This question has vexed the leasing community for some time, and has recently been addressed (in part at least) by a VCAT decision that was published in the last week or so.

There are, by and large, two questions:

1. Does the Retail Leases Act 2003 (Vic) continue to apply to the lease if, say, the tenant becomes a listed company or the lease was assigned during its term to a listed company?
2. If the Act does not apply, do the amendments to the lease that were caused by the RLA 2003 still carry through to the renewed term?

Both questions have now been addressed by VCAT in the recent decision of Tiba Kebab Pty Ltd v G8 Education Limited (Building and Property) [2025] VCAT 987, a copy of which is not yet available on AustLii, but can be accessed here.

I refer readers to two excellent blog posts by my friend and fellow-blogger Robert Hay KC that discuss in detail the background to these questions and the recent VCAT decision that are available here and here.

The upshot of the decision is:

1. the RLA 2003 does not apply to a lease if one of the statutory exceptions applied when the lease was renewed.  In that particular case, a lease of retail premises to which the Act applied was assigned during its term to a listed company.  The new listed tenant then exercised two options for further terms.  The Tribunal held that the RLA 2003 does not apply to the renewed terms;  and
2. because of the way the lease deed was drafted, the terms of the renewed lease being considered by the Tribunal were not affected by the RLA 2003. The lease that was under consideration appears to be a version of the LIV copyright lease, but it is unclear which version was being used.  The covenant had one version of its rent review provisions that applied if the Act applied to the lease and another version that applied if the Act did not.  As a result, nothing in the lease was rendered void by the RLA 2003 when it applied and the lease on renewal was unaffected by the RLA 2003.

It is important that the answer to the second question depended on the drafting of the particular covenant being considered in that case.  The answer may have been different if the lease covenants do not allow for the RLA 2003 applying or not applying at different times.

With land tax increasing and its consequential effect on rent, more and more tenants are turning their minds to the question of whether the Retail Leases Act 2003 (Vic) applies to their leases.

A few month ago, fellow barrister Ben Kelly and I presented a paper on this topic to the Legal Practitioners Liability Committee. Given the ongoings interest in the topic from readers of this blog, I thought it would be useful to provide a link to the webinar and the paper on the LPLC website here.

There have been some other recent developments in this area that I will post about shortly.

A number of readers have told me that are interested in following developments in the Wollert Lifestyle Community case, discussed in an earlier post here, and have requested updates on the case as it develops.

For those who are following the case, the respondents applied to VCAT for a stay of the Tribunal’s orders until hearing and determination of a foreshadowed appeal.

That application was heard and determined by VCAT on Wednesday by the President of the Tribunal, who declined to grant the stay.   

A copy of his Honour’s reasons for refusing the stay are available here.

The Tribunal’s reasons refer to the orders made in the various proceedings by number (ie order 1, order 2 and order 3).  To help interested readers follow the Presidents’ reasons, I have attached a copy of the orders made in one of the proceedings with those orders highlighted for easy reference.

Tenants with rent in arrears often try to reduce those arrears by setting them off against some other claim against the landlord. This has caused many landlords to introduce covenants that require the rent to be paid ‘without deductions’ or words to that effect.

While a contractual exclusion of set-off is generally effective, in the recent decision of AMTB Pty Ltd v Chan (Building and Property) [2025] VCAT 236, VCAT has recognised that such a clause may not be effective against a damages claim arising from an alleged breach of a covenant implied into a lease by the Retail Leases Act 2003 (Vic) (RLA 2003).

Some background on equitable set-off

To understand the implication of VCAT’s decision, you need some background on equitable set-off and how it works.

Generally, if a tenant owes, say, $1500 rent to its landlord, and the tenant has a separate claim against the landlord for $1000, those amounts could be netted off against each other, resulting in the landlord receiving $500.  However, in the ordinary course, both of the underlying debts continue to exist – it’s just more convenient for the tenant to make a single payment of $500 to the landlord. This is how ordinary set-offs work. Importantly, in this situation, the landlord could still give the tenant a default notice and seek to terminate the lease for the full $1,500.

However, equitable set-off is different.  When there is a particular connection between the two claims (more on that later), the Courts will recognise that the tenant’s counterclaim operates as a defence to the landlord’s claim.  In the example above, if the tenant can establish an entitlement to an equitable set-off, the tenant’s primary liability to pay rent to the landlord is reduced to $500 – the counterclaim reduces the rent itself.  Also, ordinary set-off only works in limited circumstances and is usually not available when the tenant has an unliquidated damages claim.  However, those rules are a little more relaxed in the case of an equitable set-off and, importantly, an equitable set-off may be available when the tenant has a damages claim.

To establish an equitable set-off, the tenant’s counterclaim must ‘impeach’ the landlord’s rent claim.  In substance, that means that there must be some form of causal or (for want of a better word) ‘moral’ connection between the landlord’s rent claim and the tenant’s counterclaim.

