October 31, 2019

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Justice Croft’s last retail leasing appeal – RFC v Verraty Pty Ltd [2019] VSC 597

My friend, colleague and fellow blogger Robert Hay QC recently wrote a post here about the Supreme Court decision in Richmond Football Club Ltd v Verraty Pty Ltd [2019] VSC 597.

The decision is significant for a number of reasons.

First, the decision is the last decision about retail leasing from his Honour Justice Croft, who recently retired from the Victorian Supreme Court after close to 10 years of service to the State of Victoria.

To describe his Honour’s contribution to retail and commercial leasing over his years of service to the Court, and in his capacity as a barrister and author, as unparalleled would be an understatement.

As the leading retail leasing barrister when at the Bar, the leading author in the country on retail and commercial leases and the Justice of the Supreme Court sitting on almost all leasing cases over the last 10 years, Croft J has been, in a very real sense, the first and last word on leasing law in Victoria.

Some of his Honour’s career highlights include:

  • appointment to the Victorian Supreme Court in 2009, during which time his Honour sat on virtually all appeals from VCAT retail leasing cases;
  • authorship of Commercial Tenancy Law (4th ed, 2018) and its earlier editions in 2009, 1997 and 1990;
  • ongoing authorship of the leasing loose-leaf service Retail Leases Victoria (Butterworths);
  • practice at the Victorian Bar as an advocate and arbitrator in retail and commercial leasing matters and appointment as senior counsel in 2000; and
  • Secretary for Law (ie head of Attorney-General’s Department) and solicitor for the Northern Territory, 1986-88.

On behalf of the Victorian retail and commercial leasing community, I would like to extend both thanks and congratulations to his Honour for his years of service to the leasing community.

Justice Croft has taken chambers in Dawson Chambers and is continuing to act as a commercial arbitrator.

Secondly, the decision is important for practitioners in this areas and warrants detailed discussion.

RFC and its landlord at the Wantirna Club, Verraty Pty Ltd, have a long history of litigation.

The litigation considered by this post considers the operation of sub-s 11(2) of the RLA 2003.  Section 11 states that:

11        Application generally

(1)       This Act applies to a retail premises lease that is—

(a)       entered into after the commencement of this section; or

(b)       renewed after the commencement of this section, whether the lease was entered into before or after that commencement.

(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.

There are other sections of the RLA 2003 that are relevant to the litigation, particularly s 1, which states that (emphasis added):

1          Main purpose

The main purpose of this Act is to replace the scheme in the Retail Tenancies Reform Act 1998 with a new scheme to enhance—

(a)       the certainty and fairness of retail leasing arrangements between landlords and tenants; and

(b)       the mechanisms available to resolve disputes concerning leases of retail premises.

RFC had entered a lease in 1998 for a term of 10 years with an option for a further term of 10 years.  In 2004 the parties purported to vary the lease by extending it to a term of 20 years commencing 7 May 1998.  It was a term of that lease that the tenant was required to pay as an outgoing land tax payable by the landlord.

In Richmond Football Club Limited v Verraty Pty Ltd [2011] VCAT 2104, the first litigation between these parties, Senior Member Riegler at VCAT held that the purported variation operated as a surrender and re-grant by operation of law and that, as a result, a new lease was entered into in 2004.  As that lease was regulated by the RLA 2003, the obligation to pay land tax was rendered void by operation of s 50 of the RLA 2003 and the landlord was obliged to refund a substantial sum of land tax paid by the RFC.

The RLA 2003 applies to leases of ‘retail premises’ as defined in the Act.  However, sub-s (2) of the RLA 2003 states that:

(2)       However, retail premises does not include the following premises:

(a)       premises in respect of which the occupancy costs (as defined in subsection (3)) under the lease concerned is more than the amount prescribed by the regulations for the purposes of this paragraph;

(3)       In subsection (2)(a), occupancy costs means—

(a)       the rent payable under the lease, not being rent (or any part of rent) that is to be determined by reference to the turnover of a business; and

(b)       the outgoings, as estimated by the landlord, to which the tenant is liable to contribute under the lease; and

Note

Section 46 requires the landlord to give the tenant a written estimate of the outgoings to which the tenant is liable to contribute.

The statutory threshold for the occupancy cost exclusion is $1M.

In the subsequent, unrelated case of William Buck (Vic) Pty Ltd v Motta Holdings Pty Ltd [2018] VCAT 15, Senior Member Riegler at VCAT held that:

  1. 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).
  2. 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 renewed.

  1. 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.
  2. 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.

At some stage since the first decision involving RFC and its landlord, the total occupancy costs for the Wantirna Club exceeded the statutory threshold of $1M and the landlord claimed that the RLA 2003 no longer applied to RFC’s lease.

Also, RFC exercised an option for a new term that commenced in 2018.  The rent for the new term was to be determined by market rent review.  The option clause in the lease stated that (emphasis added):

16.2     Terms and Conditions of Renewed Lease

The renewed Lease granted pursuant to Clause 16.1 hereof shall be subject to the same covenants, conditions, agreements, stipulations and providers contained in this Lease save and except that:

(a)       the Annual Rent reserved by and payable for the first year of the renewed Lease shall be the Annual Rental determined in accordance with the provisions of Clause 15.1(b) of this Lease and, where appropriate, the provisions of Clause 15 shall be incorporated in full into any such renewed Lease and for the purposes of Item 13 of the Schedule hereto as incorporated into any such renewed Lease the term “lease year” shall mean each consecutive twelve (12) month period during the term created by such renewed Lease with the first such period commencing on the commencement date of such renewed Lease; and

(b)       such new renewed Lease shall omit from Item 11 of the Schedule to that lease the first further term (if any) of this covenant for renewal.

However, the market rent review clause in the lease deed contained a ratchet clause, preventing the rent from going down at a market review. Ratchet clauses are rendered void by operation of s 35(3) of the RLA 2003.  Consequently, there was also a question over whether the rent review for the new term would be regulated by the RLA 2003 or just by the lease deed.

Consequently, the landlord issued proceedings seeking:

  • the payment of land tax for the period after the total occupancy costs exceeded $1M; and
  • a declaration that the RLA 2003 did not apply to the rent review for the further term.

At the trial before VCAT, Senior Member Forde (discussed here) held that:

  • sub-s 11(2) of the RLA 2003 permits a lease to ‘jump out of’ the Act;
  • the landlord was required to give an estimate of outgoings in its disclosure statement and annually under s 46 of the RLA 2003 until the RLA 2003 ceased applying to that lease;
  • once the total occupancy costs exceeded $1M as estimated by the landlord, the RLA 2003 stopped applying to the lease; and
  • once the RLA 2003 stopped applying to the lease, those covenants rendered void by the operation of that Act ceased to be void and land tax became payable.

On appeal, Croft J overturned the decision on three grounds.

