By Phillip Leaman

7 May 2015

In a first for leasing law, the President of the Victorian Civil and Administrative Tribunal, Justice Garde has on 1 May 2015 handed down his advisory opinion in case whereby he was asked to advise the Small Business Commissioner whether or not Landlords can seek the costs of compliance with Essential Safety Measures (ESMs) from a Tenant. The news is not great for Landlords. Although, Tenants will breathe sighs of relief.

What are Essential Safety Measures?

ESMs are listed in Schedule 9 of the Building Regulations 2006 and include items such as emergency exit signage and lighting, fire fighting equipment, fire and emergency exit doors, smoke alarms, paths of travel to exit, fire sprinklers to name just a few.

What is the case about?

Section 52 of the Retail Leases Act 2003 requires a Landlord to maintain the premises in the same condition as when the lease was entered into. Landlords cannot on-charge to a Tenant the costs that the landlord has incurred in complying with its obligations under Section 52. A landlord has an obligation under sections 250 and 251 of the Building Act 1993 and the Building Regulations 2006 to deal with ESMs.

There has been mixed opinion on whether or not a landlord could seek reimbursement of expenses arising from a landlord’s obligation to comply with the Building Act and Regulations.

The Victorian Small Business Commissioner sought an advisory opinion on various questions from VCAT. In particular, the Commissioner asked (in respect to Retail Leases Act leases):

  • Whether or not the Landlord could require the Tenant to provide or maintain the leased property’s ESMs;
  • Whether Section 251 of the Building Act operates despite section 39 of the Retail Leases Act imposing the costs of maintaining ESMS on the Landlord;
  • Whether a Landlord is entitled to recover from the tenant the costs of maintenance and repairs to the retail premises or to the landlord’s installations in the retail premises as outgoings.

What was decided?

Justice Garde AO RFD, the President of the Victorian Civil and Administrative Tribunal determined that:

  • A landlord is not able to require a tenant under a retail premises lease to provide or maintain essential safety measures where:
  • Section 52 of the Retail Leases Act 2003 applies and the landlord is responsible for providing or maintaining the ESM in order to maintain the premises in a condition consistent when the lease was entered into and
    • the ESM forms part of the structure of or is a fixture in the retail premises; or
    • ESM constitutes plant or equipment at the premises; or
    • is an appliance, fitting or fixture provided under the lease by the landlord relating to the gas, electricity, water, drainage or other services.

Unless the need for repair of the ESM arises out of the misuse by the tenant, or the tenant is entitled or required under the lease to remove the ESM at the end of the lease.

The cost of compliance cannot be recovered as an outgoing from the Tenant nor can the landlord require the Tenant to perform the obligations of the landlord under the Building Act and associated regulations (unless the landlord is paying for the costs of compliance). Although, if the Landlord agrees, the Tenant may carry out the necessary works at the Landlord’s expense.

A landlord may recover from the tenant the cost of maintenance and repairs to the retail premises or to the landlord’s installations as outgoings in certain circumstances where particular sections of the Retail Leases Act do not apply.

What is the impact for Landlords?

Landlords should obtain advice on:

  • The outgoings they are charging tenants in relation to essential safety measures and stop charging tenants if they are currently charging items they are now no longer entitled to charge;
  • Obtaining a release from Tenants for amounts previously charged which could be recovered by tenants when negotiating rent and new leases with tenants (for existing tenants);
  • Whether or not they are required to pay back any ESM charges if requested by a Tenant.
  • Some ESM charges will still be recoverable by Landlords but in limited circumstances.

What is the impact for tenants?

Tenants should obtain advice on whether any outgoings charged and paid can be recovered from landlords and if so, consider whether a claim should be made or whether the Tenant should offset the amounts from Rent payable in the future.

What do I do now?

  • If a Tenant consider your position and what outgoings you have paid.
  • If a Landlord, consider the outgoings charged and consider leases moving forward to seek a higher rent noting that you can no longer claim ESM costs in some circumstances.

It should be noted that the decision is an advisory opinion which is not based upon any facts or particular circumstances. As such, there may be cases which will result in a landlord being able to successfully seek a particular expense. However, the decision will serve as a very good guide as to the interpretation of the law and until a case is determined in the Supreme Court, the decision will be very persuasive in dealings between landlords and tenants. It remains to be seen if this will also impact commercial premises, not covered by the Retail leases Act. Watch this space.

 

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

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