On 16 October 2020 the Court of Appeal confirmed that a ‘retail premises lease’ will remain subject to the Retail Leases Act 2003 (Vic) (the “Act”) even if the premises cease to be retail premises.

In Verraty v Richmond Football Club [2020] VSCA 267, the Court of Appeal has upheld Croft J’s decision in Richmond Football Club v Verraty [2019] VSC 597 in confirming that the status of a retail premises lease cannot change during the lease, even where circumstances would otherwise change the legal characterisation of that lease (for example, the occupancy costs exceeding the $1million statutory threshold).

Justices Kyrou, Kaye, and Sifris confirmed as follows [at paragraph 8]

“If a lease is a retail premises lease at the commencement of the lease, it remains subject to the Act even if the premises cease to be retail premises.  In short, the text, context and purpose of the Act strongly support the view that it is not possible to jump in and out of the Act from time to time depending on whether premises continue to fall within the definition of ‘retail premises’.”

The critical issue in the appeal was whether a retail premises lease that was subject to the provisions of the Act at the time the lease was entered, can at some point in future cease to be a retail premises lease if the premises are no longer a retail premises for the purposes of section 4 of the Act.  As a result of the Court of Appeal upholding Croft J’s 2019 decision, it is now settled that in order for the Act to apply, “the premises must be retail premises at the time the lease is entered into or renewed and not at a later time” [paragraph 65].

In the case of Verraty, when the lease was entered back in 2004, the premises constituted a retail premises within the meaning of the Act. Over the years, the property’s occupancy costs (rent and outgoings) increased, and by May 2016 the annual occupancy costs exceeded the $1million statutory threshold. The key question looked at by the Court of Appeal was whether the lease ceased to be a ‘retail premises lease’ upon the premises ceasing to satisfy the statutory definition of ‘retail premises’.

The Court of Appeal confirmed that the only relevant point in time to assess whether the premises are retail premises is the time at which the lease is entered into or renewed. This temporal requirement is a one-time assessment according to the Court of Appeal. This means that the characterisation of a lease cannot change during the currency of its term, irrespective of any change in circumstances surrounding the retail premises itself (for example, increase in occupancy costs beyond the $1m threshold). The Act does not contemplate late departure from the Act; it merely fixes the date for determining the Act’s application as the date when the lease was entered.

It is still unclear whether a lease can jump in or out of the Act on renewal of lease. The Court of Appeal stayed silent on this point, but Croft J’s 2019 decision suggests that this will depend on the renewal provisions of the lease.

The Court of Appeal also noted that the Act is silent about any exit and re-entry into the Act. The obligations in the Act focus on the status of the lease at the time it is entered into or renewed and the Court of Appeal found there to be a “compelling indication that the Act does not contemplate a change of status of the lease during the term of the lease” [paragraph 69].

One question that arises from the Court of Appeal’s decision is whether a clause rendered void when the Act applied to it will no longer be void if the Act stops applying. The Court of Appeal stated, at paragraph 90:

“….It is no answer to say that once the clauses are void they cannot be revived. Rather, they would only be void in particular circumstances and if those circumstances did (hypothetically) cease to exist, there would be no reason why the clauses should continue to be void. Although the relevant provisions of the Act operate directly and expressly on the retail premises lease, as the Tenant contends, so as to displace the express terms of the lease, it is only as a consequence of the application of the Act to the lease.  If (hypothetically) the Act no longer applied to the lease, plainly, its provisions would no longer operate on it.”

It remains to be seen whether a clause rendered void by operation of the Act will still be void if the Act stops applying. The Court of Appeal indicates that such a clause would not continue to be void but the matter may require further litigation to clarify and confirm the point.

The Court of Appeal confirmed that the estimate of outgoings required under section 46(3) assumes the lease is a retail premises lease, and is separate and distinct from the estimate required by section 4(3) which is for the purposes of determining occupancy costs. The Court of Appeal stated that the mechanism under section 4(3) does not require that a determination take place annually or at any time after the commencement of the lease, and it “does not readily translate into an exit from the Act at a later point” [paragraph 108].

The Court of Appeal decision is significant as it effectively means that if a lease started as a retail premises lease, the parties to that lease can rely on it remaining a retail premises lease throughout its term. The consequences of a lease being retail, as readers will be well aware, include the inability to recover land tax as a building outgoing, the inability to enforce a ratchet clause, market rent reviews being regulated and governed by the provisions of the Act, and increased repair and maintenance obligations on the part of a landlord.

If you have any questions in relation to the Court of Appeal’s decision, or in relation to your lease or renewal of lease and the applicability of the Retail Leases Act, please do not hesitate to contact Angela Kordos or a member of our Property Law Team.