Posts Tagged Landlord
The Supreme Court of Victoria has ruled that a lease that is a “retail premises lease” (within the meaning of s.11 of the Retail Leases Act 2003) when it is entered into cannot cease to be such a lease during its term.
In Richmond Football Club v Verraty  VSC 597. Croft J upheld an appeal by a tenant from a VCAT decision which held that a lease that was a “retail premises lease” when entered into could cease to be such a lease during the lease term. VCAT held that the Act ceased to apply when “occupancy costs” exceeded $1,000,000 exclusive of GST.
Section 4(2) of the Act sets out circumstances in which premises are excluded from the definition of “retail premises” in s.4(1). The exceptions include, among other things, where “occupancy costs” (i.e. estimated outgoings plus the rent) exceed $1,000,000 exclusive of GST, where the tenant is a publicly listed company or a subsidiary of such a company, and where the Minister makes a declaration that the premises are premises to which s.4(2)(f) applies with the consequence that the premises are not “retail premises”.
The effect of Croft J’s decision appears to be that all of the circumstances listed in s.4(2) of the Act are relevant only when the lease is entered into – they are not relevant after that time. Unless one of the exclusions in s.4(2) applies when the lease is entered into, the lease will be a retail premise lease for the term of the lease.
The judgment is less clear concerning the terms of a lease resulting from the exercise of an option. It appears that even if an exclusion in s.4(2) applies (i.e. so that the premises are not “retail premises”) when a renewed lease commences (i.e. following the exercise of an option), the renewed lease will nevertheless contain the provisions implied into the lease by the Act (i.e. provisions such as ss. 37, 52 – 57) and the provisions of the lease made void by the Act (i.e. provisions such as those referred to in s.35(3) (ratchet clauses) and 50 (land tax) will remain void. The only way to avoid the renewed lease containing the terms implied by the Act, or to revive provisions made void by the Act, is to include appropriately worded provisions in the lease that are to apply if the Act ceases to apply.
I will write further about this case.
Today I posted an article about Verraty Pty Ltd v Richmond Football Club  VCAT 1073.
I have had queries about paragraph (i) where I said:
“where the commencing rent under a new lease does not exceed $1,000,000 for the first 12 months, before the lease is entered into the landlord should make an estimate of outgoings for the first 12 months of the lease and keep a record of the making of the estimate;”
The point I was intending to make is that where a new lease is being entered into and the rent is less than $1,000,000 (but when added to outgoings “occupancy costs” exceed $1,000,000), a failure to make an estimate under s.4(3) could result in the lease (assuming it concerns “retail premises” (s.4(1)) being a “retail premises lease”. The reason is that “occupancy costs” constitute rent and an estimate of outgoings made by the landlord (s.4(3)); in the absence of an estimate of outgoings the “occupancy costs” will be restricted to the amount of the rent. There is no need to give the estimate to the tenant.
A new lease will be a “retail premises lease” where “occupancy costs” do not exceed $1,000,000 in which case it is necessary to give a written estimate under s.46.
Can a “retail premises lease” (within the meaning of s.11 of the Retail Leases Act 2003) cease to be a “retail premises lease” during its term? That long-standing question has finally been resolved.
In Verraty Pty Ltd v Richmond Football Club Ltd  VCAT 1073 the Tribunal held that a lease could cease to a “retail premises lease” during the lease term. The lease was for a term of 20 years commencing 7 May 1998. A variation made in 2004 effected a surrender and regrant with the consequence that a “retail premises lease” was entered into at that time. In April 2017 the tenant exercised an option to renew the Lease from 7 May 2018 for a term of 10 years. The landlord claimed that the lease had ceased to be a “retail premises lease” from 7 May 2016 because “occupancy costs” were $1,000,000 or more and that the renewed lease was not a “retail premises lease”.
The issues were:
(a) whether the lease ceased to be a “retail premises lease” for the period 7 May 2016 to 6 May 2017 and was therefore not governed by the Act;
(b) if yes to (a), did the lease remain outside the ambit of the Act for the period 7 May 2017 to 6 May 2018; and
(c) if yes to (b), was the renewed lease resulting from the exercise of the option a “retail premises lease”?
