More on outgoings …

There has been a lot of debate in the leasing community over the effect of the President’s opinion discussed in my earlier post here.

A copy of the President’s opinion is now available on AustLii here.

Here are my thoughts on a few things that have emerged from the last fortnight’s discussions.

Summary of the opinion

In summary, the main points in the President’s opinion are:

  1. if a land owner is required to undertake work or do a thing under the Building Act or associated regulations (including essential safety measures), the cost of undertaking that work or doing that thing must be born by the landlord;
  2. whether the act of compliance with the Building Act or associated regulations can be delegated to a tenant (although still at the landlord’s cost) is a matter of statutory interpretation;  and
  3. the landlord is responsible for the cost of complying with s 52 of the RLA 2003.

Allens Linkaters have posted a useful summary of the decision here.

Another excellent summary has been prepared by Madgwicks here.

Both summaries are excellent and I recommend them to readers.

Gross leases?

There has been a lot of talk about landlords switching to ‘gross leases’.  Allens Linklaters end their summary by suggesting that landlord should consider moving to gross leases in Victoria.

The President’s opinion does not substantially affect a landlord’s ability to recover outgoings for consumables (water, electricity, gas, etc), council rates and other items, so a gross lease may be going too far.

However, I agree that landlords should consider bargaining on leases for which the landlord pays repair and maintenance cost.

How to determine whether outgoings are recoverable?

The President found that all compliance costs under the Building Act and the associated regulations must be born by the landlord (whether or not the act of compliance can be delegated).

The President also suggested a formula for determining whether outgoings are recoverable under a retail premises lease (see paragraphs [60] to [64] of the opinion).

Here is a checklist of questions and answers that practitioners might want to use to determine whether a particular expense is a recoverable outgoing based on the President’s opinion (with a few extra considerations added by me):

  1. Does the text of the lease deed allow recovery?  Yes.
  2. Is the outgoing an ESM or other requirement placed on the landlord under the Building Act or Regs?  No.
  3. Is it a retail lease?  No, then stop here and recover the expense.  Yes, then continue.
  4. Has s 39 of the RLA 2003 been complied with? Yes.
  5. Have the requirements of the Retail Leases Regulations 2013 (Vic) been complied with (as required under s 39(1)(b) of the RLA 2003 )? Yes.
  6. Is it a capital cost under s 41 of the RLA 2003?  No.
  7. It is an amount in respect of depreciation under s 42 of the RLA 2003? No.
  8. Is it a contribution to a sinking fund under s 43 of the RLA 2003? No.
  9. Is it interest on the landlord’s borrowings under s 44 of the RLA 2003? No.
  10. Is it rent under the head lease or rent or other costs associated with other land under s 45 of the RLA 2003? No.
  11. Has an estimate been provided under s 46 of the RLA 2003?  Yes.
  12. Is it a legal or other expense under s 51(1) of the RLA 2003?  No.
  13. Is it a cost of repair and maintenance under s 52(2) of the RLA 2003?  No.
  14. If yes to 13, is the cost excluded by s 52(3) of the RLA 2003?  Yes.

Other considerations may affect the landlord’s ability to recover outgoings, which will need to be considered on a case-by-case basis.

Can the act of compliance be delegated?

Whether the act of compliance can be delegated is a matter of statutory construction.

I expect that it will be too costly and too uncertain to undertake a legal analysis of each liability and it may be more practical to assume that the task is non-delegable unless a significant issue arises over a particular act.

Recovery of outgoings by tenants

Tenants may have substantial claims for outgoings that have been wrongly paid.

Tenants should be looking at their outgoings history to determine whether they have paid significant:

  1. ESM or other Building Act compliance costs; and
  2. s 52(2) repair and maintenance costs.

At the same times, retail tenants should consider whether they have paid:

  1. capital costs;
  2. legal or other costs;  and
  3. land tax.

Tenants should also consider whether the landlord has complied with the requirements of s 39 of the RLA and the Retail Leases Regulations 2013 (Vic).

However, landlords should not be hasty to repay any amounts claimed. There are a number of issues to be considered in any recovery action, including:

  1. whether it is commercially viable to make a claim (depending on the sums involved);
  2. whether the tenant can set-off the claim against their rent (the presence of a clause in the lease prohibiting set-off will be significant);
  3. the effect of the statute of limitations;
  4. the effect of delay in making the claim and whether the landlord has materially changed its circumstances in reliance on the payment;
  5. the extent of any benefit received by the tenant for the payments made (see Ovidio Carrideo Nominees Pty Ltd v The Dog Depot Pty Ltd [2006] VSCA 6 and Richmond Football Club Limited v Verraty Pty Ltd (ACN 076 360 079) (Retail Tenancies) [2011] VCAT 2104).  An interesting question arises if the rent was expressly bargained for and set on the assumption that the tenant would undertake work that affected by the opinion;
  6. whether the lease or agreement to lease was agreed to on a mistaken understanding of the law;
  7. the possibility of amendments to either or both statutes; and
  8. the possibility that the President’s opinion will not be adopted by a subsequent court or Tribunal (especially on appeal).

The validity and weight of these considerations, and whether they provide a defence or defences to landlords, will be tested in the fullness of time.

The resolution of some issues will also depend on the particular circumstances of the landlord and the tenant.

Tenants and their lawyers considering making a claim for the recovery of outgoings paid, and landlords and their lawyers facing those claims, should consider obtaining specialist advice.

Status of the opinion

There has also been recent discussion of the extent to which the President’s opinion creates a binding precedent.

While it does not create a binding precedent in the strict sense, it effectively has the status of a Supreme Court decision for most purposes because:

  1. it is the decision of a Justice of the Supreme Court and President of VCAT exercising statutory power in a case argued by counsel, including two contradictors;
  2. the opinion vindicates the decisions of Deputy President Macnamara in Chen v Panmure and Café Dansk and Senior Member Riegler in McIntyre v Kucminska;
  3. the President refers to providing an ‘answer to the questions definitively’ (at [16]), so did not view the opinion as a mere guideline;
  4. the decision in relation to the recovery of s 52(2) costs is broadly similar to the published views of Croft J that were followed in Chen v Panmure; and
  5. consequently, it is likely to be followed by VCAT members at first instance and a Judge hearing an appeal is likely to view the opinion as persuasive. A Judge on appeal is not strictly bound by the decision of another single Judge in any event, so the opinion should be treated as having the same standing as a decision from a single Judge in the Supreme Court.

Implications for renegotiating leases and for valuers determining rent

The parties should approach their negotiations on the footing that s 52 RLA 2003 costs and the costs of ESMs and other requirements of the Building Act and regulations are not recoverable and set the rent accordingly.

If they cannot agree, the valuer reviewing the rent should consider whether the rent should be ‘grossed up‘ on the assumption that compliance costs cannot be recovered.

Other obligations under the Building Act and Regulations

It is also important to remember that s 251 of the Building Act applies to all obligations placed on the owner under the Building Act or the Regulations.

Although the President’s opinion does not address this directly, the prohibition on recovery may extend to the cost of compliance with a Building Order or Building Notice.

About Sam Hopper

Sam is a property and insolvency barrister.

View all posts by Sam Hopper

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