Generally speaking, while the categories aren’t closed, an equitable set-off may be available in the following circumstances: [1]

• where the liability under the originating claim arose only because of the originating claimant’s breach of duty;
• where the originating claimant’s behaviour is hindering or preventing the originating claim from being satisfied; and
• where the originating claimant is in some way responsible for reducing or denying to the opposing claimant the benefit which was the quid pro quo for satisfying the originating claim, or the enjoyment of the benefit.

Usually, that will mean the tenant needs to show that it has a counterclaim against the landlord arising from the landlord’s breach of the lease, and possibly that its counterclaim caused or contributed to the tenant’s inability to pay the rent.

Landlords’ responses – ‘no deductions’ clauses

In response, it has become common for landlords to require a covenant in their leases that stipulates rent is to be paid ‘without deduction or set-off’, or variations on that theme.

Generally, the Courts have held that such a clause will be effective to prevent a party relying on an equitable set-off (see Citibank Pty Ltd v Simon Fredericks Pty Ltd [1993] 2 VR 168 at 175; Connaught Restaurants Ltd v Indoor Leisure Ltd [1994] 1 WLR 501; 4 All ER 834 (CA); and Main Roads Construction Pty Ltd v Samary Enterprises Pty Ltd [2005] VSC 388 at [47]).

This leaves tenants whose rent is in arrears but who have a genuine grievance against their landlord in a difficult position.

VCAT’s recent decision

In the AMTB decision, the Tribunal granted an injunction restraining the landlord from terminating a lease and re-entering the leased premises.  The tenant claimed an equitable set-off reducing the alleged rent arrears arising from losses incurred by the landlord’s breach of its statutory implied repair obligations under s 52 of the RLA 2003, despite the lease containing a ‘no deductions’ clause.

The tenant was operating a nightclub the second floor of premises leased from the landlord. To enter the nightclub, patrons could enter via a stairwell or a lift. The lift had been unreliable for some time and from mid-2024 was largely inoperable, which the tenant says led to significant losses in trade. The tenant stopped paying rent from October 2024 and in December 2024 was served with a notice of default claiming rent arrears upwards of $80,000.

The tenant applied to VCAT for an injunction to prevent the landlord from re-entering the premises and argued that its damages claim could be set off against the alleged arrears.

The landlord argued that the rent clause contained in the lease excluded any right to equitable set-off. The rent clause stated (emphasis added):

5.       Payment of Rent

… The said rent is to be paid clear of all deductions or abatements of all or any kind whatsoever and not otherwise except with the consent in writing of the Lessor…

The landlord also referred the Tribunal to the case of Paramount Investments Pty Ltd v Club Fogolar Furlan Melbourne [2024] VCAT 169, where the Tribunal held:

[22] I accept that in some circumstances, a tenant who has a legitimate claim against a landlord may set-off that claim against a competing claim for rent in arrears. However, that right of set-off is subject to the terms of the lease. 

In response, the tenant argued that the ‘no deductions’ clause was not effective against a claim for damages arising out of a breach of a covenant implied by the RLA 2003 because the parties to a retail premises lease cannot contract out of that Act.

The tenant’s claim arose from alleged breaches of s 52 of the RLA 2003, which states that:

52 Landlord’s liability for repairs

(1) A retail premises lease is taken to provide as set out in this section.

(2) The landlord is responsible for maintaining in a condition consistent with the condition of the premises when the retail premises lease was entered into –

…

(b) plant and equipment at the retail premises; and..

Section 94 of the RLA 2003 states that:

94 The Act prevails over retail premises leases, agreements etc.

(1) A provision of a retail premises lease or of an agreement (whether or not the agreement is between the parties to a retail premises lease) is void. To the extent that it is contrary to or inconsistent with anything in this act (including anything that the lease is taken to include or provide because of a provision of this Act).

(2) A provision of a retail premises lease or of an agreement (whether or not the agreement is between the parties to a retail premises lease) is void. To the extent that it purports –

(a) to exclude the application of the provision of this Act; or…

The tenant argued that as a result of s 94 the parties could not contract out of the covenant implied by s 52. If they cannot contract out of a covenant implied by the Act, they similarly cannot contract out of the remedies that flow from a breach of that covenant. It must also follow, so the tenant argued, that the parties cannot contract out of an equitable set-off that flows from a breach of that covenant.

The tenant relied on the decision of Deputy President Macnamara (as his Honour was then) in C & A Delaveris Pty Ltd v Bretair Pty Ltd [2009] VCAT 1663, in which his Honour contemplated the corresponding provisions of the now repealed Retail Tenancies Reform Act 1998 (Vic) (1998 Act), and held that:

79. … a provision in a retail lease is void to the extent that it claims to ‘exclude the application of any provision of this Act’. In my view, the inclusion of the words ‘without deduction’ in the covenant to pay rent is avoided by Section 47 to the extent that it limits the effect of the statutory implied covenant to repair would otherwise have, hence a breach of the repair covenant would be available as a set off in the present case.

