Case Law Update: Retail Leases – Is your Lease In or Out of the Act?

A recent Victorian Civil and Administrative Tribunal case of William Buck (Vic) Pty Ltd v Motta Holdings Pty Ltd (2018) has decided whether a lease which is subject to the Retail Leases Act 2003 (Vic) can subsequently fall outside the definition of retail premises during the term of the lease.

Retail Leases

In 2006 the tenant entered into a lease in respect to premises in Hawthorn East for an initial term of 8 years with two further terms of 6 years each. The Tenant under the lease paid land tax of approximately $250,000. The question the Tribunal needed to answer was whether the lease was subject to the Act. The reason for the argument was that the initial rent was $802,795 plus GST and estimated outgoings of $150,209. If GST was counted then the occupancy costs would be more than $1,000,000 and the Act would not apply. The Tenant contended that GST should not be counted and therefore as the occupancy costs were $953,004 the Act applies apply and land tax would not be recoverable from the tenant.

What did the Tribunal find?

The rent payable under the lease means the sum payable for rent inclusive of GST. GST was deemed to be a component of outgoings and therefore part of the occupancy costs of a lease. This meant that the occupancy costs exceeded $1,000,000 (inclusive of GST) and the lease fell outside the Act.

Change of the Law

On 15 April 2013, the Retail Leases Regulations 2013 was introduced which clarified the position moving forward from that date that occupancy costs for the purpose of a retail premises was now $1,000,000 exclusive of GST. The Tribunal found that notwithstanding the change in law, for leases which commenced prior to that change, the Tribunal considered that GST should be included within the $1,000,000 figure for occupancy costs for that relevant period.

Should land tax be calculated in the calculation of occupancy costs?

The Tribunal considered whether land tax should be included or excluded for the purpose of working out occupancy costs to see whether the total would fall under the relevant amount to bring it under the Retail Leases Act. Whilst the tribunal made no finding, given the prohibition on recovery of land tax under the Retail Leases Act, it may be that this should not be counted for the purpose of working out occupancy costs.

So can a premises which falls within the definition of retail premises at the commencement of the lease fall outside the definition of retail premises during the term (because occupancy costs exceed $1,000,000 exclusive of GST)?

Senior Member Riegler confirmed Section 11 (2) of the Retail Leases Act prevents late entry into the Retail Leases Act. If premises are not retail premises at the time the lease is entered into (or renewed) then the premises cannot become retail premises later. However, the Tribunal found that premises that had occupancy costs under $1,000,000 exclusive of GST at the start of the lease were considered retail premises and subject to the Retail Leases Act and if occupancy costs subsequently increased to over $1,000,000 exclusive of GST during the term of the lease then the premises would no longer fall within the definition of retail premises.

So what does this mean for landlords and tenants?

If a lease is subject to the Retail Leases Act at the commencement, but there is a disqualifying characteristic in section 3 (1) (a), (b), (c), (d) or (e) under the Retail Leases Act during the term (such as occupancy costs increasing due to rent reviews, the tenant becoming a publicly listed corporation etc) then the retail premises can cease to be retail premises during the term.

Tenants, be careful if your starting occupancy costs are close to $1,000,000 exclusive of GST or if there is potential for outgoings or rent increases to push you over the figure during the term. The consequences of falling outside the Retail Leases Act will mean that land tax is payable as well as the removal of certain other statutory protections.

Landlords, check your leases and see if the occupancy costs are currently over $1,000,000 exclusive of GST and see whether your lease allows for the recovery of land tax if the Retail Leases Act does not apply.

It is important to ensure that where there is a potential for the Retail Leases Act to not apply that the lease is drafted carefully (whether you are the tenant or landlord) by an experienced leasing expert. The difference of a few words in the lease allowing land tax recovery could mean tens or hundreds of thousands of dollars.

For expert advice on retail leasing matters contact Phillip Leaman or a member of our Property Law team.