Archive for category Lease
The CB Cold Storage and IMCC Group saga has ended. This morning the High Court of Australia refused the landlord’s application for special leave to appeal. The consequence is that the Court of Appeal’s decision in IMCC Group (Australia) Pty Ltd v CB Cold Storage Pty Ltd  VSCA 178 stands and practitioners can draft leases and give advice confident that the so-called “the ultimate consumer test” remains one of the main indicia in determining whether premises are “retail premises” and therefore governed by the Retail Leases Act 2003. The saga began as a preliminary question in VCAT – the question being whether the Act applied to the premises. The lease permitted CB Cold Storage to operate the premises as “Cold and cool storage warehouse and transport facility” and also contained a clause that precluded CB Cold Storage from operating the premises as “retail premises”. The prohibition on the tenant operating the premises as “retail premises” was irrelevant because the landlord agreed that that the tenant’s actual use of the premises accorded with the permitted use; this meant that the only question was the premises should be characterised as “retail premises” under the Act. Premises are “retail premises’ where:
“under the terms of the lease…the premises are used, or are to be used, wholly or predominantly for –
(a) the sale or hire of goods by retail or the retail provision of services” (s.4(1))
In Wellington v Norwich Union Life Insurance Society Ltd  1 VR 333 Nathan J said that:
“The essential feature of retailing, is to my mind, the provision of an item or service to the ultimate consumer for fee or reward. The end user may be a member of the public, but not necessarily so.”
His Honour’s statement has been applied many times. Where a service is provided there will be few instances where the service is not “consumed” or used in the leased premises. In CB Cold Storage the service was “consumed” or used in the premises by the ultimate consumer, being the tenant’s customers. While the tenant’s customers ranged from large primary production enterprises to very small owner operated businesses, any person could store goods in the premises. VCAT held that the premises were not ‘retail premises’ on the basis that the tenant’s customers were using the tenant’s service for business purposes rather than for personal use. In CB Cold Storage Pty Ltd v IMCC Group (Australia) Pty Ltd  VSC 23 Justice Croft held that the premises were “retail premises” and the Court of Appeal agreed with His Honour. The Court of Appeal held that the “ultimate consumer test” was one of the indicia of the retail provision of services. In all cases it is necessary to consider whether the premises are “open to the public” – that is there are no restrictions on access to the service and who can use it. The characteristics of the user – that is whether the use is an individual or a business is not relevant. At  the Court of Appeal said:
“In summary, the services were used by the Tenant’s customers who paid a fee. Any person could purchase the services if the fee was paid. The Tenant’s business was open during normal business hours. The Tenant’s customers have not passed on the services to anyone else. They were the ultimate consumers of the Tenant’s services. In isolation, none of these features would suffice to constitute the premises as retail premises. Conversely, the absence of one or more of them, would not necessarily result in a finding that the premises were not retail premises. However, in the circumstances of this case, when all of those features are taken together, the conclusion must be that the premises are retail premises.”
Where the parties intend that premises not be governed by the Act the permitted use should make that clear. A good example is Sofos v Coburn  2 VR 505 where the permitted use was “wholesale and export fish supply”. The tenant was undertaking retail sales. Nathan J held that the tenant could not rely on what it was actually doing when that contradicted the express terms of the lease.
The long awaited fourth edition of the leading text on leasing law, Commercial Tenancy Law, will be published in mid December 2017 by LexisNexis. The authors of the fourth edition are Justice Croft, Robert Hay QC and Luke Virgona of the Victorian Bar. The third edition was published in 2009. As was the case with the third edition, Commercial Tenancy Law considers the law governing leases throughout Australia including the various State and Territory statutes concerning retail and shop leases.
At general law the question of whether a tenant has validly exercised an option for a further term depends upon whether the tenant has met the conditions contained in the lease for the exercise of the option. The general law has been altered by the Retail Leases Act 2003. Section 27(2) provides that:
” If a retail premises lease contains an option exercisable by the tenant to renew the lease for a further term the only circumstances in which the option is not exercisable is if –
(a)the tenant has not remedied any default about which the tenant has been given written notice; or
(b)the tenant has persistently defaulted under the lease throughout is term and the landlord has given the tenant written notice of the defaults.
Section 27 raises a number of questions: what does a notice need to say to be be a “notice” of default (ss.27(2)(a) and (b)) and how many defaults must there be for the defaults to be “persistent” and when in the term of the lease do they need to occur to be defaults “throughout the term” (s.27(2)(b)).
In Leonard Joel Pty Ltd v Australian Technological Approvals Pty Ltd  VCAT 1781 VCAT had to consider s.27(2)(a). The dispute concerned whether the tenant was in default by not furnishing the landlord with “as built” plans following alterations to the premises and whether the purported notices of default constituted “notice” of the default. After deciding that the tenant had not been in default at the time it exercised the option, the Tribunal went on to consider whether the purported default notices given by the landlord constituted “notice” of the default. The landlord’s letters requesting “as built” plans made no mention of a “default” under the lease or a “breach” of the lease.
In determining that the landlord’s letters were not “notices” of a default, Member Josephs said :
“….the potential consquences to the tenant of the landlord not being required to grant the option to renew are significant and serious and as such I find that a more narrow interpretation has to be applied to the sufficiency of the notice any default under the lease “about” which the landlord has given. It is necessary therefor that the landlord applies some rigour in its giving of notice which should make it expressly clear that a breach by the tenant is alleged and should be clear and consistent in its description of the nature of the breach, all of which is alleged to constitute the default.”