First (at [38] to [62] of the Court’s reasons), Croft J held that sub-s 11(2) of the RLA 2003 does not contemplate a late departure from the RLA 2003, it merely fixes the date for determining its application as the date when the lease was entered into.

Moreover, allowing a late exit from the RLA 2003 is inconsistent with the express statutory purpose of enhancing certainty in retail leasing arrangements between landlords and tenants (see sub-s 4(1)(a) of the RLA 2003, set out above).

Consequently, the Court held that:

  • the RLA 2003 does not allow a late-exit and the sole date for determining whether the Act applies is the date that the lease was entered into;  and
  • as a result, the tenant was not liable for land tax.

Secondly (at paras [63] to [68] of the Court’s reasons), partly as a result of the first finding, there is no requirement under s 4 of the RLA 2003 to provide an estimate of outgoings every year in order to determine the total occupancy costs.

Section 46 of the RLA 2003 requires the provision of annual estimate of outgoings.  The Court held that this requirement is separate to the occupancy costs exclusion in s 4(2) and (3) of the RLA 2003, despite the presence of the note under sub-s 4(3) of the RLA 2003 that refers to s 46.

Although not strictly relevant to the decision, it is worth noting that Croft J also made the following remarks about the operation of s 46 of the RLA 2003:

  1. … I do agree with the view expressed by the Tribunal as to the effect of non-compliance with the requirements of s 46(3)(b), as follows:

52.   I accept Verraty’s [the Landlord’s] submission that it is irrelevant that the notice was not given within the time prescribed by s46(3)(b). The only penalty for not giving notice by that time is that the liability to contribute to outgoings does not arise.  I reject Verraty’s submission that even when the estimate is given late, the tenant remains liable to pay outgoings that relate to the period before the estimate is given.  Such an interpretation makes the consequence of a landlord not giving a notice meaningless.[1]

Thirdly (at paras [69] to [80] of the Court’s reasons), Croft J considered the impact of the avoiding provisions of the RLA 2003 on the 2018 lease.

After considering the text of clause 16.2 of the lease deed (the text of which is set out above), the Court held that:

  1. On the basis of provisions such as clause 16.2 of the 2004 Lease and having regard to the provisions of s 27 of the RLA, in particular s 27(1)(c)—a provision which will operate as soon as the application of the Act to the lease as a “retail premises lease” occurs by reason of the operation of s 11(2)—the position would appear to be that the provisions of the lease being renewed for the purpose of a provision such as clause 16.2 would be the lease is effectively revised by the implication of the various provisions of the Act which apply the formula discussed—“a retail premises lease is taken to provide as set out in this section”. This would, in the present circumstances, and having regard to the provisions of clause 16.2 of the 2004 Lease and s 94 of the Act, include the provisions of s 37 of that legislation.
  2. There would not, however, appear to be any difficulty with the parties directing their minds to this possibility when the lease was first entered into if they contemplated the possibility of the RLA not applying at the time of renewal and, consequently, providing express terms to the effect that the provisions contained in any renewed term are to be those contained in the original lease unaffected by the operation of the RLA. There would be no problem with the application of s 94 of the RLA on this basis because, on renewal—the other point of time at which the operation of s 11(2) becomes relevant—the renewal is not a “retail premises lease” and therefore there is nothing to attract the operation of s 94 of the Act.

It follows, then, that because of the particular terms of the option clause:

  • those parts of the 2004 lease that were rendered void by operation of the RLA 2003 were not carried over into the 2018 lease;  and
  • it appears that those covenants implied into the 2004 lease by operation of the RLA 2003 would also be implied into the 2018 lease (for example, the repair and maintenance obligations of s 52 and compensation provisions in s 54 of the RLA 2003).

However, that only arose because of the particular option clause considered in that case.  While similar clauses are extremely common in the Victoria, there is nothing stopping the parties from drafting an option clause that avoids that consequence.

It is unclear at this stage if there will be a further appeal.  At the time of writing this paper, the landlord is still within time to file an appeal.

There are a number of take-home points for practitioners.

First, keep an eye out for news of an appeal in the next few weeks.  News of any appeal will be posted here.

In the meantime, the present state of the law is that:

  • the RLA 2003 does not permit a ‘late exit’ during the lease term; and
  • the usual form of option clause in Victoria means that the RLA 2003 will affect lease covenants into a renewed term.

Secondly, when drafting, reviewing or settling a lease for your client:

  • check whether the option clause takes the usual form (set the example above); and
  • consider whether your client should seek a variation to the form of the clause to avoid inadvertently affecting the lease terms on renewal if the RLA 2003 ceases to apply.  As a general rule, the effects of the RLA 2003 favour the tenant, so tenants will want the benefit of the Act to continue and landlords will not, but practitioners will need to consider their clients’ individual circumstances.

Thirdly, consider the operation of the RLA 2003 when an existing option is exercised.  In particular, if the option clause takes the usual form (see above), then:

  • it might be possible to re-negotiate the bargain so that the parties agree that the new term operates as if the RLA 2003 did not apply to the previous lease deed. However, a well-informed tenant would require a substantial concession from the landlord before agreeing to that amendment;
  • the effect of the RLA 2003 should be considered with respect to the new rent agreed or determined by a valuer for the new term. The RLA 2003 can affect a number of terms that are relevant to the mechanics of the rent review, including:
    1. a ratchet clause will be rendered void;  and
    2. a market rent review will be regulated primarily by s 37 of the RLA 2003;  and
  • the landlord will be liable in the new term for repair and maintenance under s 52 of the RLA 2003 and the tenant is not liable for the landlord’s land tax as an outgoings, both of which would tend to drive the rent up.

Other provisions of the RLA 2003 may also affect individual clients.

Fourthly, tenants may have exercised an option in the usual form (see above).  However, because the lease otherwise falls outside the operation of the RLA 2003, the parties may be proceeding on the assumption that the tenant is liable for the landlord’s land tax as an outgoing or for repair and maintenance costs otherwise regulated by s 52 of the RLA 2003.  If so:

  • tenants should consider a claim against their landlord for amounts paid by mistake; and
  • rent may have been determined by a valuer, or agreed between the parties, on the mistaken apprehension that the landlord could recover land tax as an outgoing or that the tenant was responsible for repair and maintenance in the renewed term. Practitioners should consider whether a determination of the rent or any agreement based on that assumption are vitiated by mistake and can be re-opened.

Fifthly, there is a question over what happens when an option is exercised and the rent is then reviewed, to take the occupancy cost either over or under the statutory threshold.

This issue is yet to be litigated.  However, sub-s 11(2) of the RLA 2003 means that the parties must look only to the date the lease was ‘entered into or renewed’ to determine the application of that Act.

