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);

3. only a small number of customers re-packaged or re-supplied the sand unchanged to their customers;
4. 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
5. 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