Controversy resolved – but more tenants under 15 year leases lose protection of Retail Leases Act 2003 (Vic)
Leased premises that are “retail premises” within the meaning of s.4(1) of the Retail Leases Act 2003 are excluded from the operation of the Act where the lease term is 15 years or longer and other conditions are met. See: ss.5(1)(c) and 4(2)(f) and the Ministerial Determination dated 23 August 2004.
The Ministerial Determination has the effect of removing premises from the operation of the Act where:
“Premises which are Leased under a Lease:
(a) the term of which (excluding any options for renewal) is 15 years or longer; or
and which contains any provisions that –
(d) impose an obligation on the tenant or any other person to carry out any substantial work on the Premises which involves the building, installation, repair or maintenance of:-
(i) the structure of, or fixtures in, the Premises; or
(ii) the plant or equipment at the Premises; or
(iii) the appliances, fittings or fixtures relating to a gas, electricity, water, drainage or other services; or
(e) impose an obligation on the tenant or any other person to pay any substantial amount in respect of the cost of any of the matters set out in sub-paragraphs (d)(i), (ii) or (iii); or
(f) in any significant respect disentitles the tenant or any other person to remove any of the things specified in paragraph (d) at or at any time after the end of any of the leases to which paragraphs (a), (b) or (c) apply.
The purpose of the Determination is unclear. Apart from statements by the Small Business Commission, there are no public documents that explain its purpose. The SBC says that the “purpose of the Determination is to exempt long term leases which impose substantial obligations on the tenant from the operation of the Act, where such exemption would be beneficial to both the landlord and the tenant”; the SBC refers, as an example of such a lease, to long term Crown leases for a low or peppercorn rent where substantial works are imposed on the tenant. See: the SBC “Guidelines to the Retail Leases Act 2003 – What are ‘retail premises’” dated 1 December 2014.
But it is unclear why the Determination applies only where it benefits both the landlord and the tenant. The application of the Determination is not restricted to where the lease provides for a low or peppercorn rent: rent is not mentioned. Why should a tenant under a 15 year lease lose the protection of the Act where the tenant is required by the lease to undertake substantial work or pay for substantial work? Why should a tenant lose the benefit of the Act where it does substantial work and the lease disentitles the tenant from removing the work?
There has long been a debate about whether the “or” that appears between (e) and (f) should be read as an “and”. The issue is important because if “or” is the correct interpretation the number of leases excluded from the operation of the Act will increase. The SBC has said that the “or” should be read as an “and” and that this interpretation had been confirmed by the Victorian Government Solicitor’s Office. See: the SBC’s Guidelines referred to above. Croft, Hay and Virgona in Retail Leases Victoria take a contrary view and say at [30,080.15] that (d), (e) and (f) “are clearly and expressly cast in the alternative…”.
The “or”/”and” controversy was considered and determined by VCAT in Luchio Nominees Pty Ltd v Epping Fresh Food Market Pty Ltd [ 2016] VCAT 937. In that case the tenant argued that for the Determination to apply (d) and (f) had to apply or (e) and (f) had to apply. Member Edquist rejected the tenant’s arguments saying at :
“I do not agree that sub-paragraph (f) in the Determination assumes the prior application of either sub-paragraph (d) or sub-paragraph (e). This is because sub-paragraph (f), which defines the breadth of the prohibition against removal of things, is expressed to relate back to ‘any of the things specified in paragraph (d)’, rather than ‘any of the things specified in paragraphs (d) or (e)’.
As to the purpose of the Determination, the Tribunal held
 …..The purpose of the Determination is, in my view, to clarify that certain long term leases or retail premises are to be deemed not be covered by the RLA…..
 …..a construction of the Determination which requires the existence of both a provision of the type identified by sub-paragraph (d) and sub-paragraph (f), or both a provision of the type identified by sub-paragraph (e) and sub-paragraph (f), would necessarily reduce, potentially substantially, the number of leases caught by the Determination. Such a construction would, in my view, be inconsistent with the presumed purpose of the Determination.”
The real puzzle is why long term leases should be excluded from the Act.
VCAT recently held that a tenant had not breached a lease by permitting users of AirBnB to stay in the tenant’s apartment. The landlord argued that the tenant had breached the lease by subletting the apartment in breach of the lease. The landlord sought possession of the apartment. The cornerstone of a lease is that the tenant has “exclusive possession” of the premises. The landlord’s case failed in VCAT because the Tribunal held that the AirBnB guests did not have exclusive possession of the apartment and therefore did not occupy the apartment under a sublease. VCAT held that the nature of the legal relationship between the tenant and the AirBnB guests was a licence to occupy, rather than a lease.
