February 7, 2018

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Challenging rental determinations because the valuer did not provide ‘detailed reasons’

Clients often want to challenge a determination of the current market rent under a retail premises lease.

The grounds for setting aside a rental determination are quite narrow. However, three recent cases have seen rental determinations under the RLA 2003 set aside because the specialist retail valuer failed to provide ‘detailed reasons’ as required under s 37(6) of that Act. These cases highlight that:

  1. valuers undertaking a determination should be careful to ensure that their written reasons fully detail the reasoning processes; and
  2. those looking to challenge a determination should consider whether the specialist retail valuer’s written reasons are adequate.

A summary of the three recent cases is set out below.

First, in Higgins Nine Group Pty Ltd v Ladro Greville St Pty Ltd (Building and Property) [2015] VCAT 1687, a valuer’s reasons were held to be inadequate because the specialist retail valuer used the ‘profits method’ as an alternative means of determining the rent. When using that method, he looked at the sitting tenant’s turnover figures and formed the view that another hypothetical tenant bidding for the lease could generate over $500,000 more revenue than the sitting tenant was currently generating.

The determination was set aside for a number of reasons. One of the reasons was that the valuer did not provide detailed reasons that explained how he calculated the higher turnover figures that he projected for the new term.

The decision was upheld on appeal before Croft J in Higgins Nine Group Pty Ltd v Ladro Greville Street Pty Ltd [2016] VSC 244.

Both cases discuss in depth the principles surrounding detailed reasons.

Secondly, in Dalmatino Pty Ltd v Creative Laser Pty Ltd (Building and Property) [2017] VCAT 875, the landlord challenged a rental determination on the basis that the specialist retail valuer took into account rent paid for properties that were put to a different use to the use that the tenant was allowed to put the property under the lease. The Tribunal rejected the grounds on which the landlord sought to challenge the determination.

However, the Tribunal went on to criticise of the specialist retail valuer’s reasons and set aside the determination of the basis that the determining valuer’s reasons were inadequate.

In particular, the Tribunal held that (see paras [69] to [76]):

  1. s 36 of the RLA 2003 requires the valuer to have regard to the rent paid for properties that are put to the same or a substantially similar use to which the leased property is being put. The valuer had regard to some leases that were for the same or a similar use and some that were not. His reasons did not allow the reader to determine what consideration (if any) was given to the properties that were being put to the same or a similar use as the leased property; and
  2. having identified a range of rents payable for comparable properties, the valuer made “inevitable adjustments for all factors which influence market rental value” but did not provide any particulars of those adjustments.

Thirdly, in the case of Josephine Ung Pty Ltd v Jagjit Associates Pty Ltd (Building and Property) [2017] VCAT 2111, handed down last just before Christmas, Member Edquist at VCAT made orders setting aside a rental determination on the grounds that (among others):

  1. the determining valuer did not explain in his reasons how he dealt with the unusual amount of fitout that the landlord provided to the tenant under the terms of the lease; and
  2. the determining valuer incorrectly assumed that, except for fair wear and tear, the tenant was responsible for repair and maintenance at the leased premises and did not give reasons for explaining his consideration of the landlord’s obligations to repair and maintain the premises under s 52(2) of the RLA 2003.

Sam Hopper and Callum Dawlings

Callum will be a joining the Victoria Bar this year and will be available to take briefs from May 2018.

January 19, 2018

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Two interesting findings – the RLA 2003 permits a ‘late exit’ from the Act and occupancy costs pre-2013 are GST-inclusive

In an interesting decision handed down this week Senior Member Riegler at VCAT considered whether the $1M occupancy costs exclusion applied to exclude a lease from the operation of the RLA 2003 and found that:

1. while sub-s 11(2) of the RLA 2003 prevents late entry into the Act, it allows a late exit, that is, a lease that starts as a retail premises lease may fall outside the Act if a statutory exclusion to the operation of the Act is triggered during the lease term; and
2. when considering the $1M occupancy costs exclusion, occupancy cost included GST payable under the lease on rent and outgoings prior to 22 April 2013.

A copy of the decision is available at William Buck (Vic) Pty Ltd v Motta Holdings Pty Ltd (Building and Property) [2018] VCAT 15.