Section 11(1) states that:

(1)       In this Act, the renewal of a retail premises lease means the renewal of the lease—

(a)       under an option granted under the lease for a further term; or

(b)       under an agreement to renew the lease on substantially the same terms and conditions, except as to rent, for a further term entered into by all of the parties to the lease.

Subject to the amendments to the RLA 2003 tabled in Parliament yesterday, in Victoria it is almost universal practice that:

  • an option is exercised;
  • a rent review to market follows after the exercise of the option; and
  • the tenant pays the rent payable at the end of the old lease term until the review to market is completed.

It seems to follow, then, that:

  • if the total occupancy costs payable at the end of the old lease term is over $1M, then the total occupancy costs payable when the option is exercised is also over $1M and the RLA 2003 does not apply and there cannot be a late entry into the Act if the rent review reduces the rent;  and
  • on the other hand, if the total occupancy costs in the last year of the old term are under $1M but the subsequent rent review means that the occupancy costs exceed $1M, then the lease cannot have a ‘late exit’ and the RLA 2003 continues to apply.

However, further litigation may be required to provide certainty on this question.  In particular, there may be contrary arguments about whether the rent paid prior to the market review was ever properly ‘payable under‘ the renewed lease in the required sense.

[1]           Phillips v Abel [2019] VCAT 1031.

October 30, 2019

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New Ministerial determination exempting farm leases from the RLA 2003

Following recent uncertainty about the application of the Retail Leases Act 2003 (Vic), the Minster for Small Business today published a determination under s 5(1)(e) and 4(2)(h) of the RLA 2003 that exempts farm leases from the operation of the RLA 2003, effective from 29 October 2019.

A copy of the determination is available here.

Again, thanks to Mark Schramm of the VSBC for alerting me to the determination.

October 30, 2019

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Retail Leases Amendment Bill 2019 tabled before Parliament

A new Retail Leases Amendment Bill 2019 (Vic) was tabled before Victorian Parliament yesterday and had its second reading today.

A copy of the Bill is available here: RLA Bill 2019.

The Bill is not a wholesale review of the Retail Leases Act 2003 (Vic).  The purpose of the Bill is to (see clause 1):

(a) to amend the Building Act 1993 to clarify the obligations of landlords and tenants under retail premises leases in respect of essential safety measures; and

(b)  to amend the Retail Leases Act 2003

(i)  to clarify the obligations of landlords and tenants under retail premises leases in respect of essential safety measures; and

(ii)  to require landlords to give information to tenants under retail premises leases in a more timely manner; and

(iii)  to clarify the timeframe within which landlords must return security deposits to tenants under retail premises leases; and

(iv)  to create a new early rent review process for tenants under retail premises leases; and

(v)  to establish a cooling off period for the renewal of retail premises leases in certain circumstances.

The Bill, if passed, will:

  1. allow landlords of retail premises to recover from retail tenants the cost of essential safety measures if the tenant has agreed to bear that cost.  The Bill is silent about other (ie non-retail) tenancies;  and
  2. give tenants of retail premises the ability to request an early rent review before they exercise their option for a further term.

Both of those amendments are significant for the leasing community.

I will write more about the Bill in due course.

Thanks to Mark Schramm and the VSBC for drawing the Bill to my attention.

September 13, 2019

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The application of the RLA 2003 post – C.B. Cold Storage – part 2: Bulk Powders Pty Ltd v Seicon Pty Ltd (Building and Property) [2018] VCAT 2000

This is the second post in a series that I am publishing on the application of the RLA 2003 and the ultimate consumer test since the CB Cold Storage appeal.

In Bulk Powders Pty Ltd v Seicon Pty Ltd (Building and Property) [2018] VCAT 2000 from December 2018, Senior Member Forde at VCAT considered a lease with the following permitted use:

  1. Use of the premises: PRODUCTION, PACKAGING AND STORAGE OF HEALTH SUPPLEMENTS (NOT RETAIL). By executing this lease you acknowledge that your use of the premises is not predominantly retail and therefore does not invoke the Retail Leases Act (2003).

The tenant’s business was the supply of powdered food and nutritional supplements for weight-lifters, body builders and other athletes.

The tenant argued that its business was retail because its supplies satisfied the ‘ultimate consumer’ test – most of its customers directly consumed its products (there was some evidence of a very small amount of wholesaling, but not enough to prevent the test from being satisfied).

However, the tenant also gave evidence that:

  1. virtually all of its business was conducted online;
  2. members of the public were not allowed to access the premises (in part because the premises of one of its competitors was burned down in what the evidence suggested might have been an arson attack); and
  3. a small number of well-known customers were allowed to access the property by invitation only.

The Senior Member’s primary finding was that the leased premises was not ‘open to the public’, so not a retail premises. She held that:

[20]      In order to answer the first issue it is necessary to determine whether the premises are used or are to be used, wholly or predominantly by the tenant under the terms of the lease for the sale or hire of goods by retail or the retail provision of services.

[21]      Mr Supple submitted that the Act does not discriminate against different types of sale by retail or retailing provision of services. Whether the sales are provided to the ultimate consumer from the premises via face, phone, email, ecommerce, conducted electronically or via the internet, the meaning of retail premises is not affected.

[22]      I do not accept Mr Supple’s submission. The classification of premises as retail premises under the Act is affected by whether sales are face to face with the consumer or by other means.

[23]      It is not disputed that the tenant has established on the evidence that it supplies goods to the ultimate consumer of those goods. Accordingly, one [of the] indicia of retail recognised by the authorities, being the requirement that a retail supply involves a supply of goods or services to the ultimate consumer, is satisfied.

[24]      Another indicium of retail recognised by the authorities is whether the premises are open to the public.

[29]      In this case, the evidence is that the premises are not open to the public. In particular:

      1. There is no signage at the premises identifying it to the public as being the premises of the tenant;
      2. Mr Supple gave evidence that the tenant did not want its location to be publicly known in part due to suspicious fires occurring at a nearby competitor’s premises, for the safety of its female staff and for commercial reasons;
      3. Mr Supple gave evidence that only customers with a long-term trading history are permitted to enter the premises by appointment.

[30]      The respondent carries on a business of selling certain products, with sales predominantly on line. Whilst that activity might be considered to be “retail”, in my view that does not make the premises retail premises. It is clear on the evidence that the premises are used predominantly for production and storage of product. The fact that product sold on line is shipped from the storage facility does not, in my view, make the storage facility retail premises.

The Senior Member also made the following finding about the permitted use (emphasis added):

[31]      The use of the premises for production and storage of product is consistent with the express permitted use of the premises under the lease. And for the purpose of determining whether premises are retail premises, it is the use permitted under the lease that is relevant.

[32]      I find that the premises are not retail premises. …

So far as I am aware, this is the first example of a premises being held not to be retail because of it not being ‘open to the public’.

The case also suggests that the permitted use remains relevant to determining the application of the RLA 2003 to the lease, but must also be read with Croft J’s remarks in the Koga case, discussed here.