The landlord applied for leave to appeal. The application was determined this morning by Justice Croft. See: Swan v Ueker and Greaves  VSC 313. Justice Croft granted leave to appeal and granted the landlord’s appeal. His Honour held that VCAT either identified the wrong legal test concerning exclusive possession or applied the correct legal test wrongly. The judgment contains a detailed analysis of what is meant by “exclusive possession”.
Justice Croft said that this was not a case about the merits of AirBnB’s arrangements but rather the legal character of the arrangement. His Honour also said that a broad prohibition in the lease on sub-leasing, assigning the lease, granting any licence to occupy all or part of the premises or otherwise parting with possession without the landlord’s prior consent would avoid the need to characterise the nature of the arrangement as a sub-lease or a licence.
I will be writing further about this judgment.
Valuers determining the “current market rent” rent under leases concerning retail premises must ensure that the valuation:
- contains “detailed reasons” for the determination; and
- “specify the matters to which the valuer had regard in making the determination”.
See: s.37(6)(b) and (c) of the Retail Leases Act 2003.
Both requirements must be met; a determination that specified the matters to which the valuer had regard but failed to provide detailed reasons for the determination would not comply with s.37(6).
In Higgins Nine Group Pty Ltd v Ladro Greville St Pty Ltd  VSC 244 Justice Croft had to consider what was required of a valuer in “giving detailed reasons” and “specifying the matters” to which he or she had regard in making the determination. Higgins concerned an application for leave to appeal from a decision given in VCAT.
After reviewing case law concerning provisions in New South Wales similar to s.37(6), His Honour said at  that it was not sufficient for a valuer to “leap to a judgment”: the valuation “must disclose the steps of reasoning” and that both the Victorian and NSW provisions “eschew and do not entertain any ‘blinding flash or light’ as satisfying their ‘requirements’”.
In Higgins the valuer examined the tenant’s financial records and determined the rent using the “profits method” of valuation for determining the rent. The tenant had a 24 hour liquor licence but traded only to 11pm. The valuer referred to the tenant’s actual sales and determined that an additional $536,782 was achievable in annual turnover for the business, being a 26% increase over the actual sales. The only indicator as to how that figure was arrived at was in comments made by the valuer in a document furnished after the valuation was made where he said the figure was derived:
“Based on the liquor licence in place, and comparable venues in the region which I hold on file.”
No details of the comparable venues were furnished.
The landlord sought to defend the valuation on the basis that it was an opinion of an expert and, given the valuer’s experience, that was sufficient in terms of reasoning for the purpose of s.37(6).
Justice Croft rejected the landlord’s argument and refused refused leave to appeal. His Honour referred to and agreed with the following analysis of the valuation given by the Tribunal:
“One might speculate that the Valuer placed considerable emphasis on the fact that the Tenant traded up until 11 pm in circumstances where the 24 hour liquor licence allowed it to trade well beyond that time. However, having to speculate as to how the Valuer formed his opinion is, in my view, contrary to what is required under s.37(6) of the Act. Moreover, no detail was provided as to what other venues were used as a comparator. That, of itself, raises a number of questions: Did those other venues have similar GLAR? Did they have the same type of liquor licence? Were they also being operated as a restaurant/bar? Was their location proximate or did they cater for the same demographic clientele? Without those details, I consider the reasoning to be deficient and not in accordance with the Act.”
His Honour said at  that the valuer’s reference to an undisclosed file of material upon which he had made an assessment was “worse than a mere ‘blinding flash of light’” and that the reasoning process was “entirely opaque”.
When a valuer is engaged the parties should refer the valuer to the requirement in s.37(6) to both provide detailed reasons and specify the matters to which the valuer had regard. A determination based on an opinion that does not disclose the valuer’s reasoning will not comply with s.37(6).
Last seek I published a post about Eng Tan and Chen Lo v Thomas Russell  VSC 93. At that time the case did not appear on austlii. The case is important because it decided that a termination notice given under s.31 of the Sale of Land Act 1962 (Vic) could not be given to a real estate agent who did not have actual authority or ostensible authority to receive the notice. The case can be accessed from this post or on austlii.
Real estate agent not authorised to accept termination notice given under s.31 of Sale of Land Act 1962
A purchaser of land in Victoria may terminate the contract “at any time before the expiration of three clear business days” after signing the contract. See: s.31(2) of the Sale of Land Act 1962 (Vic). The termination notice must be “given to the vendor or his agent” or left at an address specified in the contract. See: s.31(3). Termination entitles the purchaser to the return of most of the moneys paid under the contract. See: s.31(4).
