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.

  1. #1 by Ron on May 6, 2015 - 4:24 pm

    If the opinion is right, an ESM item must be paid for by the landlord and these items include air conditioners and I think exhaust fans, so if a tenant wants to start a fish & chip shop does the landlord have to now pay for those items? I presume the landlord must do so because if the lease or other agreement was that the tenant should pay for them that would be contrary to the Building Act and unenforceable?

  2. #3 by Ron on May 7, 2015 - 11:44 am

    Thanks, but (1) what tenant is going to agree to do that without a lease? and (2) whether the agreement by the tenant to do that is part of the lease or outside the lease, isn’t such an agreement unenforceable because it is contrary to the Building Act (as the opinion has now stated)?

    • #4 by ROBERT HAY QC COMMERCIAL LAW BARRISTER on May 7, 2015 - 2:14 pm

      Tenants agree all the time to do work at the commencement of a lease. I think the lease could require the work to be done as part of the fit out (e.g. the tenant must install six air conditioners of capacity x etc). Subsequent work required to ensure ongoing compliance with standards would have to be at landlord’s costs. The lease could also require specified capital works to be done every so many years (e.g.airconditioners replaced after 3 years). No reference need to be made to Building Act etc. Section 41(2) of the Retail Leases Act makes it clear that a provision in a lease requiring the tenant to do capital works at the tenants cost is not void. Alternatively the landlord could fit out the premises and charging a “special rent’ to cover those costs (s.32) .

  3. #5 by Ron on May 8, 2015 - 9:24 am

    Yes tenants do work as part of fit-outs all the time and have done so up until now in the absence of the advisory opinion. If an air-con is an ESM item and the opinion says the landlord MUST pay for an ESM item, how can an agreement which requires or allows a tenant to pay for the ESM item (whether hardware like air-con or fire-extinguishers) NOT be contrary to the Building Act and the opinion? It doesn’t make sense to say that because it is done as part of the fit out somehow the landlord doesn’t have to pay for it, because the advisory opinion clearly says the landlord must pay for an ESM item and any agreement to the contrary would be void (see paras 41 & 42 of the opinion). And that would apply to replacement every three years as well notwithstanding that s.41 allows capital works. S.41 must be read subject to the Building Act and regs surely? What you say about s.32 is interesting and may cover it assuming the charging of a special rent does not contravene 251 of the Building Act and the opinion. I think the only way a landlord can get out of paying is to charge a special rent or build it into the rent over the life of the lease.

  4. #6 by Ron on May 8, 2015 - 9:51 am

    or is the answer that the Building Regs are only concerned with the maintenance of such items and the requirement to install them is not a landlord cost?

  5. #7 by on May 12, 2015 - 11:29 am

    How can a lease require a tenant to pay for capital works in the form of replacement of air-conditioners if they are of a type covered by the ESM (e.g. a smoke handling one or moisture removal one)? The advisory opinion says the landlord must pay for an ESM item.

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