September 2, 2019

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Retail leasing post-C.B. Cold Storage Part 1: Koga Nominees Pty Ltd v Loscam Australia Pty Ltd & Ors [2018] VSC 455

Noman Mermelstein of the firm Law Ink Pty Ltd has recently published an article in the Law Institute Journal that asks whether, in light of a string of recent decisions, there is really a need for retail tenancies legislation in our community. A copy of Norman’s article is available here. The article is excellent and I recommend it to all of my readers.

One of the issues discussed in the article is, of course, the application of the “ultimate consumer” test that I have discussed at length on this blog. Since the High Court declined special leave to appeal the C. B. Cold Storage case, there have been a number of cases that have applied the law and tested the boundaries of the application of the Retail Leases Act 2003 (Vic) (RLA 2003).

In order to contribute to the debate, I have prepared a series of posts that discuss the application of the RLA 2003 and the test for retailing under that Act the since the C.B. Cold Storage case that have not otherwise made their way onto this blg. This is the first post in that series.

For background reading, see here, here, here and here.

In Koga Nominees Pty Ltd v Loscam Australia Pty Ltd & Ors [2018] VSC 455, Croft J was asked to determine the application of the RLA 2003 in the following circumstances:

  1. the landlord granted a lease to a tenant who used the premises for the storage of pallets. The permitted use in the lease was:

Warehouse (and ancillary or associated office use) and repair, storage, hiring and dehiring of pallets and related equipment but expressly excluding the use by the Tenant for any retail purpose.

  1. a sub-lease was later granted to a metal recycling business and the permitted use in the sub-lease (to which the landlord consented) was:

Warehouse (and ancillary or associated office use) and repair, storage, hiring and dehiring of pallets and related equipment, commercial and industrial metal recycling which includes the storage, warehousing and transportation of scrap metal material, but expressly excluding the use by the Tenant for any retail purpose.

  1. the landlord made a claim for significant make good at the end of the head lease. The head tenant joined the sub-tenant, which responded with an argument that the sub-lease was a lease of retail premises under the RLA 2003 and that a substantial amount of the make good was the head tenant’s responsibility under s 52 of the RLA 2003; and
  2. the head tenant argued that:
    • the permitted use in the sub-lease prohibited retailing, so the lease could not be retail, relying on the decision in Sofas v Cobum (1992) V ConvR 54-439; and
    • in the alternative if the sub-lease was a retail premises lease, then so too must the head lease have become a retail premises lease when the sub-lease was granted.

Unfortunately, the evidence presented at the preliminary hearing meant that Croft J was unable to determine those questions. However, his Honour did make the following remarks.

First, his Honour made the following remarks about the effect of a sub-lease being retail:

[22]     Loscam submits the effect of a finding that the Sub-Lease is a lease of “retail premises” under the Act would be to produce a surrender and re-grant of the Head Lease.[1] The Defendant says there would be a substantive change that would be effected in obligations of the parties under the Sub-Lease and thereby, as I understand the submissions, under the Head-Lease—in the latter case, particularly with respect to the permitted use.[2] Loscam also contends that it follows that if the Sub-Lease is found to be a lease of “retail premises”, then it must follow that the Head-Lease is also a lease of “retail premises” under the Act.[3] Having regard to the provisions of the Sub-Lease which are set out in the preceding paragraph, my preliminary view is that this position is not as clear as contended by Loscam. In any event, both these issues are, for the reasons which follow, matters for trial.

Secondly, on the question of the effect of the prohibition on retailing in the permitted use, his Honour provided guidance on the appropriate analysis when tackling this issue:

[30]     As I have indicated, Loscam would have it that the preliminary questions are to be answered simply and solely on the basis of the proper construction of the permitted use provisions contained in the Sub-Lease. In this respect, reliance is placed upon decisions such as Sofos v Coburn[4] and Cambridge Co-ordinates Pty Ltd v Viking Press Pty Ltd,[5] and extrinsic Parliamentary[6] and also Small Business Commission Guidelines[7] as to the critical and decisive effect of the words “under the terms of the lease” in the “retail premises” definitional provisions of s 34(1) of the Act. Turning to the Sub-Lease permitted use provisions themselves, Loscam says that, on this basis, the words “… but expressly excluding the use by the Tenant for any retail purpose” is therefore decisive against the position of the Third Parties.[8]

[31]     The Third Parties, on the other hand, do not dissent from this position but rather contend that proper construction of these permitted use provisions involves more than simply having regard to the words themselves in isolation from the permissible consideration of their factual matrix.[9] Thus they focus on the actual use of the Premises in the context of the permission provisions, rather than the (retail use) exclusionary provision of the permitted use provisions under the Sub-Lease.[10] In so doing, reliance is placed on the decision of the Court of Appeal in IMCC Group (Australia) Pty Ltd v CB Cold Storage Pty Ltd (“CB Cold Storage”),[11] the passage where the Court said:[12]

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.

[32]     Although CB Cold Storage was a case concerning “services”, the Third Parties submit that this statement is equally applicable to “goods” for the purposes of s 4(1) of the Act.[13] Reliance was also placed by the Third Parties on the statements in cases such as Fitzroy Dental Pty Ltd v Metropole Management Pty Ltd[14] and Access Solutions International Pty Ltd v Gamet Pty Ltd (“Access Solutions”).[15] The position which, in essence, the Third Parties seek to put in this application is, as I understand it, that it is necessary first to analyse and properly construe the permitted use provisions of the Sub-Lease to determine whether they do, on a proper construction, permit the sale of goods by retail and then to consider whether, having thus permitted retail sales, the exclusionary provisions are rendered void by the operation of s 94 of the Act.[16] Thus, the process of determining that which is permitted “under the terms of the lease” is not as simple as Loscam would have it.

[33]     In relation to the appropriate analysis of considering the effect of the permitted use provisions of the Sub-Lease, I could no better than make reference to the analysis set out in the Access Solutions case by Judge Macnamara:[17]

142      In Victorian Frozen Food Distributors Pty Ltd v Anassis (Unreported, 16 July 2009) as a Deputy President of VCAT, I considered whether a lease of premises to the applicant company was governed by the Retail Leases Act. While there were some over-the-counter fish sales, presumably to ordinary consuming members of the public, more typically and predominantly the company’s sales were to other enterprises such as hotels, restaurants, vineyards, clubs and so forth. Counsel for the applicant tenant submitted that there was here no wholesale sale, that is, a sale to a person who intended to on-sell to an ‘ultimate consumer’. The fish were ‘consumed’ by the hotel, kitchen or vineyard or club and a different commodity was supplied by wholesale to the customer of the hotel, club, etc. I said:

“The question is whether … where for instance bulk fish items are delivered to the kitchen of an hotel, motel or club the kitchen can be regarded as the ultimate consumer. In my view this cannot be. It would lead to bizarre results if this were correct. On this view a factory which manufactures plastic and/or rubber items such as body trims or windscreen wiper blades for supply to a car manufacture such as Holden or Ford would be regarded as in the retail trade because Holden or Ford in the hypothetical example ‘consume’ the plastic and rubber items by incorporating them as trim or wiper blades in the final motor vehicle construction. An ordinary person would be astonished and bemused at the suggestion that such an enterprise was a retailer.

