Further to my previous post, the new Regulations have not made their way onto the Victorian Law Today page yet.

A copy is attached here: Retail Leases Regulations 2013 (Vic).

Regular readers will be aware that the Retail Leases Regulations 2003 (Vic) will sunset shortly and that the Minister for Innovation, Services and Small Business recently released a Regulatory Impact Statement and called for submissions about proposed new Regulations.

The Acting Minister Minister for Innovation, Services and Small Business published in the Victoria Government Gazette on 8 April 2013 notice of his decision to make the proposed Retail Leases Regulations 2013 (Vic), subject to a number of amendments.

The amendments are summarised in the Gazette entry as follows:

• The prescribed percentage for the purposes of section 47(5)(b)(i) of the Act, as provided under Regulation 12 has been retained at 10%.
• Transitional arrangements have been provided so as to enable landlords to continue to use the Disclosure Statement formerly prescribed by the Retail Leases Regulations 2003 until 22 July 2013.
• A further item has been included in each of the Disclosure Statements in Schedules 1, 2, 3 and 4.  This new rule requires retail landlords (or a tenant in the case of Schedule 4) to disclose to the prospective retail tenant (or assignee in the case of Schedule 4) any alteration or demolition works to the premises or building/centre in which the premises is locate, including surrounding roads or land adjacent to, or in close proximity to, the retail premises, during the term of the lease (or any further terms) where such works are planned or known to the retail landlord (or tenant in the case of Schedule 4) at the time of disclosure;  and
• other minor amendments to correct or clarify words used in Schedules 1, 2, 3 and 4.

A copy of the Gazette entry is available here: Gazette entry (8 April 2013).

I cannot see a copy of the new Regulations online yet.

Practitioners acting for landlords should note the following:

1. landlords can continue to use the current form of disclosure statement until 22 July 2013;
2. solicitors acting for landlords should ensure that their precedents (as well as and their clients’ and clients’ managing agents’ precedents) are updated with the new disclosure statements prior to 22 July 2013;
3. it is prudent to make appropriate diary notes now to remind yourselves to check for the new regulations in the lead-up to 22 July 2013;  and
4. if your clients are themselves planning to redevelop their centres or are aware of any neighbours that are planning to redevelop, they should start thinking now about the new disclosure obligations so that they can be prepared to give adequate disclosure when the new form takes effect.

Practitioners acting for tenants should be aware that the existing disclosure statement creates difficulties for assigning tenants (see an earlier post here).  An assignors’ disclosure statement has been foreshadowed in the new Regulations.  It is likely to be available to assignors under the new Regulations before 22 July 2013.  When acting for a tenant that is assigning its lease, practitioners should check to see whether the new form of disclosure statement is in force and, if it is, consider using the new form rather than the current form.

The Retail Leases Regulations 2003 (Vic) sunset on 23 April 2013.

For a useful discussion on the differences between the current Regulations and the proposed Regulations, refer to an excellent note prepared by Allens Linklaters, available here.  It should be noted that this note pre-dates the latest Gazette entry from the Acting Minister.

Thanks to Peter Lowenstern from the REIV for forwarding to me a copy of the recent Gazette entry.

In the recent VCAT decision of South Yarra Colonnade Pty Ltd v Designbuilt Industries Pty Ltd & Ors (Retail Tenancies) [2013] VCAT 266, a tenant of a retail shop sent a letter to its landlord advising the landlord that it intended to exercise its option.

When the lease was subsequently terminated, the landlord argued that the tenant had validly exercised its option, creating a new lease term.

The tenant argued, on the other hand, that the letter constituted no more than a statement of future intentions and that the option lapsed when the tenant failed to make good that intention.

The Tribunal found that the tenant had not validly exercised its option.

Senior Member Walker set out the relevant correspondence and surrounding facts as follows:

[18]            … on 12 October 2005 Mr Cumberlidge wrote to Mr Murray as follows:

“Re; exercising of lease option Shop 13 The Colonnade (554) Chapel Street, South Yarra

We write to advise you of our intention to exercise our lease option for a further 6 year period.

…

[19]            On 24 October 2005 Mr Murray wrote back to Mr Cumberlidge as follows:

“Acknowledgement of exercise of option.

