ED – readers referring to this post should also refer to the later, related post here.

I am often asked whether a lease to a serviced apartment operator is a retail premises lease for the purposes of the Retail Leases Act 2003 (Vic) (RLA).

At this stage, the only indication we have from the Tribunal was in the case of  Meerkin v 24 Redan Street Pty Ltd [2007] VCAT 2182, where Deputy President Macnamara said (at 33):

In light of the conclusions that I have reached on the renewal issue, I believe it would be inappropriate for me upon the limited argument that I have heard to express a view on the difficult question as to whether a lease by a landlord of a serviced apartment for use as such by a tenant who will be offering the apartment to its own customers as a serviced apartment is governed by the Retail Leases Act 2003.

Consequently, there is no certain answer to this question.

There is an argument that the lease of a serviced apartment is excluded from the RLA by the operation of s 4(1), which says (emphasis added):

In this Act, retail premises means premises, not including any area intended for use as a residence, that under the terms of the lease relating to the premises are used, or are to be used, wholly or predominantly for… [the supply of goods or services by retail]

As a serviced apartment is a form of residence (so the argument goes), it is excluded from the RLA.

This argument is supported, at least in part, by the decision of Deputy President Macanamara in Bay Street Rose Pty Ltd v Christopoulos (unreported, VCAT, 30 March 2011).  In that case:

1. the Deputy President considered that “hotel” in modern parlance included both a traditional hotel that included accommodation and also a pub that did not offer any accommodation;
2. a guest staying at a traditional hotel could be described as a “resident” of that hotel;  and
3. the lease in question permitted use of the premises as a “hotel” but prohibited use of the premises “for any residential purpose whether temporary or permanent”;  and
4. the Tribunal found that this prevented guests from staying at the hotel but permitted use of the premises as a hotel in the modern sense of a bar and/or restaurant.

On the other hand:

1. the exclusion of any area intended for use as a residence appears to be directed towards the excluding the small business operator’s residence when considering the ‘whole or predominant purpose‘ for which the premises is used.  Consider the once-common example of a fish and chip shop where the tenant and his family live upstairs and the whole building is leased under one lease.  That would appear to be the classic small business that Parliament intended to protect when passing the RLA.  Is the predominant purpose of the lease to conduct a fish and chip shop or to be the tenant’s home?  The exclusion in s 4(1) appears to direct a court or the Tribunal to ignore the upstairs residence when considering whether the premises is let wholly or predominantly for the sale or supply of goods or services by retail;
2. this is consistent with s 95 of the RLA, which implies a condition into a retail premises lease requiring the landlord to maintain the residential area in good repair if the retail premises lease confers a right on the tenant to occupy a residential area in the building in which the retail premises are located;
3. there seems to be no material difference between a serviced apartment on the one hand and hotels, motels and caravan parks on the other, all of which provide accommodation services, usually on a short- to medium-term basis (although both have been known to provide long-term accommodation also).  When the RLA was enacted in 2003, one of the key areas of reform was certainty of the operation of the legislation.  Both the Retail Tenancies Act 1986 (Vic) and the Retail Tenancies (Reform) Act 1998 (Vic) (both predecessors to the current RLA) excluded from the operation of those Acts premises with a floor area in excess of 1,000 square metres.  This created uncertainty over whether caravan parks were excluded from the operation of those Acts.  It would appear from the discussion paper and issues paper published prior to the RLA being passed that Parliament was particularly concerned to extend to caravan park operators the protections offered by the RLA.  This suggests that Parliament did not want to exclude from the operation of the RLA premises used for the supply of short- to medium-term accommodation services.  This would appear to include serviced apartments;  and
4. the serviced apartment operator does not itself use the serviced apartment as a residence – it uses the apartment to conduct a business for the supply of accommodation services to its customers.   While this at least partially inconsistent with the finding in the Bay Street Rose decision, the different interpretations may be explained by the different contexts of the lease on the one hand and the statute on the other.

Although there is no certainty until a court or the Tribunal rules on the question, it appears that the better view is that a lease to a serviced apartment operator is a retail premises lease.

Premises above the third floor will probably be excluded from the operation of the RLA by the Ministerial determination made 29 April 2003, a copy of which is located here, because a serviced apartment probably provides retail accommodation services (as opposed to the sale or hire of goods by retail).

Thanks to my colleague Paul Duggan for his valuable input into this post.

VCAT has recently considered the impact of a Calderbank offer on liability for costs under s 92 of the Retail Leases Act 2003 (Vic).

Calderbank offers can arise in various circumstances.  They are usually expressed as being ‘without prejudice, save as to costs’ and conclude with a threat like: ‘the plaintiff/defendant will rely on this letter in an application for indemnity costs in the event that it achieves a better result at trial than is contained in this offer’.

Typically, a Calderbank offer arises where one party wins, say, $100,000 at trial, but has made an offer prior to trial to settle the case for a lesser amount (say, $75,000).  The Court can look at all the circumstances (including the content and timing of the letter) to decide whether it was unreasonable for the losing party to reject the offer and, accordingly, whether costs should be awarded on a higher scale.

It has been acknowledged for some time that the rejection of a Calderbank offer may, in some cases, be sufficient to trigger liability for costs in the retail tenancies list (see De Simone Nominees Pty Ltf v Szabo [2005] VCAT 2919, esp paragraph [17]).

However, costs can only be awarded under s 92 of the RLA when (relevantly) one party has conducted the case in a vexatious way that unnecessarily disadvantages the other party to the proceeding (see s 92(2)(a) of the RLA).  Consequently, the applicant for costs in the retail tenancies list has to satisfy a higher threshold than it would in a court.