Again, on the same reasoning, BHP Steel would be regarded as a ‘retailer’ if it delivered raw sheets of metal to be pressed into car bodies by one of the major car manufacturers. Again, an astonishing proposition.” [75]-[76]

143      I reached this conclusion and adopted that reasoning without the benefit of the later authoritative statements from Croft J in Fitzroy Dental and the Court of Appeal in CB Cold Storage. I now turn to those authorities.

[after discussing these authorities, His Honour Judge Macnamara continued]

152      The court was unwilling to upset what it regarded as a judicially settled meaning of the phrase ‘retail provision of services’ [24].

153      These cases do, as Ms Marcus correctly submitted, deal with the phrase ‘retail provision of services’, not with the meaning of the phrase ‘the sale or hire of goods by retail’. Nevertheless, the analysis by Croft J in Fitzroy Dental extends to sales of goods as well as services. It remains possible, based on those authorities, to argue a narrower approach to the concept of retailing relative to goods. It might be, therefore, that my own decision in Anassis’ case, which seems to fit ill with these cases, could still be justified based upon its dealing with sales of goods rather than the retail provision of services.

It may assist that I indicate that, with respect, this is an analysis with which, on the basis of the matters presently before me, I agree and endorse. This does not, however, pre-empt any position ultimately reached in these proceedings.

In my view, these passages suggest:

  1. the Courts and Tribunal will need to look at the use to which the premises is, or is to be, put when determining the application of the RLA 2003, and cannot simply look to the permitted use in the lease in isolation; and
  2. the Courts and Tribunal may be willing to adopt a more narrow approach to the retail supply of goods than the decision in Fitzroy Dental might suggest.   However, we will need to wait for more decisions to see the impact of that indication.

[1] Defendant’s Outline of Submissions (6 August 2018), [99].

[2] Defendant’s Outline of Submissions (6 August 2018), [94]–[96].

[3] See Defendant’s Outline of Submissions (6 August 2018), [97]-[102].

[4] (1992) V Conv R 54-439.

[5] (2001) V ConvR 58-533.

[6] Retail Tenancies Bill 1986; Retail Tenancies Bill (No 2) 1986; Victoria, Parliamentary Debates, Legislative Assembly, 23 October 1986, 1511–2 (Robert Fordham, Minister for Industry, Technology and Resources).

[7] Victorian Small Business Commissioner, Guidelines to the Retail Leases Act 2003 – What are “Retail Premises” (2006).

[8] See Defendant’s Outline of Submissions (6 August 2018), [70] and following.

[9] Outline of Submissions Filed on Behalf of the Third Parties (7 August 2018), [13]–[16].

[10] See Transcript, 22–3; Outline of Submissions Filed on Behalf of the Third Parties (7 August 2018), [17]–[28].

[11] [2017] VSCA 178.

[12] [2017] VSCA 178, [23].

[13] Outline of Submissions Filed on Behalf of the Third Parties (7 August 2018), [15]–[16].

[14] [2013] VSC 344.

[15] [2017] VCC 1563.

[16] Cf Defendant’s Outline of Submissions (6 August 2018), [73]–[85].

[17] Access Solutions International Pty Ltd v Gamet Pty Ltd [2017] VCC 1463, [142]–[153].

August 1, 2019

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The RLA 2003 permits a ‘late exit’ part 2

My good friend and fellow retail leasing blogger Robert Hay QC has just posted a note here about the recent decision of Senior Member Forde at VCAT in Verraty Pty Ltd v Richmond Football Club Ltd [2019] VCAT 1073, which confirmed that a retail premises lease can ‘jump out’ of, or have a ‘late exit’ from the RLA 2003 if its occupancy costs exceed $1M.

Senior Member Forde’s recent decision adopts a similar approach to the obiter remarks by Deputy President Riegler in William Buck (Vic) Pty Ltd v Motta Holdings Pty Ltd (Building and Property) [2018] VCAT 15 discussed here.

Robert’s note is very comprehensive and all practitioners in this area should read it and consider the implications for their clients’ leases.

The upshot of the decision is that a lease that starts its life as a retail premises lease can fall out of the Act during the lease term if its occupancy costs exceed $1M.

This is significant because many practitioners have util now assumed that:

  1. a lease was governed by the RLA 2003 at the start of its term will remain regulated by the Act until the term ends;  and
  2. the RLA 2003 can only ‘stop’ applying when a new lease is entered into.

The two decisions arose in the context of $1M occupancy costs exclusion.  However, a similar issue would arise if a tenant or its parent company are listed on or are acquired by a company listed on the ASX or its overseas equivalent (see here) or if they fall outside the Act for any other reason.

Also, it is unclear at this stage whether the Act would cease to apply if the tenant stops retailing mid-term (eg if it changes its business to predominantly wholesale).  However, based on the reasoning in both the William Buck and the Verraty cases, that seems to be arguable.

July 12, 2019

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Sand quarry is a lease of retail premises and late provided s 46 estimate does not revive liability for old outgoings under RLA 2003

In the decision of Phillips v Abel [2019] VCAT 1031, handed down last week, VCAT held that:

  1. a lease of a quarry where the tenant processed and sold to members of the public sand extracted from the site was a lease of retail premises under the Retail Leases Act 2003 (Vic) (RLA 2003); and
  2. late provision of an estimate of outgoings under s 46 of the RLA 2003 did not retrospectively revive the tenant’s liability to pay outgoings that accrued before the estimate was provided.

I will expand on the two findings below.

Sand quarry is a retail premises lease

The application of the RLA 2003 and the definition of ‘retail premises’ under that Act was the subject of substantial litigation in 2017 (see here).

In this latest application of the test of ‘retail premises’, the Tribunal heard argument from the tenant that:

  1. the tenant used the leased premises to extract, process, clean and sell to the public sand found in a quarry at the leased premises;
  2. the vast majority of the sand sold from the premises was either:

(a) used directly by the tenant’s customers (such as equestrian centres who used the sand on their arenas);  or

(b) used by the tenant’s customers in a process to create other products (such as concrete, bitumen or tiles);

  1. only a small number of customers re-packaged or re-supplied the sand unchanged to their customers;
  2. any member of the public could attend the leased premises to purchase sand, provided they had a vehicle to remove it. If they did not have the right vehicle, one could be arranged for them at cost; and
  3. accordingly, the leased premises satisfied the test of retailing endorsed by the Court of Appeal in IMCC Group (Australia) Pty Ltd v C.B.Cold Storage Pty Ltd [2017] VSCA 178.

