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.