Shop 13, The Colonnade, South Yarra

We are in receipt of your letter dated 12 October 2005 wherein you have exercised your option for a further term of 6 years from 1 February 2006.

On behalf of the lessor, South Yarra Colonnade Pty Ltd, we acknowledge that the option has been exercised in accordance with the Lease agreement.

Should you have any further queries, please do not hesitate to contact the undersigned”.

[20]            Nothing further was done by either side in regard to the exercise of the option or to determine what rental should be paid. In particular, no notice was served by the Landlord pursuant to Clause 14.1 to propose the market rental for the first year of any renewed term.

…

[22]            On 14 February 2006 Mr Murray wrote back to Mr Cumberlidge, confirming that the Tenant had exercised its option and that a market review of rent was due with effect from 1 February 2006. He stated in the letter that the Landlord sought a rental of $125,500 per annum and set out some calculations to justify that figure. The last paragraph of the letter states:

“We look forward to receiving your written acceptance of this proposal by return. However please do not hesitate to contact the undersigned should you have any queries”.

The landlord made a number of arguments in support of its submission that the tenant validly exercised it option, summarised at paragraph 33 of the Tribunal’s decision.

The tenant, on the other hand, argued that the plain meaning of the letter of 12 October 2005 was prospective.  Other circumstances relevant to the tenant’s argument are summarised at paragraph 37 of the Tribunal’s judgment.

After discussing authorities relevant to the issue, the Tribunal held that (emphasis added):

[38]            … I have to determine whether the option was exercised as a matter of objective fact. To find that the option has been exercised I must find that the letter, when viewed objectively, would have been understood by a reasonable person in [the landlord’s] position to clearly and unequivocally express the fact that the Tenant intended, by that letter, to exercise the option. In considering that question I must construe the letter taking into account the circumstances that the parties would have had in mind at the time.

[39]            The first such circumstance is the wording of the letter itself. As Mr McNamara said, it contains no qualification or reservation but, as Mr Frenkel pointed out, it is expressed in terms of an intention. It does not say, clearly and unequivocally, that the option is exercised. The letter on its own without more would, I think, amount to no more than an expression of a future intention.

After considering the surrounding circumstances, the Tribunal concluded that:

[46]            I cannot see that there is any circumstance that renders the letter of 12 October “clear and unequivocal”. It expresses an intention to renew the Lease but does not clearly and unequivocally do so. I therefore do not find that the option for a further term of six years was exercised.

I have been informed that it is quite common for tenants to purport to exercise options in a similar way.

Every case turns on its facts.  However, given the treatment of the letter by the Tribunal, it is prudent for:

1. lawyers acting for landlords to advise their clients to be on the lookout or correspondence expressing the tenant’s ‘intention’ to exercise an option and, if received, to seek confirmation in writing that the tenant has in fact exercised its option.  Given that a letter from the landlord’s agent confirming the exercising of an option was not found to be sufficient, landlords should be insisting on that confirmation being in writing from the tenant;  and
2. lawyers acting for tenants to advise their clients to avoid ambiguous language such as that discussed in this case to avoid inadvertently failing to exercise their option.

Thanks to Jamie Bedelis of Moray & Agnew Lawyers for his valuable input into this note.

In an interesting recent decision, Garde J in the Victorian Supreme Court:

1. confirmed that distress for rent remains abolished in Victoria, despite the repeal of the Landlord and Tenant Act 1958 (Vic); and
2. found that a lien in a lease over goods left behind by a tenant is effective, provided that it crystallised after re-entry and termination of the lease.

Distress for rent was an ancient self-help remedy that allowed landlords to seize and sell tenant’s goods on the leased premises to satisfy unpaid rent.  The remedy is called ‘distress for rent’ and the act of seizing and selling the tenant’s goods is called ‘distraining for rent’.  The remedy was only available to the landlord before termination of the lease.  Distress for rent was abolished in Victoria in 1948 in provisions that were replicated in the Landlord and Tenant Act 1958 (Vic).

In Asian Pacific Building Corporation Pty Ltd v Sharon-Lee Holdings Pty Ltd [2013] VSC 11, Garde J confirmed the widely-held view that the repeal of the Landlord and Tenant Act 1958 (Vic) did not revive distress for rent and that the remedy remains abolished in Victoria.

