Posts Tagged retail premises

Lessor’s purpose for demolishing leased building is irrelevant

Leases commonly permit a landlord to terminate a lease if the landlord intends to demolish the building located on the leased premises. Section 56 of the Retail Leases Act 2003 (Vic) implies terms into a retail premises lease that provides for the termination of lease on the grounds that the building is to be demolished. Section 56(2) of the Act says:

The landlord cannot terminate the lease  on that ground unless the landlord has—

(a)        provided the tenant with details of the proposed demolition that are sufficient to indicate a genuine proposal to demolish the building within a reasonably practicable time after the lease is to be terminated; and

(b)       given the tenant at least 6 months’ written notice of the termination date.

Tenants often claim that a proposal is not a “genuine proposal” because the landlord intends to demolish the building so that the new building constructed on the site can be used for the landlord’s own purpose or for the purpose of leasing to a new party. However, the claim is misconceived because the purpose for which a landlord wishes to “demolish” leased premises is irrelevant to the question of whether there is a “genuine proposal”.

Assuming that enough detail is provided in the notice of termination concerning the proposed demolition, the only question is whether there is a genuine proposal to demolish. The term “demolish” is widely defined in s.56(7). In Blackler v Felpure Pty Ltd (1999) 9 BPR 17,259 Bryson J said at [31] that the lessor “should have a genuine proposal to demolish the building within a reasonably practical time after the lease is to be terminated.” Blackler concerned s.35 of the Retail Leases Act 1994 (NSW) which contained a demolition clause in similar terms to s.56 of the Act. Bryson J identified the question for determination as whether the notice itself provided sufficient details to indicate a genuine proposal.

At [37] His Honour said:

The requirement to provide details is not merely a formal step imposed in the lessor’s path, but the details are to be provided so that the lessee can come to a conclusion about whether the termination will be effective, and whether the lessee should accept that it will be effective or dispute it. The sufficiency of details provided should be tested in relation to that purpose. The question is whether the details provided are sufficient to indicate a genuine proposal to demolish the building; if they are not the termination cannot take place and if they are it will be effective no matter what other details of the proposed demolition exist or could have been provided.

And at [61]:

It is not in my view open to contention by the lessee whether the lessor’s decision to demolish, repair, renovate or reconstruct the building is reasonable or appropriate; it is sufficient if there is a genuine proposal. Nor in my opinion is it open to debate whether the lessor could in some way modify the lessor’s proposal so as to continue to accommodate the lessee after the premises have been demolished, repaired, renovated or reconstructed. The opportunity to break a lease, retake possession of take advantage of the demolition clause is a contractual opportunity made available to the lessor by the terms of the lease itself, ……, it is not injurious to the lessor’s position whether the lessor has decided to take advantage, and it is not relevant that the lessor has in view occupying the premises itself, or selling them after reconstruction, or leasing them again, even if the lease should be a business similar to the lessee’s. The demolition clause is a reality of the party’s relationship, and so is its potential operation to end the lease.

See also [62].

In Skiwing Pty Ltd v Trust Company of Australia [2006] NSWCA 276 the Court of Appeal held that a proposed “refurbishment redevelopment or extension” did not lose the character of a “genuine proposal” because the commercial motivation of the lessor was to attract a tenant or particular kind of tenant. See: Skiwing at [22] (Spigelman CJ (with whom Hodgson JA and Bryson JA agreed). Skiwing concerned a relocation notice given under s.34A of the Retail Leases Act 1994 (NSW) which provision was described at [22] as a “parallel formulation” to that considered by Bryson J in Blackler. The Court of Appeal at [22] said that Bryson J in Blackler was “correct”.

In Blackler Bryson J also accepted at [32] that there was an implied duty of good faith in the exercise of the contractual right to terminate the lease. However, the duty of good faith was not breached where the landlord had an intention to occupy the premises itself or lease them out to an identified person after the works had been carried out. His Honour said at [32]:

The defendant can exercise its power to terminate the lease with a view to its own advantage; it is for purposes of that kind that contractual entitlements generally exist.

