characterised as a sub-lease, which could give to the franchisee significant leverage when the franchise agreement comes to an end.  The extent of that leverage will, as always, depend on the circumstances.

The Tribunal’s determination that the outlet licence was in fact a sub-lease was not appealed and Croft J expressly left the question open: see paragraph [61].

October 21, 2013

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Management fees – Practice Note for LIV’s November 2012 lease revision

Robert Hay and Derry Devine of the Law Institute of Victoria’s Leases Committee have written a practice note about an issue with the November 2012 edition of the LIV’s standard lease.

Any practitioner using the November 2012 revision of that LIV standard lease should be aware of the practice note, which states that:

“When using the LIV Commercial lease for a retail premises lease containing an option to renew and under which management fees will be payable, it is recommended that:

    • Item 10 of the Schedule be modified by deleting the paragraph beginning ‘If the Act applies’ and ending ‘section 49(4)’.
    • The information relating to the amount of the management fee and the method of calculating the amount payable by the tenant, for the first accounting period of the lease term, be specified in the disclosure statement rather than the lease.  This will satisfy section 49(1)(b) without creating potential issues where an option is exercised.  When an option is exercised, the disclosure statement for the new term should also specify the management fee and the method of calculating the amount payable by the tenant for the first accounting period of the new lease.”

Robert’s blog post about the practice note is available here.

October 2, 2013

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Costs of essential safety measures and s 251 of the Building Act

Whether a landlord can pass on the costs of complying with the Building Act 1993 has been the source of a significant debate over the last year or so.

A recent article of mine on this issue has been published in the Law Institute Journal here.

In summary, the article suggests that:

  1. the better view is that landlords are able to recover from tenants the costs of compliance with the Building Act 1993 (Vic), including the costs of essential safety measures, at least where the landlord has incurred the cost itself;  and
  2. in light of recent consternation on the issue, either legislative amendment or a test case in the Supreme Court is required.

Some background to the debate is available here, here, here, here and here.

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