The case was about a lease entered into in 2006. The tenant had been paying land tax for many years. The tenant, an accounting practice, found an argument that it was the tenant of retail premises regulated by the RLA 2003 and tried to recover $251,234.68 of land tax that it said was wrongly paid.

For discussion of a similar case about the recovery of land tax, see Richmond Football Club Limited v Verraty Pty Ltd [2011] VCAT 2104, discussed here.

GST on rent

The landlord in the William Buck case argued that the $1M occupancy costs exclusion applied, taking the lease outside the operation of the Act.

If you are not familiar with the $1M occupancy costs exclusion, have a look at paragraphs [4] and [5] of the Tribunal’s reasons.

Rent in the first year was $802,795, plus GST. Outgoings were estimated at $150,209. Consequently, the threshold issue was whether rent and outgoings were to be considered inclusive or exclusive of GST for the purposes of determining whether the $1M occupancy costs exclusion was invoked, as this was (or was close to) enough to take the occupancy costs over the $1M mark.

The Tribunal concluded that the amount of rent payable under the lease was to be considered as a GST-inclusive sum. The Tribunal’s reasoning on this question is detailed and are set out at paragraphs [11] to [29] of its reasons.

This finding may be significant where occupancy are approaching to $1M, as GST under those leases pushes up the occupancy costs by a significant amount.

A few landlords may be pleasantly surprised to find that their leases are in fact outside the operation of the Act, which may allow them to bring a claim for unpaid land tax and have other advantages.

However, the impact of the decision is likely to be limited. The Retail Leases Regulations 2003 that established the $1M threshold were replaced by the Retail Leases Regulations 2013, which commenced operation on 22 April 2013, state that occupancy costsunder those Regulations are calculated as $1M exclusive of GST (see paragraph [24] of the Tribunal’s reasons).

Consequently, this part of the decision only really affects leases entered into before the Retail Leases Regulations 2013 took effect on 22 April 2013, and many of those claims will be wholly or partly barred by the Statute of Limitations.

Late exit from the RLA 2003

The Tribunal also considered that it is possible for a lease that is regulated by the RLA 2003 at the start of its term to subsequently fall out of the Act if a statutory exclusion is later invoked. This finding is likely to be more significant.

After finding that the rent was GST-inclusive for the purposes of determining occupancy costs, the Tribunal considered the ‘late exit’ issue and held that:

52. Although my findings set out above do not require me to make any determination on this issue, I consider it appropriate to set out my observations concerning this issue, having regard to the submissions filed by the parties.

53. Section 11(2) of the RLA states:

11 Application generally
(1) …
(2) Except as provided by Part 10 (Dispute Resolution), this Act only applies to a lease of premises if the premises are retail premises (as defined in section 4) at the time the lease is entered into or renewed.

54. In my view, s 11(2) of the RLA prevents fluctuation to prevent late entry into the Act. Therefore, if the premises are not retail premises at the time the lease is entered into (because the occupancy costs exceed $1 million), then the premises cannot become retail premises later (if the occupancy costs fall below $1 million).

55. However, I do not consider that the reverse scenario applies. In particular, I am of the opinion that a plain reading of the provision does not prevent late exit from the Act. As submitted by the Landlord, to construe the provision so as to disallow late exit from the Act would require the word ‘only’ to be positioned differently within the provision, as follows:

this Act applies to a lease of premises only if the premises are retail premises at the time the lease was entered into [or] renewed.

56. If the provision was expressed in that manner, then it would make no difference that the disqualifying characteristic subsequently arose, such as the occupancy costs increasing to over $1 million during the term of the lease because the characterisation of the lease is made at the time the lease is entered into.

57. Therefore, if leased premises do not fall within the definition of retail premises at the time that the parties entered into the lease (or its renewal), the premises cannot become retail premises later (for example if the occupancy costs reduced to under $1 million during the term of the lease). However, that does not prevent the reverse scenario. For example, if the occupancy costs were under $1 million at the time the parties entered into the lease, then the premises fall within the definition of retail premises. However, if the occupancy costs subsequently increased to over $1 million during the term of the lease, then the premises would no longer fall within the definition of retail premises.

See also the balance of the discussion at paragraphs [51] to [62].

There will be debate over whether this finding is obiter. However, even if it is, it is fully reasoned obiter from a Senior Member of VCAT who regularly hears retail leasing matters, so should not be dismissed lightly.