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Rent reviews – mandatory or at the landlord’s discretion?

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 [2014] 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 [1978] 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.

 

 

 

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No easy answers to whether premises are “retail premises”

It is often difficult to determine whether premises are “retail premises” within the meaning of s 4 of the Retail Leases Act 2003 Act. Section 4(1) provides that “retail premises” means premises 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 retail provision of services.”

One difficulty that arises is that the definition excludes premises that are “intended for use as a residence” with the result that it is not always clear  whether premises such as motels, serviced apartments and caravan parks are “retail premises”.  In the recent decision of String v Gilandos Pty Ltd [2012] VSC 361 Croft J highlighted that there are no easy or broad brush answers: in each case the terms of the lease and the nature of the premises needs to be examined carefully.

His Honour was required to decide whether leases by owners of units in an apartment/resort  complex to the operator of the resort were “retail premises leases” within the meaning of the Retail Tenancies Act 1986, the Retail Tenancies Reform Act 1998 and the 2003 Act. The operator paid rent to the owners and rented the units to members of the public. The units were used as “serviced apartments” and the members of the public did not know who the owners were. From at least 2007 to January 2012, no member of the public had stayed at the units on a permanent or semi-permanent basis and members of the public had only occupied the units for a day or few days at a time. His Honour determined (at [42]) that the units were used for short-term holiday accommodation in a manner difficult to distinguish in any meaningful way from the manner in which motel and hotel rooms were used.

At [47] His Honour considered the meaning of “serviced apartments” and said:

The term or description “serviced apartments” seems to be a relatively modern one; which probably accounts for the lack of assistance from dictionaries. Thus it cannot be assumed that this term or description has any settled meaning. Consequently it is only a term or description that derives meaning – other than in a very general sense – from the particular circumstances in which it is used; and, in most cases with respect to particular premises. This is, in my view, clear from the cases in which the term or description has been considered.

After reviewing the authorities, Croft J said at [52]:

Thus these cases indicate that there may be very fine distinctions between use of premises as a motel on the one hand or as a serviced apartment or serviced apartment complex on the other hand. The observations by the various courts and tribunals with respect to motels and serviced apartments indicate that the characteristics of both types of premises can overlap, thus adding to difficulties in characterising the mode of usage. A clear example is to be found in St Kilda City Council v Perplat Investments Pty Ltd [(1990) 72 LGRA 378] where Young CJ observed that, while it was open to the Tribunal to make a finding of fact based on the evidence before it that the proposed building would be used as serviced apartments, in his view, the proposed buildings looked more to be a motel.

Following Wellington v Norwich Uniton Life Insurance Society Limited [1991] 1 VR 333 and similar cases (at [58]), His Honour held that that the “ultimate consumer” test was the “touchstone of retailing, whether goods or services” and (at [65]) that members of the public were ultimate consumers for fee or reward (being fees paid for accommodation) and the units were used “wholly or predominantly for the carrying on of a business involving the sale or hire of goods by retail or the retail provision of services”.  Thus, each of the leases were “retail premises leases”.

At [65] His Honour said:

Motels, hotels or resort complexes, generally speaking, provide retail services for fee or reward, including the hiring out of rooms. They may also sell food, liquor and other beverages, by retail, at any restaurant faculty provided. In any event, the hiring out of rooms or units for fee or reward to members of the public clearly constitutes the provison of retail services.

His Honour stressed that in each case the nature of the premises had to be analysed together with the manner in which the occupancy was provided. His Honour said at [68]:

I should, however, sound a note of caution in relation to this finding by emphasising that whether or not premises described as “serviced apartments” is to be characterised as “retail premises” depends upon the particular circumstances, including the nature of the premises, the manner in which occupancy is provided and the nature of that occupancy (see Meerkin v 24 Redan Street Pty Ltd [2007] VCAT 2182 (Deputy President Macnamara); though see Bradfield & Ors v QOB Tenancy Pty Ltd (Retail Tenancies) [2012] VCAT 755 (Senior Member Davis) where the parties took the common view that the serviced apartments ought to be considered as retail premises for the purposes of the 2003 Act (see paragraph [82]) .  As I have said, the term or description, “serviced apartments”, is not a term of art. Rather, it is a term or description of premises which connotes a range of possibilities. At one end of the range one would find premises managed and occupied in a manner indistinguishable from a motel or hotel and at the other end premises indistinguishable from long term residential accommodation, separately let but with the attribute of being serviced. In the former case it would be expected that the Acts would apply on the basis that the premises are “retail premises” and in the latter case they would not, any more than they would to any block of residential units. In between there are a range of possibilities each of which may have different consequences in terms of the application of the Acts.

As to the exclusion from the definition of “any area intended for use as a residence”, His Honour said at [64]:

For the sake of completeness I observe that the Retail Leases (Amendment) Act 2005 amended the 2003 Act to include the words “not including any area intended for use as a residence” in the provisions defining the meaning of “retail premises”. In my view, the expression residential accommodation connotes accommodation of this type which is occupied with a degree of permanence. I observe that, consistent with this view, the Full Federal Court of Australia said, in Marana Holdings Pty Ltd v Commissioner of Taxation (2004) 141 FCR; 214 ALR 190; [2004] FCAC 307 (“Marana Holdings”) that: [citation omitted]

“It may be that the expression “residential accommodation” is sometimes used to describe short-term accommodation in an hotel or a motel. We are not sure that any such usage is as common in Australia as the Court of Appeal in Owen v Elliott [(Inspector of Taxes) [1900] 1 Ch 786] considered it to be in England. We would have thought that such accommodation is more often described as “temporary accommodation”, “holiday accommodation” or perhaps as “hotel accommodation” or “motel accommodation””.

Although Marana Holdings was not a retail leases case this statement is, in my view, one of general application. In the present case the agreed facts are that the Plaintiffs’ Units have been used as only temporary accommodation by its occupants,[citation omitted] so no issue arises with respect to the possibility of residential use.

The agency exception

His Honour also considered a claim by the operator the units were not “retail premises” because the employee or agency exception applied. Section 4(2)(b) of the 2003 Act exempts premises where the tenant is “carrying on” a business “on behalf of the landlord as the landlord’s employee or agent”. After a comprehensive consideration of the terms of the leases His Honour at [69] – [95] rejected the operator’s claim that it was carrying on a business as the landlord’s agent.  Helpfully, His Honour at [94] said:

….in my view, the agency exception only applies if the tenant and landlord relationship is merely incidental to the agency relationship. So even if I am wrong in finding that there is no agency relationship, it cannot be said that the landlord and tenant relationship between the Plaintiffs and the Defendant is incidental to the agency relationship.

(italics added)

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Section 52 – when is the lease “entered into”?

There is a translation key (widget) on the mirrored blog for ease of reading for non-English speaking members of the public or professionals. The mirrored blog can be found at http://roberthaybarrister.blogspot.com.au/

 

Section 52 of the Retail Leases Act 2003  is proving to be a difficult provision to apply. Section 52 implies into a retail premises lease a term that:

“The landlord is responsible for maintaining in a condition consistent with the condition of the premises when the retail premises lease was entered into –

(a)     the structures of, and fixtures in, the rental premises lease; and

(b)     plant and equipment at the retail premises; and

…..” (s.52(2))

When is the lease “entered into”?

If the tenant occupies premises for 5 years and exercises an option for a further 5 years what is the date at which the “condition of the premises” is assessed; at the commencement of the first term of 5 years or at the commencement of the second term of 5 years?  In Ross-Hunt Pty Ltd v Cianjan Pty Ltd [2009] VCAT 829 Deputy President Macnamara held that the relevant date was the date that the new term commenced following the exercise of an option.

The lesson for tenants is that a thorough assessment of the state of the premises should be undertaken when the tenant first occupies the premises; regular reviews of the state of the premises should also be undertaken during the term; and the landlord should be requested to undertake repairs during the term.

 

My clerk can be contacted via this link for bookings  http://www.greenslist.com.au/

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