Landlords’ ability to recover outgoings curtailed

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

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

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

In short, in the President’s opinion:

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

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

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

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

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

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

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

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