VCAT answered “yes” to each of the three questions.
Section 11 says, among other things, that the Act applies to a “retail premises lease”. Section 11(2) says that “….this Act only applies to a lease of premises if the premises are retail premises…at the time the lease is entered into….” (emphasis added)
While the Act does not contain a definition of “retail premises lease” the expression “retail premises” is defined in s.4(1). Where “occupancy costs” are $1,000,000 or more per annum premises are excluded from the definition of “retail premises” (s.4(2)(a)) and regulation 6 of the Retail Leases Regulations 2013). “Occupancy costs” are defined in s.4(3) to mean:
- the rent payable under the lease (s.4(3)(a)); and
- the outgoings, as estimated by the landlord, to which the tenant is liable to contribute under the lease (s.4(3)(b))
There is a note under s.4(3) that says s.46 requires the landlord to give the tenant a written estimate of the outgoings to which the tenant is liable to contribute.
The landlord alleged that the lease had ceased to be a “retail premises lease” on 7 May 2016 because the “occupancy costs” for the next 12 months were $1,000,000 or more.
The landlord gave the tenant an estimate of outgoings dated 12 May 2016 (Estimate) pursuant to s.46(2) of the Act for the landlord’s 12 month accounting period commencing on 7 May 2016. Section 46(3) requires an estimate to be given before a retail premises lease is entered into and in respect of each of the landlord’s accounting periods during the term of the lease, at least one month before the start of that period. Section 46(4) says that a tenant is not liable to contribute to any outgoings of which an estimate is required to be given to the tenant until the tenant is given that estimate. The Estimate was not given at least one month before the start of the landlord’s accounting period commencing 7 May 2016. The Estimate and the rent exceeded $1,000,000 for those 12 months.
On 3 May 2017 the landlord estimated the outgoings to which the tenant was liable to contribute for the 12 month accounting period commencing 7 May 2017. No written estimate was given to the tenant. The estimated outgoings and rent exceeded $1,000,000 for those 12 months.
The landlord contended that whether or not the lease was a “retail premises lease” was governed solely by s.4(3) and that s.46 was irrelevant – all the landlord had to do was make an estimate of outgoings – a written estimate did not have to be given to the tenant. Consequently, it did not matter that the Estimate was not given within the time prescribed by s.46(3). The landlord also contended that because the lease ceased to be a “retail premises lease” on 7 May 2016 it was not required to given a written estimate under s.46 for the year commencing 7 May 2017 – all it had to was make an estimate of the outgoings under s.4(3).
The tenant contended, among other things, that a “retail premises lease” could not cease to be a “retail premises lease” during its term but that if a lease could cease to be a “retail premises lease” all the provisions made void by the Act were not revived – the lease continued without those provisions. The lease contained a “ratchet clause” that prevented the rent from decreasing – such clauses in a “retail premises lease” are void (s.35(3)).
The Tribunal held that:
- a lease could cease to be a “retail premises lease” during its term – s.11(2) prescribed the time at which a lease had to be a “retail premises lease” for the Act to apply but said nothing about a lease ceasing to be a “retail premises lease”;
- the landlord had to give an estimate under s.46(1) for the year commencing 7 May 2016 and, because the Estimate was give late, any outgoings referable to the period 7 May 2016 to 12 May 2016 had to be excluded from the estimate of outgoings;
- even with outgoings for the period 7 May 2016 to 12 May 2016 excluded, “occupancy costs” exceeded $1,000,000 for the 12 months commencing 7 May 2016 with the consequence that the Act did not apply for those 12 months;
- because the Act did not apply it was not necessary for the landlord to give an estimate of outgoings under s.46 for the accounting period commencing 7 May 2017 – all that the landlord had to do was to make an estimate of outgoings as required by s.4(3);
- the landlord made an estimate of outgoings on 3 May 2017 and, because “occupancy costs” exceeded $1,000,000 for the 12 months commencing 7 May 2017, the Act did not apply for those 12 months;
- the renewed lease was not a “retail premises lease”; and
- clauses in a lease that were void while the lease was a “retail premises lease” (such as the “ratchet clause”) were not void once the Act ceased to apply.
