Head leases and the Retail Leases Act 2003

In the recent case of Izett St Pty Ltd v Applgold Pty Ltd (Building and Property) [2021] VCAT 174 (3 March 2021, Senior Member Forde at VCAT held that a head lease was not a lease of a retail premises under the Retail Leases Act 2003.

The parties entered into a lease back in 1996 for Premises that were dilapidated and uninhabitable. The Tenant spent in excess of $1.2million converting the premises into lettable areas and a residential area. The Tenant subleased and resided on the second floor of the leased premises, and the ground floor was converted into an area suitable for a café or retail food outlet and had been sublet to various entities since 2013. The first floor is configured and fitted out to the specific requirements of the subtenant, with the tenant providing what they refer to as a ‘bespoke rental service’, including provision of a kitchen facility. So effectively the, tenant was in the business of subleasing parts of the leased premises to retail tenants.

It was undisputed that the subtenancies in this case classified as retail leases covered by the Retail Leases Act. However, the key question was whether the Premises themselves (being distinct from the spaces within them leased under the subleases) were used wholly or predominantly for the retail provision of services.

The tenant argued that the subleases entered into between the tenant and its subtenants are retail leases, with the subtenants being the ultimate consumers of the subleased space, and that as a consequence, the premises is used predominantly for the retail provision of services and the head lease must be a retail premises lease.

The Tenant relied on IMCC Group (Australia) Pty Ltd v CB Cold Storage Pty Ltd [2017] VSCA 178 (5 July 2017) (“Cold Storage”) and submitted [at paragraph 22] that:

1. “the sublease services are provided by the applicant to its subtenants in exchange for payment of a regular fee in the form of rent;
2. any person can enter into a sublease with the applicant to secure sublease services to occupy part of the Premises;
3. the applicant’s business of providing a sublease service is available for use by the respective subtenants during normal business hours; and
4. the subtenants as customers of the applicant do not pass on the subleasing services to anyone else — they are the ultimate consumers of the subleasing services provided by the applicant.”

Both parties relied on the words used by the Court of Appeal in Cold Storage at paragraph 50—

“In isolation, none of these features would suffice to constitute the premises as retail premises. Conversely, the absence of one or more of them would not necessarily result in a finding that the premises were not retail premises. However, in the circumstances of this case, when all of those features are taken together, the conclusion must be that the premises are retail premises”

The Landlord contended that the Lease is not a lease of a retail premises, and relied on the fact that the premises must in addition to the ultimate consumer test, be open to the public, namely that there should be no restrictions on access to the service and who can use it. The Landlord relied on the case of Bulk Powders Pty Ltd v Seicon Pty Ltd (Building and Property) [2018] VCAT 2000 and said that the premises are not open to the public because the subtenants had exclusive possession of those parts of the leased premises that they subleased. The landlord’s argument was rejected insofar as it was found by the Tribunal that:

“the Premises is ‘open to the public’ in the sense that between sublets it is possible for a member of the public to enter a space available for sublet. There is no evidence to suggest that any person is prohibited from subletting a space in the Premises. …” [para 44]

Senior Member Forde at VCAT nonetheless held that the premises in this fact scenario were not retail premises and the lease was not a retail premises lease:

“50. Had the applicant offered licences to the public to use parts of the Premises it may have been more akin to the provision of services. Unlike a caravan park, serviced office, conference centre or cold storage facility, the applicant gave exclusive possession often for years at a time to its subtenants thereby giving away the right to use the Premises.”  

“51. Subletting premises is not the provision of a service in the sense required by the RLA. If that were the case every sublet premises could be classified as a retail premises. The provision of kitchen facilities by the applicant does not make the Premises retail premises…the applicant is not integral to the operation of the subleases once granted.” 

If you have any questions in relation to this case or the applicability of the Retail Leases Act 2003 to your leasing matter, please do not hesitate to contact Angela Kordos or a member of our property and commercial team.