However, the landlord in that case held a lien over the tenant’s goods left at the premises that crystallised after the landlord re-entered the premises and terminated the lease.  Consequently, the lien was not characterised as distress for rent and Garde J held that the lien was effective against the tenant’s goods.

The Tribunal held that the lien was void as against public policy.  That argument was rejected by Garde J and the Tribunal’s decision was overturned.

It is standard practice for leases in Victoria to deem goods left behind by the tenant to be abandoned and often to vest ownership of the abandoned goods in the landlord.  If the clause is enforceable and the tenant simply abandons its goods, a lien is probably does not assist the landlord.

However, a lien over the tenant’s goods could be useful if the goods are valuable and, for example:

1. the tenant tries to remove them after the lease has been terminated;
2. the tenant’s financier tries to execute a charge over the tenant’s goods;  or
3. the tenant’s Liquidator tries to remove the goods after the lease is terminated.

Consequently, practitioners acting for landlords should consider updating their precedents to include a lien in similar terms to the lien in the Sharon-Lee Holdings case.

The text of the lien is extracted at paragraph [12] of the judgment.  However, although the Court upheld the lien, it was critical of the way in which it was drafted (see paragraph [62]).  Accordingly, practitioners should not slavishly copy the form of lien considered in the judgment.

It is important to note that the lien must take effect after termination of the lease in order to avoid being characterised as distress for rent.

Consideration should also be given to registering the lien on the Personal Property Securities Register.

Thanks to Jamie Bedelis of Moray and Agnew for drawing my attention to this case and for his valuable input in discussing this post.

I am often asked by lawyers acting for landlords of retail premises leases whether to issue proceedings in Court or VCAT for arrears of rent.

The recent decision of Cavarno Nominees Pty Ltd v Melbourne Liquidation Centre Pty Ltd [2012] VCC 1599 in the County Court illustrates the risk of a false start if proceedings are issued in court.

This note discusses that case and sets out some other considerations when deciding whether to issue in a court or VCAT or arrears of rent under a retail premises lease.

Background

VCAT has exclusive jurisdiction to determine a retail tenancy dispute.[1]  However, a ‘retail tenancy dispute’ does not include a dispute relating ‘solely to the payment of rent’,[2] meaning that the courts retain jurisdiction to hear and determine claims relating solely to the payment of rent.

However, VCAT also has a general landlord and tenant jurisdiction (outside the operation of the RLA 2003).[3]  Consequently, when suing for rental arrears, a landlord has a choice between suing at VCAT or the appropriate court.

The appropriate court will typically be the Magistrates’ Court for claims of up to $100,000 and the County Court or Supreme Court for larger claims.

The risk of a ‘false start’

The biggest risk when commencing proceedings in court for arrears of rent under a retail premises lease is the risk of a ‘false start’.

If proceedings are issued and the tenant brings a counterclaim, the claim is no longer a dispute ‘solely in relation to the payment of rent’.  This takes the dispute outside the courts’ jurisdiction and into VCAT’s exclusive jurisdiction.  This invariably results in the court proceeding being stayed and the dispute starting again (usually in a mediation at the Office of the Small Business Commissioner followed by VCAT proceedings).

For a landlord, a false start causes frustration and wasted costs.

The recent decision of Cavarno Nominees Pty Ltd v Melbourne Liquidation Centre Pty Ltd [2012] VCC 1599 is an example of how a counterclaim, even if based on weak evidence, may cause a false start.

In that case, the landlord issued proceedings in the County Court seeking arrears of rent.  The tenant subsequently filed an application with the Office of the Small Business Commissioner seeking mediation of a retail tenancy dispute.  The tenant’s application to the SBC’s office alleged that the lease was invalid, that the retail premises were not fit for purpose and that the landlord breached the covenant of quiet enjoyment.  The judgment does not elaborate on those allegations.  His Honour Judge Lacava found that the Court did not have jurisdiction as a result of the tenant’s application to the SBC’s office and stayed the proceedings in the County Court.

Importantly (for the purposes of this note), Judge Lacava held that:

24 Mr Osborne submitted that the particulars of the retail tenancy dispute were vague and unlikely to succeed and that there was no evidentiary basis for them before the court. All of that maybe so. In my view in deciding the questions raised by the summons it is not necessary that I have to decide the strength or otherwise of the retail tenancy dispute application lodged properly by the first defendant. That may ultimately be for the VCAT to decide in accordance with the Act.