The Tribunal rejected the argument, concluding that (footnotes omitted):

I agree with the comments made by Deputy President Macnamara (as he then was) in De Simone Nominees. In the present case, the offers made by the Landlord were that the proceeding be withdrawn on the basis that each party bear their own costs. I do not regard rejection of such an offer as constituting vexatious conduct in the present case. Although there may be instances where the rejection of an offer amounts to vexatious conduct, those instances will be rare. In the present case, it cannot be said that the claims raised by the Applicants were fanciful, hopeless or lacking in substance such that they could be said to have propounded a palpably incredible factual case or a legally misconceived claim. Ultimately, I found that the impugned conduct was not misleading or deceptive. That was a question to be decided objectively based on the evidence before the Tribunal.

In an excellent post on his new blog, available here, barrister Paul Duggan discusses the decision in Complete Pets and suggests that a litigant in the retail tenancies list may be wasting their time and money in making a Calderbank offer.

Given that a Calderbank offer is relatively cheap and easy to prepare, I am not convinced that it is a waste of time as both Deputy President Macnamara (as he was then) and Senior Member Riegler have left open the possibility of a Calderbank offer being relevant to the award of costs in the retail tenancies list, although those circumstances may be rare.

It is also relevant that Senior Member Riegler in the primary decision of Complete Pets Pty Ltd v Coles Property Group Pty Ltd [2011] VCAT 2165 found that the alleged representations were made but that they did not induce the tenant to take the lease (see paragraphs [81] to [88]).  Consequently, it is difficult to see how the case could be said to have been conducted in a manner that was vexatious.

Litigants in the retail tenancies list still need to show that the other side’s conduct (including the rejection of the offer) means that they conducted the litigation in a manner that was vexatious causing unnecessary disadvantage.

An example of a case in which a Calderbank offer might be successful is where you are opposed to a litigant who honestly puts forward a misconceived case.  Being honestly wrong about the law is probably not sufficient to satisfy s 92 of the RLA.  However, a well-crafted Calderbank letter that points out the insurmountable flaws in your opponent’s case may help tip the balance in your client’s favour.  If the offer is rejected, the letter could be used at the case’s conclusion to demonstrate that the continued conduct of the litigation was vexatious causing unnecessary disadvantage to your client, particularly if the other side is legally represented.

My colleague John Simpson put it well – ‘a Calderbank offer is designed to flush out the vexatious conduct’.

The Age yesterday published an article here in which franchisees complain about receiving no payment or compensation at the end of a franchise agreement for the goodwill that they have established during the term of the franchise agreement.

This is a common complaint by franchisees who feel that the franchisor who refuses to renew the franchise (or, more properly, grant a new franchise agreement) gets a windfall gain, either by:

1. operating the franchisee’s former outlet as a corporate store;  or
2. granting a franchise agreement to a new franchisee who may be willing to pay more for an established outlet than for a greenfield site.

It is usually an inherent feature of a franchise arrangement that the franchisees are left with nothing at the end of their term or terms (although this will, of course, depend on the terms of the individual franchise agreements and possibly the tenancy arrangements).  However, this may be different if the franchisor has encouraged or allowed the franchisee to proceed on the erroneous belief that a new franchise agreement would be granted.

The article serves to remind practitioners that when acting for potential franchisees:

1. they should advise the franchisee on their entitlements at the end of the franchise agreement;
2. they should conduct their due diligence and assess the potential returns on their investment on the assumption that the franchisee will not be granted any further terms or a new agreement;  and
3. if the franchisee would like a new franchise agreement, then they should start negotiating early and may need to pay fees under a different fee structure (which could well mean higher fees).

When acting for franchisors, it may be prudent to obtain either an acknowledgement or a solicitor’s certificate from the franchisee confirming that the franchisee is aware of their rights at the end of the agreement.

For those who were interested in my previous post on this topic here, Robert Hay has just added another post to his blog that expands on the topic here.

Robert’s post details a NSW Supreme Court decision in which it was found that a right of re-entry on account of the tenant being placed into liquidation should be construed as a form of breach requiring service of a notice under the NSW equivalent of s 146 of the Property Law Act.

Robert’s excellent analysis reinforces that it remains prudent to serve a s 146 notice on a tenant when relying on the tenant’s bankruptcy or insolvency as a default event.

In the interesting recent decision of N R Reid & Co Pty Ltd v Pencarl Pty Ltd [2011] VCAT 2241, Judge O’Neill sitting as a Vice President of VCAT considered a case in which the landlord terminated the lease after the tenant’s guarantor was made bankrupt.

The default and termination provisions of the lease took the usual form of giving the landlord the right to terminate the lease if the tenant’s guarantor became bankrupt.  However, the relevant clause was not expressed as a promise that was capable of being breached.

The landlord argued that:

1. the lease gave the tenant a contractual right to terminate the lease if the tenant’s guarantor was made bankrupt;
2. there is no sense in which the tenant ‘breached’ the lease as required by s 146 of the Property Law Act 1958 (Vic);  and
3. accordingly, no notice was required.

His Honour Judge O’Neill accepted that argument, but does not appear to have been referred to any authorities on the issue.

Duncan’s Commercial Leasing in Australia (6^th ed) discusses this issue, reviews the relevant authorities at [13.10], and concludes that:

1. the English courts have tended to treat breach of a condition in a lease as equivalent to a breach of a covenant, requiring notice under s 146 or its equivalent;  and
2. the issue is unresolved at appellate level in Australia.

This suggests that:

1. it remains prudent to serve a s 146 notice on a tenant where the tenant or its guarantor has been made bankrupt or placed into liquidation;  and
2. if the landlord has re-entered in those circumstances without a notice, it remains arguable that the re-entry was effective.