The finding is significant, as leases may ‘exit’ from the RLA 2003 if, during the term:

1. the total occupancy costs exceed $1M;
2. the tenant or its parent company become listed; or
3. the status of an overseas listed company’s exchange is altered (see my earlier post here).

An ‘exit’ from the Act can have a number of effects. For example: it may allow the landlord to recover land tax from the tenant, it removes the prohibition on a ‘ratchet clause’ and other restrictions governing a market rent review and affects whether proceedings can be issued in court or are limited to VCAT, which is a ‘no cost’ jurisdiction.

Consequently, practitioners should be aware of this development as it has the potential to affect a significant number of leases in Victoria and disputes under those leases, particularly since the Court of Appeal confirmed the breadth of the ‘ultimate consumer’ test under the RLA 2003.

December 15, 2017

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The High Court has refused special leave to appeal the CB Cold Storage case – When is a lease for business-to-business services governed by the Retail Leases Act 2003 (Vic)? Part 5

The High Court of Australia this morning refused special leave to appeal the decision of the Victorian Court of Appeal in IMCC Group (Australia) Pty Ltd v CB Cold Storage Pty Ltd [2017] VSCA 178.

For a discussion of that decision, see my earlier post here. If you are really keen, you can follow the links in that post to read some of the history of the debate.

The upshot of special leave being refused is that:

  1. the ‘ultimate consumer’ test of retailing is cemented as part of the test of whether a premises is a retail premises under the Retail Leases Act 2003 (Vic) for the foreseeable future (or unless Parliament intervenes);
  2. a substantial number of leases in Victoria are likely to be retail without the parties realising (see, for example, the discussion here); and
  3. litigation on some of those leases is likely, such as by tenants seeking to recovery the payment of land tax made under the mistaken belief that their lease was not regulated by the RLA 2003 (eg see here).

November 15, 2017

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Contents of notice of default under s 27 of the RLA 2003

Robert Hay QC has written an excellent blog post here commenting on a recent VCAT case about the requirements of a notice of default under s 27 of the RLA 2003.

You should read Robert’s note before reading post any further.

Whether a tenant has validly exercised an option in a retail premises lease often turns on whether the tenant has been given notice in writing of the default or defaults under s 27 of the RLA 2003.

However, while s 27 requires the tenant to have been given notice in writing of the default or defaults, it does not prescribe the form or contents of that notice.

This has given rise to a number of issues.

Landlord, relying on invoices and monthly statements to satisfy s 27 of the RLA 2003

I often see landlords trying to rely on an invoice or a monthly statement of account to say that the tenant was on notice of default for the amount set out in the invoice or statement.

While it has been tolerably clear for some time that a mere invoice or statement was unlikely to satisfy s 27 of the RLA 2003, we have not had a definitive statement from the Tribunal to rely on.

As a result, it was open to mount an argument that the tenant had not validly exercised its option under s 27 based only an invoice or a statement.

This, in turn, requires the tenant to issue proceedings for a declaration and other orders for the execution of a new lease.

Even if the tenant and its lawyers think the tenant will win, the time, distress and cost of litigation (particularly in a ‘no cost’ jurisdiction) creates significant leverage for the landlord. That leverage can then be used for various purposes, such as pressing the tenant to agree on a higher rent for the new term instead of having the rent reviewed to market. That leverage is amplified if the tenants wants to sell its business as the tenant needs a lease deed before it can assign.

For practitioners acting for tenants, the passages of Leonard Joel Pty Ltd v Australian Technological Approvals Pty Ltd [2017] VCAT 1781 that Robert has set out in his post would be useful to address that approach if taken by a difficult landlord.

Drafting notices under s 27 of the RLA 2003

Drafting notices under s 27 of the RLA 2003 has been an uncertain exercise.

Prior to the Leonard Joel decision, the safest course in the circumstances was to draft a notice of default under s 146(1) of the RLA 2003. However, as that notice is a statutory precursor to re-entry, service of a s 146 notice could cause the tenant to run off to VCAT for an injunction, which can be expensive and time-consuming for all parties. Also, using a default notice when you don’t intend to re-enter can reduce the impact of a default notice when you do – much like the boy who cried ‘wolf’.