The Tribunal also held that the note at the foot of s.4(3) referring to s.46 was no more than a reminder that if the lease were a retail premises lease the landlord had to comply with s.46.
The tenant is likely to seek leave to appeal.
The following propositions emerge from the case:
(i) where the commencing rent under a new lease does not exceed $1,000,000 for the first 12 months, before the lease is entered into the landlord should make an estimate of outgoings (under s.4(3)) for the first 12 months of the lease and keep a record of the making of the estimate;
(ii) where the estimate of outgoings plus the rent for the first 12 months exceeds $1,000,000 the lease will not be a “retail premises lease” and a written estimate of outgoings under s.46 need not be given to the tenant;
(iii) where the estimate of outgoings (made under s.4(3)) plus the rent for the first 12 months does not exceed $1,000,000 it is necessary to give a written estimate of outgoings pursuant to s.46 to the tenant;
(iv) a “retail premises lease” can cease to be such a lease during its term;
(v) a lease can cease to be a “retail premises lease” during its term because “occupancy costs” exceed $1,000,000 provided an estimate of outgoings has been given under s.46;
(vi) where a lease ceases to be a “retail premises lease” during its term the landlord should make an estimate of outgoings (under s.4(3) for each remaining 12 month accounting during the term but need not give a written estimate of outgoings (under s.46) to the tenant where “occupancy costs” exceed $1,000,000.
With respect to (vi), while the Tribunal did not determine whether a lease that has ceased to be a “retail premises lease” during its term can revert to being a “retail premises lease” during the term, it is likely that a lease can revert to being a “retail premises lease” during the term.
Following last week’s High Court decision in Burns v Corbett  HCA 15 the Victorian Victorian Civil and Administrative Tribunal has lost its jurisdiction to hear and determine a dispute where one of the parties is resident of a State other than Victoria.
This will pose significant problems for VCAT particularly concerning its exclusive jurisdiction to hear and determine a “retail tenancy dispute” under the Retail Leases Act 2003 (2003 Act). Proceedings in the Tribunal where a party is not resident in Victoria will be affected by the decision. Because VCAT never had jurisdiction to hear and determine a matter where a party was not resident in Victoria, Burns is also likely to have consequences for proceedings that have been heard and determined where one party was not a resident of Victoria.
Where a party is not resident in Victoria, disputes under the 2003 Act will have to be heard and determined in a Victorian court, the Federal Court or an interstate court. Where a “retail tenancy dispute” is heard in a court, a significant issue will be whether the cost regime in the 2003 Act applies or whether the awarding of costs will be governed by court rules. Except in limited circumstances, s.92 of the 2003 Act requires each party to bear its own costs.
In Burns the High Court held that provisions of the Civil and Administrative Tribunal Act 2013 (NSW) were invalid to the extent that they purported to confer jurisdiction upon the Civil and Administrative Tribunal of New South Wales (NCAT) concerning matters between residents of different States.
Chapter III of the Australian Constitution includes ss75 to 77. Section 75(iv) provides that the High Court has original jurisdiction in all matters between residents of different States. Section 76 enables the Commonwealth Parliament to confer additional original jurisdiction on the High Court. Except for the High Court, s.77 permits Parliament to defines the jurisdiction of any federal court including defining the extent to which the jurisdiction of any federal court is exclusive of the jurisdiction of a State court, and gives State courts federal jurisdiction. Section 39 of the Judiciary Act 1903 invests State courts with federal jurisdiction subject to certain conditions and restrictions.
In Burns, Mr Burns complained to the Anti-Discrimination Board of New South Wales about statements made by Ms Corbett and Mr Gaynor which he alleged vilified homosexuals contrary to the Anti-Discrimination Act 1977 (NSW)). Mr Burns was a resident of New South Wales, Ms Corbett was a resident of Victoria and Mr Gaynor was a resident of Queensland.