The landlord argued that the RLA 2003 did not apply because:

  1. the lease was primarily a ground lease without a building on it and the RLA 2003 should be construed as not applying on a ground lease.The landlord relied on a number of decisions that had construed ‘premises’ in other statutes as requiring a building and various provisions of the RLA 2003 that contemplate buildings on retail premises; and
  2. an argument that the RLA 2003 is a primarily an urban statute that should not apply to premises in a rural setting.

The tenant argued in response that the RLA 2003 should not be limited to exclude ground leases or leases in a rural setting, in part because the 1,000m2 rule in the statutory predecessors to the RLA 2003 was abolished in the RLA 2003 due to conceptual difficulties created by caravan parks, nurseries, second hand car yards and other retail businesses that are conducted primarily outside.

In finding that the sand quarry is a retail premises under the RLA 2003, the Tribunal held that:

[35]  In my view, the references to a building in various parts of the RLA does not necessarily mean that the word premises is to be construed as land having some form of infrastructure built on it. Each of the provisions of the RLA that reference a building have their own purpose, which deal with a circumstance that might arise where there is a building or plant and equipment located on the demised land. For example, where the building is damaged. However, that, of itself, does not mean that the word premises must be defined as only including land that includes some form of building. In my view, the fact that there are numerous references to a building simply reflects the fact that most retail premises will include some form of a building.

[36]  It is still possible for a retail business be conducted on bare land. For example, a car park (without an attendant’s kiosk), a paddock for the purposes of horse agistment or a race track which the public can hire for hosting racing events. In my  view, interpreting retail premises narrowly to exclude a lease of bare land upon which a retail business is being conducted would require reading words into the RLA that are not there.

[37]  …  In my view, the fact that the RLA is silent on whether bare land falls within the definition of retail premises mitigates against finding that the definition should be narrowly construed to exclude bare land.

[38]  Further, I do not consider that the authorities relied upon by Ms Porter greatly assist in interpreting the word premises, as it relates to the RLA. This is because those authorities concern different legislation to what is currently under consideration. …

[39]  In my view, the definition of retail premises in s 4(1) of the RLA appears to be directed towards the purpose of occupation; namely, the provision of retail goods or services, rather than the character of the demised land. … 

[40]  …. [The RLA 2003’s] main purpose is to enhance:

(a) the certainty and fairness of retail leasing arrangements between landlords and tenants; and

(b) the mechanisms available to resolve disputes concerning leases of retail premises.

[41]  Clearly, retail leasing arrangements between landlords and tenants do not necessarily require that a building be erected upon the demised land. As indicated above, there are many retail leasing arrangements which concern ground leases, absent any building.

[42]  Ms Porter submitted that it could not have been the intention of Parliament to extend the operation of the RLA to bare agricultural land surrounded by acres or hundreds of acres of grazing and agricultural land, kilometres from any town or shop. She argued that such an expanded definition of retail premises would mean that a lease of bare land used for:

(a) grazing cattle or other livestock that is sold to butchers who get them slaughtered or to members of the public who buy livestock for their own use;

(b) growing fruit vegetables that are picked and sold to restaurants for use in their business or to the public who come and pick themselves;

(c) growing wheat or grain that might be sold to flour mills and made into flour; or

(d) the extraction of coal sold to a power station and used to make energy,

are retail leases which would fall under the RLA.

[43]  I do not accept that the definition of retail premises is readily informed or ascertained by reference to those fact scenarios, assuming that they constitute the retail provision of goods and services. All those scenarios could equally apply to a property which had a building erected upon it and from which the supply of goods or services was conducted. If the definition excluded a ground lease, then the retail activity conducted from bare land would not be governed by the RLA; while the same retail activity conducted from land which contained a building would fall within the RLA. I do not accept that this was the intention of Parliament. In my opinion, that outcome would be contrary to the purposes of the RLA, which includes enhancing the certainty and fairness of retail leasing arrangements between landlords and tenants.

This first aspect of the decision stands as another example of the broad application of the RLA 2003, often in unexpected circumstances.

Section 46 estimates

Section 46 of the RLA 2003 states that (emphasis added):

(2) The landlord must give the tenant a written estimate of the outgoings to which the tenant is liable to contribute under the lease that itemises those outgoings.

(3)   The tenant must be given the estimate of outgoings—

(a)  before the lease is entered into; and

(b)  in respect of each of the landlord’s accounting periods during the term of the lease, at least one month before the start of  that period.

(4)   The tenant is not liable to contribute to any outgoings of which an estimate is required to be given to the tenant as set out in this section until the tenant is given that estimate.

It is well-established that a tenant cannot claw back from its landlord outgoings paid without a s 46 estimate (see Richmond F.C. v Verraty Pty Ltd [2011] VCAT 2109; see also Australian Asset Consultant Pty Ltd v Staples Super Pty Ltd [2016] VCAT 1726).

However, there has been a long-standing question over whether a tenant becomes liable to pay outgoings that accrued prior to the late provision of a s 46 estimate.

In Dovastand Pty Ltd v Mardasa Nominees Pty Ltd [1991] 2 VR 285, Marks J held that time limits in s 17 of theRetail Leases Act 1986 (Vic)(the statutory predecessor to s 46 of the RLA 2003) were not mandatory and that late provision of an estimate did not affect the tenant’s obligation to pay.  However, s 17 of the 1986 Act did not contain the equivalent to sub-s 46(4) of the RLA 2003.

The Tribunal in Phillips v Abel held that:

[62]  Both Richmond Football Club and Australian Asset Consulting deal with a different factual matrix. In both those cases, the tenant was seeking reimbursement of outgoings already paid. Although not specifically argued in Australian Asset Consulting, the basis for refusing the claim in Richmond Football Club was that the landlord’s counter?restitutionary claim prevailed. In other words, it was held that the tenant had received good consideration for the payment of outgoings and on that basis, equity would not come to the tenant’s aid to recover monies had and received.

[63]  The present case is different. Here, outgoings were not paid during the period that the Landlord had failed to comply with his obligations under s 46 of the RLA. Here, it is the landlord that seeks to recover those outgoings, rather than resisting a claim by a tenant for reimbursement of outgoings already paid.

[65]  … I am of the opinion that the purpose of s 46(4) would be rendered somewhat otiose if the Landlord’s interpretation of the provision was accepted. The corollary is that an interpretation which does not revive an entitlement to claim outgoings incurred prior to the giving of the statement of outgoings best accords with the main purpose of the· RLA; namely, to enhance the certainty and fairness of leasing arrangements. In my view, this is best achieved by construing the provision against the Landlord, given that he ultimately has control over this situation. If outgoings are not paid because the Landlord has failed to give the Tenant a statement of outgoings, then that situation is easily remedied by the provision of a statement of outgoings. The landlord is only penalised to the extent that it continues to fail to comply with its obligations under the RLA.