In Eng Kiat Tan and Cheng Lo v Thomas Russell  VSC 93 the Supreme Court of Victoria had to decide whether the vendor’s real estate agent was an “agent” for the purpose of being given a termination notice.
The High Court has said that the employment of a real estate agent to find a buyer of property does not necessarily create any authority to do anything which will affect the legal position of the employer; an agent does not even have implied authority to receive the purchaser money. See: Peterson v Maloney (1951) 84 CLR 91. In Brien v Dwyer (1978) 141 CLR 378 Gibbs J said that the expression “agent”, when used in relation to a real estate agent, was misleading because “Such so-called agents do not have a general authority to act on behalf of a vendor in relation to a contract.”
In Eng Kiat Tan the purchasers gave the termination notice to the real estate before the expiration of three clear business days after signing the contract. The vendor refused to accept that the contract had been terminated pursuant to the Act. The sale price was $4,480,000. The vendor resold the land to another purchaser for $4,070,000. The purchasers commenced a proceeding seeking recovery of the deposit and the vendor counterclaimed seeking the balance of the deposit and the loss suffered on the resale of the property. The purchasers claim failed and the vendor’s claim succeeded.
The purchaser argued that s.31 was remedial legislation and that the expression “agent”in s.31 must extend to the vendor’s real estate because, among other things, the purchaser had only three days to make inquiries as whether a person was or was not an “agent” with authority to accept the termination notice. The purchaser also referred to Lloyd and Rimmer’s Sale of Land Act Victoria where the authors say that for the purpose of s.31 “agent” includes but is not limited to the estate agent engaged by the vendor in connection with the sale.
The vendor argued that s 31 did not create a statutory authority to receive a termination notice: the purchaser had to establish that the vendor’s real estate had actual or ostensible authority to accept the termination notice and there were no facts which established any authority in the vendor’s real estate agent beyond that usually granted to real estate agent.
The trial judge held that s.31 did not create a statutory authority in a real estate agent to accept a termination notice.
Purchasers need to ensure that the sale contract identifies the person or persons upon whom a termination notice under s. 31 can be given or the place where a notice can be left.
Vendors who terminate contracts for the sale of land on the ground of a default by the purchaser often claim interest on moneys that have not been paid calculated from the date of the breach to the date of termination. Clause 25 of the general conditions of the standard form of contract concerning the sale of land prescribed by the Estate Agents (Contracts) Regulations 2008 (Vic) provides that:
“A party who breaches this contract must pay to the other party on demand:
…… ; and
(b) any interest due under this contract as a result of the breach.”
Does clause 25(b) entitle a vendor to interest on the contract price from the date of a breach by a purchaser to the date the vendor terminates the contract?
Two cases in the Supreme Court of Victoria suggest that the answer to this question is “yes”. In Portbury Development Co Pty Ltd v Mackali  VSC 69 the plaintiff sold a property for $1,600,000 with a deposit of $60,000, with the balance of purchase price payable on a nominated date. The defendant failed to complete and the plaintiff terminated the contract. The court accepted that the plaintiff’s termination was valid. The plaintiff’s claim included damages being, among other things, the difference between the contract price and the value of the property at the time of termination and “interest between default and rescission” based on a clause similar to clause 25. The court awarded the amount of interest claimed to the plaintiff, noting that such interest was under the terms of the condition payable on demand and remarking at :
“By the notice of rescission the plaintiff made an appropriate demand for that interest. Accordingly, the plaintiff is entitled to judgment against the defendant for the sum of interest claimed by it.”
In Pettiona v Whitbourne  VSC 205 the facts were similar to those in Portbury. The price of the property was $5,850,000. The purchaser failed to pay the balance of purchase price on the date nominated for settlement. A notice of default was served and the contract was terminated. The plaintiff claimed, amongst other things, interest on the unpaid balance for the period of default. The claim for interest, which was made under the terms of the contract, was not disputed by the defendant.
A recent case in the County Court of Victoria suggests that the answer to the question posed is “no”. In Yvonne Maria Van Der Peet Bill v Allan James Clarke  VCC 1721 Judge Macnamara declined to follow Portbury and Pettiona in deciding that a vendor of land was not entitled to interest from the date of the breach to the date of the termination of the contract. At  His Honour analysed the issue as follows:
“To put it in a nutshell, how can interest be awarded upon an alleged principal sum that ultimately was never payable?”
