29 Oct 2020

Once a retail lease, always a retail lease? Yes, Victorian Court of Appeal confirms

By Andrew Norman

The Victorian Court of Appeal's decision in Verraty confirms the status of a retail lease, but uncertainty remains on whether the Retail Leases Act 2003 applies to many warehouse operations.

Can a lease which is subject to the Retail Leases Act 2003 (Vic) at the time it is entered into cease to be subject to the Act as a result of a change in circumstances?

On 16 October 2020, in Verraty Pty Ltd v Richmond Football Club Ltd [2020] VSCA 267, the Court of Appeal of the Supreme Court of Victoria emphatically confirmed that it cannot.

Endorsement of Supreme Court's decision in Verraty

The Court of Appeal emphatically endorsed the decision of the Supreme Court, and the reasons for that decision, and dismissed the landlord's appeal from that decision.

The court determined that "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 (be retail premises)".

The court considered that jumping in and out of the Act was an untenable interpretation of the Act and one which would "deprive the parties of any certainty in respect of their rights and obligations, which is a key purpose of the legislation".

Effect of the Verraty decision

If a lease is a retail premises lease at the commencement of the lease, it remains subject to the Act, regardless of any change in circumstances (such as occupancy costs increasing above $1m p.a. or the tenant becoming a subsidiary of a company listed on the ASX).

What should landlords and tenants do?

The actions we recommended for entering the lease, renewals, permitted uses, and lease negotiation remain valid.

There may be scope for landlords and tenants to structure their commercial arrangements to either fall within, or to fall outside, the operation of the Act, but once that position has been set, it will remain the position for the relevant lease term.

Warehouse operations

The decision does nothing to address the uncertainty that continues to exist on whether the Act applies to many warehouse operations where, with evolving e-commerce practices, it can be very difficult to determine whether the premises, at the commencement of the lease, are to be used "wholly or predominantly for the retail provision of services".

It can be particularly difficult for purchasers of warehouse properties to determine whether particular leases fall within, or outside, the scope of the Act, though the consequences for a purchaser can be significant.

Certainty on this could be achieved by excluding from the Act premises with an area (or an NLA) of greater than 1,000m2, an exclusion that existed previously in the Retail Tenancies Reform Act 1998 (Vic) and which continues to exist in most other Australian jurisdictions.

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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.