[66]  On the other hand, I accept that it would be unfair and create uncertainty if a landlord was able to retrospectively claim for historical outgoings many years ahead of when they were actually incurred. It is not difficult to imagine that such a scenario would place a tenant in a financially difficult position, having assumed that what had been charged historically represented its liability to pay outgoings. It is also not difficult to imagine that such an impost could be financially burdensome and place a tenant in a precarious situation if it were unable to make payment within what might be a relatively short default period following service of a default notice. Indeed, the failure to pay may lead to an early termination of the lease or deprive a tenant from being able to exercise an option to renew. In my view, neither of those outcomes would enhance the certainty and fairness of retail leasing arrangements.

[67] In forming that view, I accept that there may be situations where a tenant takes advantage of a landlord’s failure to comply with s 46(4) of the RLA. However, as I have already indicated, a landlord ultimately has control over that situation. It can immediately remedy the non-payment or short payment of outgoings by giving its tenant the statement of outgoings. On the other hand, apart from protesting or litigating, a tenant cannot force a landlord to give the statement of outgoings. Therefore, when balancing the rights and obligations of each of the parties to a lease agreement, I believe the object and purpose of the RLA is best met if the self-regulating provision did not operate in the manner suggested by the Landlord.

[69] Accordingly, I accept the Tenant’s submission as to the proper interpretation of s 46(4), which I consider best reflects the main purpose of the RLA. As indicated above, the provision is intended to self-regulate compliance with s 46. To the extent that it imposes a burden on a landlord in not being able to recover outgoings, that burden is mitigated or extinguished once a landlord complies with its obligations under the RLA. In my view, that best reflects striking a balance between the interests of tenants and landlords and importantly, enhances the certainty and fairness of retail leasing arrangements between landlords and tenants.

This second aspect of the decision is particularly significant in light of the broad application of the RLA 2003, often in unexpected circumstances, as landlords might not discover that they are subject to the RLA 2003 until after the outgoings are substantially in arrears.

Sam Hopper and Callum Dawlings

April 30, 2019

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New decision and the cost of s 52(2) RLA 2003 repairs

Deputy President Lulham at VCAT has on 12 April 2019 handed down a decision that is potentially significant in the ongoing issue over the operation of both s 52 of the Retail Leases Act 2003 (Vic) and s 251 of the Building Act 1993 (Vic).

For background to that issue, see here.

Since President Garde J’s opinion in Small Business Commissioner: reference for advisory opinion [2015] VCAT 478 (Opinion), many landlords have maintained that the Opinion does not create a binding precedent and was merely advisory, and have continued to recover from their tenants both the costs of repair and maintenance under s 52 of the RLA 2003 and the costs of essential safety measures under the Building Act and Regulations.

In Deputy President Lulham’s recent decision of Cheng v Wang [2019] VCAT 496, the Tribunal considered claims by a tenant that his landlord is responsible for certain repairs at his cost. The terms of the lease deed required the tenant to be responsible for certain repairs, but the Deputy President found that most of the relevant clauses in the lease deed were inconsistent with the landlord’s repair and maintenance obligations sub-s 52(2) of the RLA 2003. The Deputy President referred to both the Opinion and the decision in Josephine Ung Pty Ltd v Jagjit Associates Pty Ltd [2017] VCAT 2111 (discussed here) and held that the landlord was not able to pass on to the tenant the obligation or cost of repairs under s 52(2) of the RLA 2003. Essential safety measures under the Building Act were not discussed.

The case of Josephine Ung Pty Ltd v Jagjit Associates Pty Ltd [2017] VCAT 2111 was the first application of the Opinion to a case decided at VCAT (see footnote [41] to that decision). The Opinion was also referred to with apparent approval by Croft J in Koga Nominees Pty Ltd v Loscam Australia Pty Ltd & ors [2018] VSC 455; (Building and Property) [2018] VCAT 1274 (see paragraph [18]), but in relation to a different issue.

So far, Cheng v Wang [2019] VCAT 496 appears to be the first application of the reasoning from the Opinion to a repair and maintenance case.

November 14, 2018

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Landlord held to have repudiated a lease by not repairing a defective air conditioning unit

In the significant recent decision of S3 Sth Melb Pty Ltd v Red Pepper Property Group Pty Ltd [2018] VCAT 1684, Deputy President Riegler held that a landlord’s failure to repair an air conditioning unit was a repudiation of the lease by the landlord, allowing the tenant to accept that repudiation and terminate the lease. The tenant used the premises as a pilates and barre studio.

The Deputy President found that (emphasis added):

[70]     In the present case, I accept Mr Norris-Ongso’s evidence that air-conditioning was critical for the financial success of the Tenant’s business. He said that clients were moving to other premises because the Premises could not be properly warmed during the colder months of the year. Although no data was provided evidencing the migration of clients from one fitness centre to another, I accept that it is likely that customers of a fitness centre require and expect a comfortable ambient temperature in which to work out. Consequently, I find that the obligation to provide air-conditioning to service the Premises is a fundamental term of the Lease.

[71]     With that in mind, I further find that the refusal or failure to repair the air-conditioning system, if fallen into disrepair so that it cannot service the Premises, may constitute a repudiation of the Lease.

[83]     Although I accept that some time should be afforded to allow the Landlord to engage its technicians to inspect the air-conditioning system and carry out repairs, 10 weeks is an unreasonably excessive period, especially so when compared to other occasions when the Landlord arranged for its technicians to inspect air-conditioning system after complaints were raised by the Tenant.

…  

[86]     In my view, the failure on the part of the Landlord to do anything to make the air-conditioning system function, so that it serviced the Premises, after receiving written notice on 15 May 2017 until the Lease was eventually terminated on 1 August 2017, is a fundamental breach of the Lease. It meant that the Tenant was effectively left without air-conditioning to service the Premises for more than two and a half months, before eventually terminating the Lease. This was an intolerable situation and, according to Mr Norris-Ongso, led to customers migrating to other fitness centres.

[87]     In my view, the Landlord’s procrastination or non-performance would convey to a reasonable person in the shoes of the Tenant that the Landlord had disavowed itself of its obligation to repair the air-conditioning system, notwithstanding repeated requests being made by the Tenant for the Landlord to honour its obligations under the Lease.

[88]     Therefore, I find that the Landlord repudiated its obligations under the Lease and that the Tenant was entitled to accept that repudiation, which it did by correspondence dated 1 August 2017. I find that the Lease came to an end on that day.

