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11 Jul 2019

Victorian landlords take note: the Retail Leases Act 2003 may apply to your lease

By Sharene Hambur, Jerome Martin

A number of recent cases have further considered the question of what constitutes "retail premises", some of which may cause concern for landlords.

In 2017, the Victorian Court of Appeal dismissed an appeal from a decision that surprised many in the property sector in finding that a lease of industrial premises used for a storage business in an industrial zone was in fact a retail premises lease (IMCC Group (Australia) Pty Ltd v CB Cold Storage Pty Ltd [2017] VSCA 178).

Since that decision, there have been a number of cases, some of which have continued to push the boundaries of what constitutes "retail premises" and ring alarm bells for landlords about the effectiveness of measures designed to try to avoid the application of the Act.

Definition of "retail premises" under the Retail Leases Act 2003

The Act applies to a lease of "retail premises", being premises that, under the terms of the lease, are used, or are to be used, wholly or predominantly for the sale or hire of goods by retail or the retail provision of services. Recent cases have reinforced that the "ultimate consumer" test (which asks whether goods or services are being supplied to a consumer who uses those goods or services) remains an important part of the test for determining if premises are being used for a retail purpose, but it is not decisive in determining whether the Act applies.

Alongside the "ultimate consumer" test, the Court will look for other indicators of retailing, such as the type of property where the premises are situated and whether the property is open to the public.

The effect of acknowledgements in leases

To try to ensure that the Act does not apply, it is not uncommon for a landlord to include in a lease a clause under which the tenant acknowledges that the Act does not apply. For example, in Access Solutions International Pty Ltd v Gamet Pty Ltd [2017] VCC 1563, the Victorian County Court considered a lease which contained a provision stating:

"the Tenant acknowledges that the Act does not apply to this Lease."

This case involved a tenant who manufactured and supplied gates. Most of the gates were sold by the tenant to builders, and not to the owners of the land where the gates were eventually installed. The Court found that the tenant's business involved selling gates to builders, who then used the gates as an input into the products that the builders delivered to their own customers. Therefore, the builders were "ultimate consumers" of the tenant, and the tenant's sales were classified as retail and not wholesale.

Regarding the acknowledgement in the lease, one of the parties in the case submitted that the acknowledgement that the Act did not apply had no effect because of section 94 of the Act (which, in general terms, operates to render void a provision in a lease which is inconsistent with, or tries to exclude, the operation of the Act). While the Judge did not expressly endorse this submission, in deciding that the lease was a retail lease, the judgment suggests that the acknowledgement in the lease was of no compelling effect.

Excluding retailing from the permitted use in a lease

Another strategy that is sometimes adopted to try and ensure that the Act does not apply to a lease is to specifically exclude retailing in the description of the "permitted use" under the lease. In the case of Koga Nominees Pty Ltd v Locsam Australia Pty Ltd & Ors [2018] VSC 455, the Victorian Supreme Court considered a lease which described the "permitted use" as:

"Warehouse… but expressly excluding the use by the Tenant for any retail purpose."

The tenant, with the consent of the landlord, then entered a sub-lease in which the description of the permitted use also sought to exclude use for a retail purpose. A dispute subsequently arose between the landlord and tenant about the poor condition in which the concrete slab at the premises was left at the expiry of the term. The tenant joined the sub-tenant to the proceedings alleging that the sub-tenant caused the damage (in using the premises for a metal recycling business).

In the course of pre-trial consideration of whether the Act applied to the lease, the Judge indicated that an express exclusion of retail use from the permitted use under a lease was not definitive on the question of whether the Act applied.

In contrast is the case of Bulk Powders Pty Ltd v Seicon Pty Ltd (Building and Property) [2018] VCAT 2000 (14 December 2018), in which the VCAT Member concluded that the restriction on retailing in the "permitted use" under the lease in question should not be ignored in determining whether the Act applies. The case concerned a tenant under a lease who operated a business involving the manufacture, development and production of sports nutrition products that are sold (primarily online) to consumers. The tenant argued that its business satisfied the "ultimate consumer" test and that the Act applied to its lease, despite the restriction on retailing in the "permitted use".

The VCAT Member concluded that while the ultimate consumer test was satisfied, another indicator of retail characterisation is whether the premises were open to the public and, in this case, they were not. The Member placed particular emphasis on the fact that virtually all of the tenant's business was online, that the premises were not open to the public (and that, in fact, the tenant prohibited the public from entering save for customers with a long-standing relationship) and that there was no signage at the premises advertising the tenant's business. In these circumstances, the Member found that while the tenant's activity might be considered to be "retail", that alone did not make the premises "retail premises" as it was clear on the evidence that the premises were predominantly used for the production and storage of products. The case illustrates that a restriction on retailing in the "permitted use" may be given weight in determining whether the Act applies, and that it is important to consider all of the circumstances of the case.

What appears to be common to both of these decisions, and to all of the relevant decisions, is that a court will look at all relevant circumstances in determining whether the Act applies.

In particular, if at the time a lease is entered into, the "permitted use" on its face appears to allow retailing and:

  • the premises are used for a retail use (for example, if the activities are known to be retail based on a lease of the same premises for an immediately preceding period); or
  • it is anticipated that the premises will be used for a retail use (for example, based on the nature of the activities of the tenant at other premises from which the tenant is relocating, or representations made by the tenant about the nature of proposed activities),

then a prohibition in the lease on retailing is unlikely to be effective in preventing the Act from applying.

Practically, what can landlords do when entering a lease?

The application of the Act to a lease carries with it a number of commercial consequences for landlords, including a prohibition on the recovery of land tax and additional maintenance obligations.

In light of these cases, before entering a lease, landlords should always seek a clear understanding of how a tenant intends to use the premises. If after thorough investigations it appears that the Act may apply, this should be taken into account in negotiating the commercial terms of the lease, bearing in mind those costs, such as land tax, which will not be able to be recovered from the tenant.

If it is concluded that the Act does not, or is unlikely to, apply, landlords should consider inserting provisions in the lease reflecting the assumptions that have led to this conclusion, such as prohibiting public access and prohibiting signage advertising sales from the premises, with as much explicit detail as possible.

Finally, landlords should still be including, where applicable, an acknowledgement by the parties that the Act does not apply and should restrict the permitted use to non-retail activities. While these are unlikely to be definitive, they could still be helpful.

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Clayton Utz communications are intended to provide commentary and general information. They should not be relied upon as legal advice. Formal legal advice should be sought in particular transactions or on matters of interest arising from this communication. Persons listed may not be admitted in all States and Territories.