And at :
“..the landlord’s letters do not in any way refer to the possible consequence of the landlord not granting the renewal option if the alleged default is not remedied.”
While the latter statement could be interpreted as requiring that a notice refer to a possible consequence of the breach as being that any option might not be exercisable, the Member does not appear to have intended that outcome because he refers to the notice given in Computer & Parts Land Pty Ltd v Property Sunrise Pt Ltd  VCAT 1522 as being an example of “a very appropriate example of a notice”; the notice in that case did not refer to the possibility that an option might be exercisable.
What the decision does highlight is that for a notice to constitute “notice” of a default under s.27 it must communicate with “obvious clarity and sufficiency” that there is a default or a breach which must be rectified. The default or breach should be identified clearly, the relevant lease provision referred to and a request made to rectify the default. The notice should be given as soon as possible after the landlord becomes aware of the default.
Where a tenant provides services from leased premises in accordance with the permitted use the lease is likely to be a “retail premises lease” and therefore governed by the Retail Leases Act 2003 (Vic).
In every case it is necessary to identify precisely the service being provided, consider what activity is permitted under the lease and whether the service provided accords with the permitted use.
The Act applies to a “retail premises lease”. “Retail’ is not defined; however, the expression “retail premises” is defined (s.4(1)):
“….premises, not including any area intended for use as a residence, that under the terms of the lease relating to the premises are used, or are to be used, wholly or predominantly for –
(a) the sale or hire of goods by retail or the provision of services;”
The authorities provide strong support for the ‘ultimate consumer’ test as the touchstone of retailing. In Wellington Union Life Insurance Society Limited  1 VR 333, Nathan J said at 336:
“The essential feature of retailing, is to my mind, the provision of an item or service to the ultimate consumer for fee or reward. The end user may be a member of the public, but not necessarily so.”
Wellington Union concerned the provision of a service: patent attorneys providing advice to large foreign chemical companies from rented premises. In some cases the advice passed through the hands of an intermediary to the ultimate consumer. Nathan J held that the premises were “retail premises”.
In Fitzroy Dental Pty Ltd v Metropole Management Pty Ltd  VSC 344 (which also concerned the provision of a service) Croft J referred to Wellington Union at :
“The fact that the advice of the patent attorneys may pass through the hands of an intermediary to the ultimate consumer or end user was not regarded as significant, provided it came into the hands of that person in a form that could not be amended and hence remained the product of the intellect of the deliverer. More generally, this highlights and emphasises the importance of characterising the nature of the “service” that is being provided. Thus, in the context of Wellington, it would follow that if the position was that the patent attorneys provided advice to, for example, a solicitor who would, in turn, provide advice to his or her client, the ultimate consumer, using the patent attorney’s advice merely as an “input” in his or her advice, wholly or partially with additions and modifications on the basis of his or her professional opinion, the position would be different. In those circumstances the patent attorney’s advice could not, in a relevant sense, be said to pass through the hands of an intermediary to the ultimate consumer. It does not, however, follow that in these circumstances the solicitor may not be regarded as the “ultimate consumer” of the service for the purposes of his or her own practice; as is likely to be the case with other “inputs” for the practice such as, for example, legal research services, stationary and office supplies.”
Most reported cases concern whether goods are being sold by retail. At  in Fitzroy Dental Croft J considered whether the sale of goods could be said to be “retail”;
“….. a sale of “widget type A” from premises by A to B who, in turn, “converts” the good “widget type A” to “widget type B for sale to C would not involve the sale of “widget type A” to C as the ultimate consumer of that type of good. Depending on the nature of the goods involved these transactions may involve sale by wholesale to B and a retail sale to C – or, alternatively, two retail sales of different goods, “widget type A” to B and “widget type B” to C.”
And at ;
“… that the fact that a good or a service is provided to a person who uses the good or service as an “input” in that person’s business for the purpose of producing or providing a different good or service to another person does not detract from the possible characterisation of the first person (and perhaps also the second person, depending on all the circumstances) as the “ultimate consumer” of the original good or service.”
In CB Cold Storage Pty Ltd v IMCC Group Pty Ltd  VSC 23 Croft J had to again consider whether rented premises were “retail premises”. The tenant conducted the business of a cold and cool storage warehouse storage from the premises which accorded with the permitted use under the lease. The tenant’s customers ranged from large primary production enterprises to very small owner operated businesses. VCAT held that the tenant’s rented premises were not “retail premises” on the basis that a “consumer” was a person who used goods or services to satisfy personal needs rather than for a business purpose and therefore the tenant’s customers were not consumers of the tenant’s services. The tenant appealed VCAT’s decision. Croft J allowed the appeal and held that the premises were “retail premises”. The Tribunal erred in holding that customers that used a tenant’s service for a business purpose were not “ultimate consumers”; the Tribunal treated the services provided at the premises as an “input” into the tenant’s customer’s business arrangements with the consequence that the tenant’s customers were not the ultimate consumers of the tenant’s services. The matter was not remitted to VCAT because the Tribunal had been satisfied of all other matters necessary to support a conclusion that the premises were “retail premises”: the premises were being used in accordance with the lease, were “open to the public” and there were no findings to support a conclusion that the premises were not “retail premises”.
CB Cold Storage highlights the importance of identifying the nature of the service being provided and the user or consumer of that service. In most cases the provision of a service will be “retail”.
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.