In answering that question His Honour said it was necessary to go to “some fundamental principles of the law of vendor and purchaser” and “one of Sir Owen Dixon’s most celebrated judgments” in McDonald v Dennys Lascelles Limited (1933) 48 CLR 457 at 477-479. In McDonald the guarantors of a purchaser’s obligations under a terms contract contended that upon termination by the vendor the contract was cancelled as to the future and, because there would be no transfer of the property, the purchaser’s obligation to pay an outstanding instalment of the purchaser price came to an end. The High Court accepted the guarantors’ contention. Because the guarantors’ obligation was a secondary one their obligation was also terminated.
His Honour also considered the decision of the New South Wales Court of Appeal in Carpenter v McGrath (1996) 40 NSWLR 39 which he said accorded with the general principles that emerged from McDonald. In Carpenter the purchaser failed to complete a contract to buy land and the trial judge awarded damages to the vendor which included a claim for interest from default until termination. On appeal the Court of Appeal disallowed the claim for interest from default until termination. The Court’s reasoning was in effect that once the contract ended the vendor could not have sued for the purchase price and was relegated to a claim for the loss of the bargain. The interest operated to increase the amount payable on completion and because the purchase moneys were not payable interest could not be claimed.
Judge Macnamara said that while Portbury and Pettiona supported the award of interest, general principle flowing from the analysis in McDonald pointed away from an award being made and therefore the claim for interest failed.
A question that is unresolved is whether the position might have been different if the vendor had re-sold the land rather than retaining it because the vendor would, in determining the loss on any resale, arguably have been entitled to treat the purchase price as constituted both by the contract price and the interest payable under the contract.
Tenants with less than 20 employees will soon have a new weapon in disputes with landlords as a result of amendments to the Australian Consumer Law: they will be able to challenge a term in a lease that is “unfair”.
The legislation effecting the changes, the Treasury Legislation Amendment (Small Business and Unfair Contract Terms) Act 2015, has received Royal Assent but the changes do not come into force until November 2016. The changes will affect contracts (including leases) entered into or renewed on and from 12 November 2016. The changes will also apply to a provision in a contract that is varied on or after that date.
The legislation extends the existing unfair contract provisions available to consumers in Part 2-3 of the ACL to small businesses with less than 20 employees when the contract is entered into. Similar changes have been made to the Australian Securities and Investment Commission Act 2001.
In determining the number of employees casual employees are not counted unless the employee is employed “on a regular and systematic basis”. To be able to challenge an “unfair” term the “upfront price payable” must not exceed $300,000 (if the lease has a duration of 12 months or less) or $1,000,000 (if the lease has a duration of more than 12 months). Because payments under a lease are usually made monthly it is unclear how the “upfront price payable” is to be calculated.
A term of a lease will be void if the term is “unfair” and the lease is a “standard form contract”. A term is “unfair” only if it:
- would cause a significant imbalance in the parties’ rights and obligations under the contract;
- is not reasonable necessary to protect the legitimate interests of the advantaged party;
- it would cause financial or other detriment to the business affected if it were applied or relied on.
A lease will be presumed to be a “standard form contract” if a party to a proceeding makes that allegation unless another party proves otherwise. In determining whether a lease is a standard form contract a court may take into account matters that it considers relevant but must take into account whether one party has all or most of the bargaining power, whether the leased was prepared by one party before any discussions occurred, whether a party was in effect required to accept or reject the terms and whether a party was given an effective opportunity to negotiate the terms.
If a term is declared void the lease will continue to bind the parties if it can operate without the unfair term.
To ensure that the legislation does not apply landlords should consider deleting lease terms that are not reasonably necessary for their protection and avoid “take it or leave it” type negotiations. Where it is unclear whether a prospective tenant is likely to have 20 employees a landlord might also consider including a term in the lease that requires the tenant to declare how many employees it does have.
The weakness of a party’s case in a retail tenancy dispute can be taken into account in determining whether or not it has “conducted” a “proceeding in a vexatious way” that would entitle the other party to a cost order under s.92(2) of the Retail Leases Act 2003 (Vic).
Part 10 of the Act contains the dispute resolution provisions. Except as provided in s.92(2) the Act requires each party to a retail tenancy dispute to bear its own costs of the proceeding. See: s.92(1). Costs may be awarded in a retail tenancy dispute under s.92(2) if:
“…the Tribunal is satisfied that it is fair to do so because;
(a) the party conducted the proceeding in a vexatious way that unnecessarily disadvantaged the other party to the proceeding; or
(b) the party refused to take part in or withdrew from mediation or other form of alternative dispute resolution under this Part.”