This finding is significant because tenant’s faced with a landlord who refuses to repair a property are faced with an un-palatable choice between:

  1. effecting the repairs themselves and suing for the repair costs;
  2. suing for an order for specific performance of the landlord’s repair obligations; or
  3. accepting the landlord’s repudiation, ending lease and suing for damages.

Options 1 and 2 are time consuming and expensive, particularly in a no-cost jurisdiction like VCAT. Option 2 also leaves the tenant in a defective premises until the repairs are completed.

Option 3 is risky and tenants have historically been slow to take that option because:

  • there are very few reported cases where a landlord has been found to have repudiated a lease; and
  • if the tenant cannot show that the landlord has repudiated the lease, then the tenant’s purported termination could itself be a repudiation of the lease and could expose the tenant to a significant damages claim from the landlord.

As an example of the Tribunal finding that a landlord repudiated a lease by failing to adequately repair and maintain the premises, the Tribunal’s decision in S3 Melb v Red Pepper offers some comfort to tenants who are considering that option.

September 11, 2018

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New “ipso facts” provisions in the Corporations Act and their application to landlords and tenants

Legislation came in force on 1 July 2018 that prevents a party terminating a contract under an insolvency clause, also known as an “ipso facto” clause if the other party is a company and has a receiver appointed or is placed into administration.

Much has been written about the legislation. However, one of the most significant barriers to the reconstruction of an insolvent or financially distressed business, particularly a retail shop, is to secure tenure of leased premises after the reconstruction.

This note aims to:

  1. show that the new legislation removes some, but not all, of the hurdles that face a tenant trying to implement an insolvent reconstruction when faced with a hostile landlord; and
  2. give some tips to practitioners trying to give effect to a reconstruction.

Reconstruction for leases pre – 1 July 2018

Imagine tenant, ABC Pty Ltd, who runs three restaurants. Two of them are not profitable, but one of them is. Although the profitable restaurant has kept the company afloat for some time, the debts of the other two restaurants have weighed down the company and it is now insolvent.

In order to avoid trading whilst insolvent, Craig, the director and shareholder of ABC Pty Ltd, appoints an administrator. Craig then purchases the successful restaurant business from the administrator and asks the landlord’s consent to assign the lease for that restaurant from ABC Pty Ltd to a new company that he has incorporated, XYZ Pty Ltd.

However, the landlord reacts badly and:

  1. terminates the lease based on an insolvency clause in the lease; and
  2. states that he will not consent to the assignment of the lease to an entity associated with Craig.

Craig suspects that the landlord wants to take control of the successful restaurant and sell if for his own profit, but Craig cannot prove it.

Under the law pre-1 July 2018, the landlord’s termination of the lease would succeed, but the administrator can remain in possession of the premises during the administration under the hiatus provisions of the Corporations Act. However, the administrator’s right to possession only lasts for the duration of the administration or until a Court orders otherwise, at which point the tenant has no tenure (see s 440B of the Corporations Act, previously s 440D; see also Re Java 452 Pty Ltd (1990) 32 ACSR  507).

Consequently, in order to successfully take over the lease from ABC Pty Ltd, Craig and XYZ Pty Ltd need to:

  1. obtain relief from forfeiture of the lease; and
  2. show that the landlord is wrongly withholding consent to the assignment of the lease to XYZ Pty Ltd.

Obtaining relief from forfeiture in these circumstances faces two major hurdles:

  1. recent authority suggests that termination under an insolvency clause is not a forfeiture, so may not be amenable to relief from forfeiture, although the issue is not resolved at appeal level (see here; see also Sky Communications Aust Pty Ltd v 38 Pacific DR Pty Ltd [2018] VCAT 781); and
  2. the tenant’s insolvency is usually a defence to an application for relief from forfeiture, so Craig will need to show that XYZ Pty Ltd is solvent and will be able to comply with the obligations in the lease.

To obtain an order that the landlord is wrongly withholding consent to an assignment of a lease, the tenant needs to show that the landlord does not have a proper basis under the terms of the lease to withhold that consent. In a lease of retail premises under the Retail Leases Act 2003 (Vic) (RLA 2003), such as ABC Pty Ltd’s lease, the landlord may withhold its consent to assignment if the landlord considers that the proposed assignees does not have the financial resources or business experience to meet the obligations under the lease (see s 60(b) of the RLA 2003). Similar restrictions appear in many commercial leases.

XYZ Pty Ltd may have trouble showing the Tribunal that it has sufficient experience and resources to meet the obligations under the lease given that ABC Pty Ltd was unable to do so.

Consequently, Craig’s proposed reconstruction faces significant hurdles that it must overcome if ABC Pty Ltd’s landlord is not friendly to the reconstruction.

New legislation

The new ‘ipso facto’ provisions of the Corporations Act mean that a lease cannot be terminated under an insolvency clause solely because the company has been placed into administration, unless ordered by the Court (see ss 451E and 451F). Similar provisions apply if a receiver has been appointed or if certain other insolvency events occur (see ss 415D and 415E; and see ss 434J, 434K and 434L), but these rarely occur in retail leases.

Consequently, if ABC Pty Ltd had entered into its lease on or after 1 July 2018, the landlord could not terminate the lease solely due to the appointment of administrators to ABC Pty Ltd. As a result, Craig and XYZ Pty Ltd would not be required to seek relief from forfeiture and would not need to overcome the legal and practical barriers associated with that remedy.

However, Craig and XYZ Pty Ltd would still need to show that the landlord was wrongfully withholding consent to the assignment.

This is still a substantial hurdle, as they would need to satisfy the Tribunal that XYZ Pty Ltd has sufficient financial resources and business experience to conduct ABC Pty Ltd’s old business successfully, despite ABC Pty Ltd’s insolvency.

Tips for practitioners

Practitioners involved in a reconstruction should note that:

  1. the new legislation does not apply if a liquidator is appointed. This is significant, as the two most common forms of insolvency administration, particularly for retail tenants, are the appointment of an administrator or the appointment of a liquidator. If a tenant considering a reconstruction in the face of a hostile landlord is at risk of having a liquidator appointed by a Court or is considering a voluntary winding up, steps should be taken to appoint an administrator before a liquidator is appointed;
  2. while the new legislation removes the legal hurdles associated with relief from forfeiture, the new company will (assuming that the lease is a retail premises lease, or otherwise depending on the terms of the lease) still need to show that it has the necessary experience and resources to meet its obligations under the lease. While this saves on some argument in Court or the Tribunal, the proofs are still substantially the same. Consequently, while the conceptual complexity of the process is reduced, there may be little or no cost saving for the assignee tenant, and as a result a reconstruction in the face of a hostile landlord remains an expensive and risky process; and
  3. the good news for the landlords is that a well-drafted lease that gives the landlord scope to withhold consent to an assignment and s 60(b) of the RLA 2003 leave the landlord in a good position to negotiate better security or other protections if the tenant requests consent to assignment to effect an insolvent reconstruction.