Member Josephs identified the notice used in the earlier case of Computer and Parts Land and said that:

  1. … it provided a very appropriate example of a notice given on behalf of the landlord by its solicitors which had been prepared with an appropriate level of care resulting in a communication of obvious clarity and sufficiency.

Practitioners acting for landlords who want to prepare notices that will later be relied on to resist the exercise of an option under s 27 of the RLA 2003 should consider using the notice in Computer and Parts Land as their precedent.

The text of that notice is set out in and discussed in paragraphs 120 to 123 of Leonard Joel Pty Ltd v Australian Technological Approvals Pty Ltd [2017] VCAT 1781, which also provide references to the Computer and Parts Land decision.

November 2, 2017

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Another application of the “ultimate consumer” test

His Honour Judge Macnamara in the County Court of Victoria recently handed down a decision that considers and applies the controversial “ultimate consumer” test under s 4 of the RLA 2003.

For some background, see my earlier post here.

In the recent case of Access Solutions International Pty Ltd v Gamet Pty Ltd [2017] VCC 1563, his Honour considered whether a lease was a lease of retail premises in circumstances where:

  1. the lease contained an acknowledgement by the parties that the RLA 2003 did not apply;  and
  2. the tenant was in the business of manufacturing and installing custom gates.   Most of the tenant’s work (by dollar value) involved the supply of gates to builders, not to the owner of the land on which the gate was eventually installed.

In summary his Honour concluded that:

  1. the acknowledgement that the RLA 2003 did not apply was of no effect because of s 94 of the RLA 2003;
  2. the product that was supplied by the tenant was similar in nature to the product sold or supplied by a builder and, on the basis of English authority, cannot properly be construed on the supply of ‘goods’.   As a result, the tenant’s product was properly characterised as the supply of ‘services’;
  3. the provision of those services was an ‘input’ into the builders businesses and was, accordingly, consumed by the builders;  and
  4. as a result, the ‘ultimate consumer’ from Fitzroy Dental and CB Cold Storage was applied and the lease was found to be a lease of retail premises.

Without deciding the matter, his Honour left open the possibility that the analysis may have been different if the supply was of goods, not services.

Readers are referred to paragraphs [128] and following of the decision for further reading.

This decision is significant, as it suggests that premises occupied by the tenants in the building trades may be considered retail premises under the RLA 2003.

July 5, 2017

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Court of Appeal dismisses appeal in the C B Cold Storage case – When is a lease for business-to-business services governed by the Retail Leases Act 2003 (Vic)? Part 4

The Victorian Court of Appeal today handed down its decision dismissing the much-anticipated C B Cold Storage appeal. The decision is cited as IMCC Group (Australia) Pty Ltd v CB Cold Storage Pty Ltd [2017] VSCA 178 and is available online.

The background to the decision is in earlier posts on my blog here.  If you have not been following this debate, you should read the earlier posts first, otherwise the balance of this post might not make much sense.

The issue is that the ‘ultimate consumer’ test leads to some counter-intuitive results.

The test suggests that:

  1. some premises will be considered ‘retail’ under the RLA 2003 when most members of the public would not characterise them that way;  and
  2. most, if not all, services are retail in nature.

This means that a significant number of leases are governed by the RLA 2003 when neither the landlord nor the tenant (nor, often, their lawyers) realise.

The consequences can be significant. The RLA 2003 alters the terms of the bargain between landlord and tenant and the forum for any litigation. The most significant change is that landlords are prohibited from recovering land tax from tenants of a retail premises lease under the RLA 2003. Claims by tenants for the recovery of substantial amounts of land tax at VCAT are not unknown.

In summary, the Court of Appeal did not overrule the ‘ultimate consumer’ test, holding that:

[3]       … In summary, the phrase ‘retail provision of services’ has long been interpreted by reference (at least in part) to an ultimate consumer test; that is, are the services used by the person to whom they are sold or are the services passed on by the purchaser in an unaltered state to some third person? No distinction has been drawn between commercial and non-commercial users of the service. The Court should be slow to depart from the interpretation of the phrase given to it by the Court over many years. It would only be appropriate to do so if the interpretation was clearly wrong; but that is not the case. Moreover, the legislature has made amendments to the legislation, but has not made any change to the phrase ‘retail provision of services.’ Consequently, and while not conclusive, the Court may presume that the legislature adopted the interpretation consistently given to the phrase by the Court in the past.