The landlord also brought a claim against the tenant’s guarantor.  The court held that:

23 It would also be wrong in my opinion to allow the plaintiff to proceed against the second defendant alone. That proceeding, whilst based on the guarantee of the lease and not the lease itself, is nonetheless dependent upon an assumption of the validity of the lease. It would again be an absurd result were the plaintiff to succeed in this court against the second named defendant alone on the guarantee and the VCAT subsequently held the lease to be invalid.

Also, it is unclear how the court will deal with the costs of the court proceeding.  However, if the landlord knew or ought to have known about the tenant’s counterclaim, there is a risk that the landlord could have an adverse costs order made against it.

Consequently, the risk of a false start should be a significant consideration for practitioners acting for landlords who are suing for arrears of rent under a retail premises lease.

Other considerations

Set out below are some other things to consider when deciding whether to issue in a court or the Tribunal for arrears of rent under a retail premises lease.  However, those considerations should not detract from the significance of the risk of a false start.

Some of the advantages of issuing in a court are:

1.  costs are recoverable on the relevant court scale;

2.  each court has its own enforcement mechanism;

3.  each court has a procedure for obtaining default judgment, so judgment can be obtained quickly against an absconding tenant;

4.  pre-judgment interest (eg under s 58 of the Supreme Court Act) can be recovered;

5.  there is no requirement to mediate at the Office of the Small Business Commissioner under s 87 of the RLA 2003.  This is an advantage if mediation is unlikely to be productive;  and

6.  a claim for rental arrears plus interest has been held to be a claim relating solely to the payment of rent,[4] so interest under the lease can probably be claimed.

Some disadvantages of issuing in a court are:

1.  the landlord’s claim is limited to rent.  This means it cannot claim:

(a) outgoings;

(b) make good costs;

(c) mesne profits, being damages in the nature of rent for the period in which the tenant is occupation of the premises after the termination of the lease.  If the lease was terminated early (eg by notice) the mesne profits may be substantial;  and

(d) loss of bargain damages (usually rent that would have been due for the balance of the old lease less any rent obtained from a new tenant).  This amount can be significant, particularly if the premises is difficult to re-let;  and

2.  there is no requirement to mediate at the Office of the Small Business Commissioner under s 87 of the RLA 2003.  This is a disadvantage if mediation at an early stage is likely to be productive.

Some of the advantages of issuing in the Tribunal are:

1.  there is no risk of a false start caused by the tenant’s counterclaim;

2.  outgoings, mesne profits, loss of bargain damages, make good costs and any other damages may be claimed;  and

3.  the Tribunal has jurisdiction to hear and determine a claim by the landlord against the tenant’s guarantor (see Athedium (Vic) Pty Ltd v Matchpoint Pty Ltd and Ors (Retail Tenancies) [2009] VCAT 1124; upheld in Tucci v VCAT [2010] VSC 425).

Some of the disadvantages of issuing in the Tribunal are:

1.  costs are generally not awarded, regardless of the outcome.  Legal costs can often consume a significant portion of the judgment and often mean the case can be uncommercial;

2.  there is no procedure for default judgment at VCAT.  This usually means that the landlord will need to appear at the Tribunal and prove its case, even if the tenant does not appear;

3.  the Tribunal has no enforcement processes.  Orders need to be registered in the appropriate court before they can be enforced;

4.  there is no provision in the VCAT Act for the award of damages in the nature of interest or an equivalent to s 58 of the Supreme Court Act.[5]  This is a particular disadvantage if there are no interest provisions in the lease.  The Tribunal probably has power under s 91(2) of the RLA 2003 to award damages in the nature of interest.  However, it appears that both entitlement to interest and the amount awarded are discretionary;  and

5.  there is a requirement to mediate before issuing, which is a disadvantage if there are little or no prospects of settling.  However, if the tenant has absconded, a failure by it to attend mediation will open the door for costs under s 92 of the RLA 2003.

Final note – the Federal Court

The landlord might conceivably issue in a federal court, eg if it wants to sue on provisions in a Commonwealth statute such as the Australian Consumer and Competition Law.

However, that is a note for another day.

Thanks to my colleague and friend Paul Duggan for his assistance with this note.