Archive for category Leasing
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.
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).
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.