[4]       Other relevant considerations that inform whether the service is ‘retail’ in nature include the type of service that is provided and whether it is generally available to any person for a fee.

[5]       Here, there is nothing in the nature of the services provided that would exclude them from being considered retail services. The services were used by the Tenant’s customers who paid a fee. Any person may purchase the services if the fee is paid. The Tenant’s customers do not pass on the services to anyone else. They are the ultimate consumers of the Tenant’s services.

The Court also provided the following commentary on the test for determining whether a lease is a lease of retail premises under the RLA 2003 (emphasis added, footnotes ommitted):

23        What can be seen from the authorities is that the concept of the ‘retail provision of services’ in the Retail Leases Act and its predecessor legislation is that it involves close consideration of the service that is offered, whether a fee is paid, whether it is a service that is generally available to anyone who is willing to pay the fee and whether the persons who use the service are the ‘ultimate consumer’. On one view, to talk of an ultimate consumer of services may appear strained. Most services that are purchased are not susceptible to being passed on to a third person. This may be contrasted with a sale of goods where the difference between wholesale and retail is easily discernible. Nevertheless, the authorities that apply an ultimate consumer test as one indicia of the retail provision of services, are of long standing.

44        As noted above, the phrase ‘retail provision of services’ has long been interpreted by reference (at least in part) to an ultimate consumer test; that is, are the services used by the person to whom they are sold or are the services passed on by the purchaser in an unaltered state to some third person? No distinction has been drawn between commercial and non-commercial users of the service. The Landlord wishes to restrict the ‘consumer’ to the consumer who purchases goods or services for personal use. But that is not the sense in which the authorities have used the word ‘consumer.’ They have used it in a broader sense to mean a person who uses the service. As the judge identified, that is not the approach that the Tribunal took. Contrary to the Landlord’s contention, the judge applied the authorities that have consistently endorsed as a relevant consideration whether the user of the service is the ultimate consumer.

45        The Landlord’s focus on what happens to the goods that are stored after they leave the premises is not relevant in this case. That may have been relevant if the question was whether there was a sale of goods by retail. But it is not. It is not a question of consumption of the goods. Rather, the focus must be on the service that is provided by the Tenant.

46        We reject the Landlord’s submission that the judge approached the task on the basis that an ultimate consumer test alone suffices to determine whether there has been a retail provision of services. The judge looked at other matters, including whether the services are generally available to any person for a fee. Ashley J referred to the provision of services to ‘members of the public’ in FP Shine. In Fitzroy Dental, Croft J looked at whether the services were ‘open to the public.’ On analysis, it seems to us that their Honours were concerned with whether there were restrictions on access to the service and who could use it. They were not concerned with the characteristics of the user (for example, whether the user was an individual or a business). Both judges relied on Wellington. In that case, Nathan J made it clear that the user may, but need not, be a member of the public.

47        Here, even if one assumes that there may be a limited number of people who use the service (because they need to use large trucks to transport the goods to be stored) that would not matter. In any event, the Tenant does provide transport facilities if required on payment of an extra fee. In short, the Tenant does not impose any relevant restrictions on access. Anyone can use the service and the Tenant’s office is open during business hours to customers and prospective customers alike.

48        Of course, in each case it is necessary to consider the exact service that is supplied. …

50        In summary, the services were used by the Tenant’s customers who paid a fee. Any person could purchase the services if the fee was paid. The Tenant’s business was open during normal business hours. The Tenant’s customers have not passed on the services to anyone else. They were the ultimate consumers of the Tenant’s services. In isolation, none of these features would suffice to constitute the premises as retail premises. Conversely, the absence of one or more of them, would not necessarily result in a finding that the premises were not retail premises. However, in the circumstances of this case, when all of those features are taken together, the conclusion must be that the premises are retail premises.

The emphasised passages show that the Court of Appeal has:

  1. left open the possibility of services that are not retail in nature, but has not identified any examples;  and
  2. emphasised that the ‘ultimate consumer’ test is one of a number of considerations to be taken into account when determining whether a lease is of retail premises under the RLA 2003.

February 24, 2017

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Ministerial Determination – overseas listed companies and their subsidiaries – Part 2

In a previous post here I discussed problems with the reference to the World Federation of Exchanges in sub-s 4(2)(d) of the RLA 2003 and the Ministerial determination that excludes overseas listed companies and their subsidiaries from the operation of the RLA 2003 effective from12 August 2016.