Judge Bowman in State of Victoria v Bradto Pty Ltd and Timbook Pty Ltd  VCAT 1813 referred to the distinction in s.92(2)(a) between a proceeding which is conducted in a vexatious way and the bringing or nature of the proceeding being vexatious. His Honour held that a proceeding is conducted in a vexatious manner “if it is conducted in a way productive of serious and unjustified trouble or harassment, or if there is conduct which is seriously and unfairly burdensome, prejudicial or damaging”.
In 24 Hour Fitness Pty Ltd v W & B Investment Group Pty Ltd  VSCA 216 the Court of Appeal considered an appeal from a decision by VCAT in which costs had been awarded on an indemnity basis pursuant to s.92(2)(a). The Tribunal’s decision was based in part on a finding that the applicant had commenced an action for damages in circumstances where the applicant, properly advised, should have known it had no chance of success and persisting in what should, on proper consideration, have been seen to be a hopeless case. The applicant contended that there was a difference between instituting a proceeding that was vexatious, or making a claim that fails, and the conduct of the proceeding which is vexatious. It argued that the Tribunal focused more on what were perceived to be the prospects of success than on the actual conduct of the proceeding.
The Court of Appeal rejected the applicant’s contentions holding that the Tribunal had considered the conduct of the proceeding in addition to the “hopelessness of the applicant’s claim” and that there was no error in also considering the hopelessness of the claim because “the strength of the applicant’s claim for damages was a relevant factor to take into account”.
At  the Court of Appeal said:
“It would be artificial to attempt to evaluate the manner in which the proceeding was conducted without having regard to the strength of that party’s case. In the present circumstances, it was relevant that the applicant pursued the damages claim, in circumstances where it was bound to fail.”
If it appears that a proceeding is hopeless the applicant should be notified at an early stage that the application is hopeless and should be withdrawn.
Today I commented on an advisory opinion given by the President of VCAT, Justice Garde, in which His Honour decided that:
(a) a landlord could not recover from a tenant the costs of complying with essential safety measure requirements imposed on the landlord under the Building Act 1993 and its regulations;
(b) a landlord could not recover from a tenant as outgoings the costs that the landlord incurs in complying with s.52 of the Retail Leases Act 2003.
The effect of the decision is that landlords are likely to require tenants to enter into ‘gross leases’. Landlords are also likely to ask tenants to apply for a certificate from the Small Business Commissioner under s.21(5) of the RLA; the giving of a certificate enables a retail premises lease to have a term of less than five years.
That part of the opinion concerning the recovery of the cost of complying with essential safety measures will prevent a landlord under both a retail premises lease and a commercial lease from recovering the costs incurred in complying with the essential safety measure requirements.
Landlord cannot recover essential safety measure costs or the costs of complying with s.52 of Retail Leases Act 2003 (Vic)
Landlords cannot require tenants under retail premises leases to undertake and pay for the work that a landlord must perform to comply with the essential safety measure requirements contained in the Building Act 1993 (BA) and its regulations. Nor can a landlord require a tenant to pay as an outgoing the costs that the landlord has incurred in complying with s.52 of the Retail Leases Act 2003 (RLA).
The BA and its regulations impose obligations on landlords to maintain buildings in a manner that complies with safety requirements that are commonly known as “ESM requirements”.
Section 52 of the RLA implies into a retail premises lease a requirement that the landlord maintain in a condition consistent with the condition of the premises when the lease was entered into the structure of, and fixtures in the premises and plant together with plant and equipment in the premises.
In a decision that will upset landlords and delight tenants the President of VCAT, Justice Garde, resolved long standing controversies in deciding that:
(a) a requirement in a retail premises lease that a tenant perform ESM requirements that the landlord must perform under the BA or its regulations is void;
(b) a requirement in a retail premises lease that a tenant pay for ESM requirements that the landlord must perform under the BA or its regulations is void;
(c) if the obligation relating to the ESM is that the landlord must ensure that a result is achieved or a standard met the landlord may agree with the tenant to achieve that result, or meet the standard, and the tenant will be obliged to perform the lease at the landlord’s expense;
(d) in the circumstances referred to in (c), the tenant can deduct the costs incurred in the performance of the term from the rent or recover the costs of from the landlord;
(e) a landlord cannot recover as outgoings the cost incurred by the landlord in complying with s.52 of the RLA.
The decision will have major consequences for tenants and landlords. In particular, tenants are likely to seek to recover from landlords any EMS costs that have been paid by the tenant together with costs that the landlord has incurred under s.52 and required the tenant to pay as outgoings.
I will be writing more about this decision.