…

84. … It is in accordance with well established practice to allow a set off of the liquidated sum incurred by a tenant in meeting a repair obligation owed by the landlord and reducing the rental liability accordingly.

Section 47 of the 1998 Act is in similar terms to s 94 of the RLA 2003.

After considering those arguments, the Tribunal in AMTB accepted that the tenant’s position was arguable and granted the injunction, holding that:

[21] …the principal question for trial is whether a claim for unliquidated damages arising from a breach of s 52 of the RLA can be set-off against a claim for rent and outgoings in arrears if the lease contains a “no deductions” clause or, alternatively, whether s 94 of the RLA renders such a clause void.

Implications

Both landlords and tenants should be aware that a ‘no deductions’ clause does not work in all circumstances, and that an equitable set-off arising from breach of a covenant implied by the RLA 2003 (or another statute that the parties are prohibited from contracting out of) can provide a work-around for a tenant seeking to remain in the leased property (at least at the interlocutory injunction stage).

This can be quite a powerful tool for tenants, as it can keep the tenant in the property and trading while it pursues its counterclaim and seeks to negotiate some form of resolution with the landlord with respect to the alleged arrears. This can, and often does, allow a tenant to trade out of its difficulties and, if necessary, refinance or otherwise restructure to save a distressed business on the brink.

Sam Hopper SC and Dylan Matthews

Dylan Matthews is a final-year Bachelor of Property and Real Estate / Bachelor of Laws student from Deakin University.

[1] See Young, Croft and Smith, On Equity (Thomson Reuters, 2009) at p 997.

In a decision handed down this week, the Tribunal held that an obligation in a retail premises lease to repaint and re-carpet periodically is not inconsistent with the landlord’s obligation to maintain the premises under s 52 of the RLA 2003.  

In the decision of Deng and Deng Pty Ltd v McPhee and Anor (Building and Property) [2024] VCAT 1025, the Tribunal granted an injunction to a tenant who had been locked out of its motel business by its landlord. One of the breaches relied on by the landlord was an alleged failure by the tenant to:

• paint the Premisses internally every 3 years and externally every 5 years; and
• replace the carpet every 5 years.

The Tenant argued that the repainting and recarpeting clause was inconsistent with s 52 of the RLA 2003.

Section 52 of the RLA 2003 states that:

(1) A retail premises lease is taken to provide as set out in this section.

(2) The landlord is responsible for maintaining in a condition consistent with the condition of the premises when the retail premises lease was entered into:

(a) the structure of, and fixtures in, the retail premises; and

(b) plant and equipment at the retail premises; and

(c) the appliances, fittings and fixtures provided under the lease by the landlord relating to the gas, electricity, water, drainage or other services.

Section 94 of the RLA 2003 renders void any provision in a retail premises lease that is inconsistent with a provision of the RLA 2003.

The tenant argued that:

1. the landlord was responsible under s 52 of the RLA 2003 to maintain the paint and carpet in the retail premises in a condition consistent with their condition when the lease was entered into;  and
2. by purporting to require the tenant to repaint and re-carpet periodically, the landlord was in substance contracting out of that obligation.

The Tribunal did not accept that argument, and found that the repainting and re-carpeting clause was not inconsistent with s 52, holding that:

[37] … it is immaterial [under the terms of the lease] whether the paint or carpet has deteriorated to a condition which is not commensurate with the condition when the retail premises lease was entered into. In other words, it has no comparator, which appears to be an essential element under s 52 of the RLA. 

[38] Unlike clause 8 [of the lease], which is directed at repairing or maintaining an element of the Premises, the obligation to paint at a point in time and irrespective of the condition of the paintwork at the time the Lease was entered into; and an obligation to re-carpet at a point in time, again irrespective of the condition of the carpet at the time the Lease was entered into, is more likely to be work of a capital nature. The obligation to repaint and re-carpet does not crystallise in order to maintain the Premises in a condition consistent with their condition when the retail leases premises lease was entered into. Rather, the obligation crystallises irrespective of that condition. 

The Tribunal ultimately found that the requirement to repaint and re-carpet fell into the exception on the recovery of capital costs in s 41(2)(a) of the RLA 2003 and that there was no arguable case or serious issue to be tried that the repainting and re-carpeting requirement was inconsistent with s 52.

The Tribunal held that there was a serious issue to be tried on other grounds, and granted the injunction to the tenant, so it does not look like the tenant will be able to appeal that decision.  

However, obligations to paint during the term of a lease are common and, in fact, can be found in some versions of the LIV standard lease.  The argument that those provisions are inconsistent with s 52 of the RLA 2003 and void by operation of s 94 of that Act has been in circulation for some time and I am aware of at least two other cases in which the point is currently being pressed.  Consequently, despite the finding of the Tribunal in this case, I expect that this will not be the last time the point argued.

Sam Hopper SC and Eli Fryar