The recent decision of AMJE Pty Ltd v Mobil Oil Australia Pty Ltd [2016] VSC 777, which was handed down on 13 December 2016 (after the new determination), highlights another problem with the exclusion contained in s 4(2)(d) of the RLA 2003.

In that case, Derham AsJ in the Supreme Court of Victoria was considering a challenge to the jurisdiction of the Court to hear and determine a case involving a lease of a petrol station by the defendant on the basis that it was a retail tenancy dispute in VCAT’s exclusive jurisdiction.

His Honour recited the following unchallenged evidence and concluded as follows (citations omitted, emphasis added):

[27]      When the Lease was executed on 19 September 1996, the defendant was a subsidiary of Mobil Petroleum Co., Inc. Mobil Petroleum Co., Inc. was, in turn, a wholly owned subsidiary of Mobil Oil Corporation, an entity listed on the New York Stock Exchange (‘NYSE’).

[28]      Exxon Corporation and Mobil Oil Corporation merged in November 1999, and the defendant became a wholly owned subsidiary of ExxonMobil Australia Pty Ltd, which in turn, is a wholly owned subsidiary of Exxon Mobil Corporation. Both Mobil Oil Corporation and ExxonMobil Corporation were listed on the NYSE at the time of the merger. ExxonMobil Corporation remains listed on the NYSE.

[29]      On 22 March 2000, defendant converted to a proprietary company known as Mobil Oil Australia Pty Ltd (‘the defendant’).

[30]      Until 2013 the NYSE, then known as NYSE Euronext, was a member of the World Federation of Exchanges (‘WFE’). NYSE Euronext was acquired by Intercontinental Exchange Group Inc. (‘ICE’) on 13 November 2013. The NYSE is not a member of WFE as the WFE ceased to exist on or about 29 October 2013. Subsequently, Intercontinental Exchange, Inc., a subsidiary of ICE, became a member of a differently constituted company called The World Federation of Exchanges Limited. Intercontinental Exchange, Inc. was also previously a member of the entity previously known as WFE. In summary, therefore:

(a)       WFE ceased to exist on or about 29 October 2013. From that date, section 4(2)(d) of the RLA could not operate and the Act applied; and

(b)       alternatively, if the subsequent entity The World Federation of Exchanges Limited is to be read as WFE for the purposes of s 4(2)(d) of the RLA, then from 13 November 2013 the NYSE was not eligible to be a member of WFE. From that date, s 4(2)(d) of the RLA could not operate and the RLA applied to the Lease.

[31]      It is not in dispute that the defendant is a subsidiary of its ultimate parent, Exxon Mobil Corporation, for the purposes of the Corporations Act 2001 (Cth) and s 4(2(d) of the RLA.

It is important to note that the Associate Justice did not make a finding that s 4(2)(d) of the RLA 2003 ceased operating on or about 29 October 2013, but left the question open as one of the two alternatives that had the same effect on the case before the Court.

Practitioners considering a lease to an overseas company (or the subsidiary of an overseas company) that was entered into before 12 August 2016 should be aware of this decision, as well as the other potential problems with s 4(2)(d) of the RLA 2003 discussed in my earlier post.

February 10, 2017

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When is a lease for business-to-business services governed by the Retail Leases Act 2003 (Vic)? Part 3

An earlier blog post here discussed the recent decision of CB Cold Storage Pty Ltd v IMCC Group (Australia) Pty Ltd [2016] VCAT 1866, in which Senior Member Walker held that a lease of a premises used to provide cold storage and logistics services to other businesses was not a retail premises under the Retail Leases Act 2003 (Vic).

The decision was overturned this week in an appeal heard by Croft J in the Supreme Court of Victoria, who found that the premises were retail premises under the RLA 2003.

An excellent summary of the decision is available on my colleague Robert Hay QC’s blog here.

A copy of Croft J’s the decision is available here.

