November 14, 2018

0 Comments

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

0 Comments

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.

April 27, 2018

0 Comments

VCAT jurisdiction over interstate residents

The High Court last week in Burns v Corbett [2018] HCA 15 held that a state tribunal does not have jurisdiction over residents of other states.   This may be raised at VCAT if either landlord or tenant are interstate residents.

There are, at this stage, two apparent answers to this problem:

  1. it appears that the High Court’s reasoning only applies to natural people (i.e. humans), not to corporations (see Australasian Temperance and General Mutual Life Assurance Society Limited v Howe (1922) 31 CLR 290 (‘Howe’s Case’); affirmed in Crouch v Commissioner for Railways (Qld) (1985) 159 CLR 22, 34 (refusing to reopen Howe’s Case); and confirmed again in obiter in British American Tobacco Australia Ltd v Western Australia (2003) 217 CLR 30, 51 [37]); and
  2. if the dispute cannot be determined in the Tribunal, then it can probably be determined by a State Court. There is an established, albeit relatively little known, procedure in the Supreme Court and County Courts where the Courts can resolve jurisdictional issues by having a proceeding issued in both VCAT and a relevant Court, then have a member of the Court also appointed as a member of the Tribunal to hear and determine the proceedings together. The President of VCAT is a Supreme Court Judge and Vice Presidents of VCAT are County Court Judges, so there are already judges who sit in both jurisdictions. We also know of cases where special appointments have been made to allow a particular Judge to continue hearing a case issued in his or her Court while wearing two jurisdictional “hats”. For an example of a Judge in the County Court sitting also as a Vice President of VCAT, see Access Solutions International Pty Ltd v Gamet Pty Ltd [2017] VCC 1563.

The authorities holding that ‘resident’ in s 75(iv) of the Constitution only refers to natural people have been criticised (eg, Isaacs and Starke JJ dissented in Howe’s Case). Justice Kirby observed and predicted in British American Tobacco Australia Ltd v Western Australia (2003) 217 CLR 30, 72–3 [109]–[110] (citations omitted, emphasis added) that:

The decisions establishing that principle involved a remarkable narrowing of the constitutional language. In my view, it is a narrowing unjustified by the text or the context. In many ways it is reminiscent of judicial holdings in Australia and elsewhere at the same time to the effect that a ‘‘person’’, when referred to in legislation (for example for the purpose of admission to professional practice) did not include a woman. The only justification for such a narrow interpretation of s 75(iv) of the Constitution was the expressed judicial fear about an extension of the jurisdiction of this Court that might result in an inundation of work that this Court could not easily deflect to other courts in the views then held concerning the obligation of this Court to discharge a jurisdiction conferred on it by the Constitution.

In a proper case, this Court should reconsider the early determination that corporations, including statutory corporations, cannot be ‘‘residents’’ of a different State for the purposes of s 75(iv) of the Constitution. Self-evidently, corporations are, and were at the time when the Constitution was made, legal persons. They were then, and still are, frequent litigants in the courts. Their existence was contemplated by the Constitution itself. Although in 1985 in Crouch v Commissioner for Railways (Q) this Court declined to reopen its early holding on the meaning of s 75(iv), the decision is open to the strongest doubt and criticism. In my view it is wrong. One day this Court will say so.

Sam Hopper and Callum Dawlings

Callum is a reader at the Victorian Bar and is available to take briefs from 11 May 2018.  

February 7, 2018

0 Comments

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

0 Comments

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

0 Comments

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

0 Comments

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

1 Comment

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

0 Comments

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

0 Comments

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.