The complaint against Ms Corbett was referred to the Administrative Decisions Tribunal of New South Wales (predecessor to NCAT) which found that Ms Corbett had breached the Act and ordered her to make an apology. Ms Corbett refused to apologise and Mr Burns commenced a proceeding in the Supreme Court charging Ms Corbett with contempt. Ms Corbett contended that neither the ADT nor NCAT had jurisdiction because she was a resident of Victoria. The complaint against Mr Gaynor was dismissed by NCAT. However, Mr Gaynor obtained leave to appeal to the Court of Appeal in respect of an interlocutory costs order on the basis that NCAT had no jurisdiction to determine matters concerning residents of a State other than New South Wales.
The New South Wales Court of Appeal determined the jurisdiction disputes. The Court had to decide whether NCAT could hear and determine a dispute arising under the Act between a resident of New South Wales and a resident of another State. It was common ground that in determining Mr Burns’ complaints, NCAT was exercising the judicial power of the State despite it not being a “court of a State” within the meaning of Chapter III. The Court held that NCAT had no jurisdiction to hear and determine the complaints against Ms Corbett or Mr Gaynor.
The High Court unanimously dismissed the appeals with a majority deciding that Chapter III permitted adjudicative authority concerning the matters in ss 75 and 76 to be exercised only by a State court. Chapter III would be undermined were a State Parliament able to confer adjudicative authority concerning any of the matters referred to in ss 75 and 76 on a State tribunal that was not a State court.
Parties to current litigation in VCAT need to consider whether the proceeding can continue in the Tribunal.
See s.89(4) of the Retail Leases Act2003.
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.
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”.
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 issue of whether a lease requires a rent review or whether the review is at the discretion of the landlord often arises. The problem can avoided by clear drafting. In Growthpoint Properties Australian Limited v Austalia Pacific Airports  VSC 556 the court had to decide whether a rent review was mandatory under the lease or whether the review was at the discretion of the landlord.
Clause 4.2 of the lease provided that:
“On each Market Review Date, the Rent is to be adjusted by a market review in accordance with the Market Review Method….”
Part B of the Lease provided:
“On each Market Review Date, the Rent will be adjusted by a market review if:
(a) APAM gives written notice to the Tenant (“Rent Review Notice”) setting out APAM’s opinion of the market rent for the Premises as at the Market Review Date; and
(b) the Rent Review Notice is given to the Tenant in the period between 6 months before and 6 months after the Market Review Date.
New Rent applies unless a dispute notice is served.
The Rent stated in the Rent Review Notice applies from the Market Review Date unless the Tenant gives APAM a notice disputing the specified Rent (“Dispute Notice”) within 21 days after the Rent Review Notice is given.”
The controversy between the tenant and the landlord arose from the imperative language in clause 4.2 (“is to be adjusted”) and the use of the conditional language in Part B (“will be adjusted”).
The tenant contended that the clauses, when read together were ambiguous and that there was a conflict between the clauses. On the tenant’s construction of the lease the landlord was obliged to initiate a rent review.
The landlord submitted that the rent provisions gave the landlord an entitlement, but not an obligation, to give the lessee a rent review notice.
The court held that the rent provisions gave the landlord an entitlement, but not an obligation, to give the lessee a rent review notice.
The case is useful because it discusses in detail the principles governing the construction of leases and rent review clauses and highlights the need to examine the lease as a whole. Of particular interest is the discussion about the purpose of rent review clauses: the House of Lords in United Scientific Holdings Ltd v Burnley Borough Council  AC 904 viewed the benefit of a rent review to the landlord as being the ability to adjust rent market with the benefit to the tenant being seen as the security of a long lease.
The lease in Growthpoint was a commercial lease. If the lease is a “retail premises lease” a tenant may initiate a rent review if the landlord fails to do so within 90 days after the period provided for in the lease for the review. See: s.35(5) of the Retail Leases Act 2003.