The main points to draw from the decision are:

  • the test to determine whether the sale of goods or supply of services is retail for the purposes of the RLA 2003 remains the ‘ultimate consumer’ test from Wellington Union Life Insurance Society Limited [1991] 1 VR 333;
  • the RLA 2003 can apply to premises from which goods or services are supplied business-to-business, provided that those goods or services are supplied to the ultimate consumer of those services. This may apply to services supplied to business-to-business, provided that the services are not on-supplied (see more below), or to goods that are supplied business-to-business and that are used as an input in the second person’s business (such as a pen in a solicitor’s practice or a bolt used in the manufacture of a car);
  • unless another statutory exclusion applies, warehousing and logistics businesses are likely to be treated as retail premises;
  • the reach of the ‘ultimate consumer’ test is broader than most people expect. The words of Member Rowland in Global Tiger Logistics Pty Ltd v Chapel Street Trust (unreported, VCAT, Member L Rowland, 8 November 2012) remain relevant:

[17]   Given the ultimate consumer test I find it difficult to conceive of any sale of a service which would be other than retail. …

  • the ‘ultimate consumer’ test applies also to the supply of goods business-to-business, provided that the goods are used as an input into the second business, rather than re-supplied.

Importantly, there are likely to be a significant number of leases in the community that are regulated by the RLA 2003 without the parties knowing.

This could have a number of effects. The most significant is likely to be the prohibition on the recovery of land tax as an outgoing in a retail premises lease under s 50 of the RLA 2003. Recent VCAT authority suggests that a tenant of retail premises is entitled to recover from its landlord land tax mistakenly paid as an outgoing (see here).

Similar arguments may also apply to payment of certain repair and maintenance costs (see here).

Practitioners acting for tenants should consider reviewing their client’s non-retail leases to determine whether:

  • their leases are in fact leases of retail premises under the ‘ultimate consumer’ test;  and
  • land tax or other outgoings mistakenly paid may be recoverable from the landlord.

Practitioners acting for landlords should be aware of the breadth of the ‘ultimate consumer’ test and advise their clients accordingly when preparing their leases. If there is any doubt, it is prudent to treat the lease as a lease of retail premises to avoid the risk of losses to the landlord down the track.

November 14, 2016

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When is a lease for business-to-business services governed by the Retail Leases Act 2003 (Vic)? Part 2

The recent trend in retail leasing cases has seen a gradual broadening of leases that fall within the definition of “retail” under the Retail Leases Act 2003 (Vic) (RLA 2003).

Many commentators, myself included, have suggested that all businesses that wholly or predominantly supply services will be considered retail, whether or not these services are supplied to the public or business-to-business (see here.)

In the recent case of CB Cold Storage Pty Ltd v IMCC Group (Australia) Pty Ltd [2016] VCAT 1866, Senior Member Walker expressed a different view, stating that:

[30]     Mr Hay provided me with an extract from … [Retail Leases Victoria]. Mr Hay is one of the authors of the book and he adopted the following statement that is to be found at paragraph 20,005 concerning … [the Fitzroy Dental] decision: 


“The consequence of Fitzroy Dental Pty Ltd v. Metropole Management Pty Ltd is that the provision of any service is likely to constitute the retail provision of services and therefore the 2003 act will apply.”

[31]     I do not accept the correctness of this proposition. The learned judge does not go that far in the case referred to. For example, in paragraph 18, when he talks about the “on-supply” of goods and services, he talks about the possible characterisation of the first person to whom the goods or services are supplied as being an ultimate consumer. He does not say that that conclusion is inevitable in regard to services.

In that case, the Senior Member considered a business that provided cold storage facilities and could also arrange refrigerated transportation. He reviewed the authorities and held that:

[62]     In all of these cases the goods or services are rendered to persons variously described as members of the public or the ultimate consumer. The term “consumer” is nowhere defined … [and] dictionary definitions are unhelpful but in the sense in which it has been used in the cases I think it means the person who uses the goods or services to satisfy his own personal needs rather than for some business or other purpose. The other characteristic is that the supply in each instance is usually in small quantities for use or consumption by the person to whom they are directly supplied.

[63]     That accords with the way I think the word “retail” is used in normal speech. As was pointed out in some of the cases, it is possible for a company or business to be involved in a retail supply of goods or services. For example, a company officer might purchase stationary at a local newsagency and that would be a retail supply. However if the company acquired a large quantity of stationery for on-supply to various purchases in smaller quantities, that would generally be regarded as a wholesale supply. 


[64]     The situation is more difficult to categorise in regard to services where one cannot talk about retail or wholesale quantities. Nevertheless, most people would have no difficulty in categorising a particular supply of services as retail if such were the case. 


