Landlords likely to consider gross leases

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.

See: In the matter of the referral of matters to VCAT for an advisory opinion pursuant to s.125 of the VCAT Act 1998 [2015] VCAT 478.

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.

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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.

See: In the matter of the referral of matters to VCAT for an advisory opinion pursuant to s.125 of the VCAT Act 1998 [2015] VCAT 478.

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.