[65]     For example, if a mining company, wishing to sell coal to a power station in India, dispatched a large shipment of coal by rail to a port, the rail operator would be providing a service of transport to the mining company but that service would not generally be regarded, in normal parlance, as being provided on a retail basis. Similarly, when the coal is loaded onto a ship by the Port authority, that again is a service rendered to the mining company but again, that would not generally be regarded as being provided on a retail basis. The same can be said of the services provided by the shipowner. In each case, the service that is provided is a necessary step in a supply chain of a commodity to a commercial customer, being the power station in India, and neither the mining company nor the customer can be regarded as an “ultimate consumer” or “a member of the public” in the sense in which those words appear to have been used in the authorities referred to. One does not get to an “ultimate consumer” or a “member of the public” until the coal is burnt to produce electricity which is then supplied to the power company’s customers in India. 


            …

[66]    I do not accept Mr Hay’ submission that, virtually any supply of services will fall within section 4. The definition is not simply the provision of services but rather, the retail provision of services. Parliament has limited the application of the definition by the addition of the word “retail” and that word must have some meaning. 


[67]     In applying the definition one must look carefully at the facts of the particular case and decide as a matter of mixed fact and law whether, under the lease, the predominant use of the premises is, or is to be, the retail provision of services. The starting point will be to examine the lease to see what the permitted use of the premises in question is …

[68]     In the present case the use is that of cold and cool storage warehouse and transport facility, involving the receipt, storage and trans-shipment of goods for producers, manufacturers, distributors, importers and exporters. The customers to which the Tenant provides these services range from large primary production enterprises to very small owner operated businesses. Mr Clarke submitted that there was nothing about the provision of these services that would give it a retail character and I think that is right. That is not the ordinary meaning of “retail”. The Tenant’s services to those customers cannot sensibly be regarded as being a retail supply of services. Indeed, such an interpretation would give the word “retail” in the section no meeting at all. 


On one view, this case represents a shift away from the broad interpretation of ‘retail’ that has been adopted by many in the leasing community and suggests that less leases will be treated by the Tribunal as retail than had previously been expected, particularly leases for the sale of goods or the supply of services between businesses.

 

 

September 7, 2016

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Ministerial Determination – overseas listed companies and their subsidiaries

An issue has emerged in recent years about the extent to which overseas listed companies and their subsidiaries are excluded from the operation of the Retail Leases Act 2003 (Vic) (RLA 2003).

Sub-section 4(1) of the RLA 2003 defines ‘retail premises’ for the purposes of that Act.   Sub-section 4(2) then contains a number of exceptions to that definition, including sub-section 4(2)(d), which excludes from the definition of retail premises:

(d)       premises the tenant of which is –

(i)   a body corporate whose securities are listed on a stock exchange, outside Australia and the external territories, that is a member of the World Federation of Exchanges; or

(ii)   a subsidiary (as defined in section 9 of the Corporations Act) of such a body corporate;

A number of problems with that exclusion have emerged.

First, a number of significant international stock exchanges are not members of the World Federation of Exchanges.

Secondly, it appears that membership of the World Federation of Exchanges is not fixed and that some significant exchanges have been members at some times and not at others.

Thirdly, it appears that there are different levels of membership. For example, the website for the World Federation Exchange currently lists 63 members, 3 associates, 26 affiliates and 1 correspondent exchange.

These issues have lead to confusion over whether and when the exclusion applies.

To address the confusion caused by this definition, the Minister of Small Business, Innovation and Trade has published a new determination under sub s 5(i)(d) of the RLA 2003 excluding the following tenants from the definition of “retail premises” in the RLA 2003:

bodies corporate or companies or corporations whose securities are listed on a stock exchange outside Australia or the subsidiaries (including subsidiaries as defined in section 9 of the Corporations Act 2001) of such bodies corporate, companies or corporations.  

The determination is prospective in operation and takes effect from 12 August 2016.   It does not appear to have retrospective effect.

The new determination also revokes the determination signed 20 December 2011 and Gazetted on 5 January 2012, which applied to the New Zealand Stock Exchange only.

When considering leases to overseas companies, practitioners should be aware of both the determination and its start date of 12 August 2016.

A copy of the new determination is available here.