What leases are “retail” leases in Victoria? How the answer has changed in 2017

5 September 2017

1.                  Why is it important?

The Retail Leases Act 2003 (Vic) (Act) imports extra duties on Landlords and restrictions on leases that fall under it.

Most tenants would prefer that their lease fall under the Act, because irrespective of what the parties agree in the document, the Act will override:

(a)                any “ratchet” clause that prevents rent from decreasing following a rent review;

(b)                short terms, with the Tenant entitled to require a minimum 5 year term;

(c)                recovery of land tax from the Tenant as an outgoing;

(d)                the tenant being responsible for the costs of Essential Safety Measures; and

(e)                restrictive assignment provisions.

Most landlords would prefer not to be subject to the extra rules imposed by the Act, with all other things being equal, especially the rent that is already set.

2.                  Application of the Act

Section 11 of the Act states that the Act applies to retail premises leases.  Section 4 of the Act provides that a “retail premises” is a premises used for “the sale or hire of goods by retail or the retail provision of services”.

But the word “retail”, upon which the whole interpretation hinges, is undefined in the Act, unlike other jurisdictions where it isexhaustively defined, by listing the only activities that are considered “retail”.

3.                  What has recently changed?

Prior to 2017 few would consider the lease of a warehouse in an industrial area to fall under the Act.  The recent line of decisions in the CB Cold Storage[1] saga has done just that.

The permitted use in the lease included the words “in connection with the conduct of a cold storage business”.  The tenant made cold storage available to people who would pay for it.  The tenant’s customers used the storage purchased from the tenant, to provide cold storage services to the general public. 

At VCAT, the landlord submitted that because the general public were not the tenant’s customers, the tenant’s use of the premises was not for the retail provision of services.   The tenant submitted that it did not matter that its customers were not the general public.  Its customers were the ultimate consumers of its service, which is to make cold storage available to people who would pay for it.  VCAT agreed applying the Act, relying on the “Ultimate Consumer Test” originally formulated by Justice Croft in Fitzroy Dental.[2]

The Landlord appealed.  Justice Croft heard the appeal in the early 2017 (the judge who formulated the “Ultimate Consumer Test” that was relied on in the VCAT Decision).  The Supreme Court Decision, unsurprisingly did not overrule the Tribunal.  Justice Croft discussed and agreed that actual use of the premises rightly fell under the permitted use of the lease.  He also said that that just because the tenant’s customers used the tenant’s service as an “input” in their business, did not make the tenant’s provision of services ‘not retail’.  He was ruled that the ultimate consumer test was satisfied, and the activity that is the retail provision of services was included in the permitted use in the lease.

The Landlord again appealed, and in the very recent Court of Appeal Decision, the Court again applied the Act, providing reasons on why the ultimate consumer test was satisfied.  It does not matter if the consumer uses the goods or services for personal use, or as an ‘input’ in their own business.  It does not matter if the consumer is a commercial entity or a member of the general public.  It only matters that the tenant’s customer purchases and uses the good or service provided by the tenant at the premises, and does not resupply them.  In this case, that the service is used as an “input” did not make it a resupply, meaning the tenant’s customer is the ‘ultimate consumer’ of the tenant’s good or service.  The “ultimate consumer” can be another business that uses the goods or services for a business purpose which does not have to be a natural person that uses goods or services to satisfy personal needs.

These principles have existed for some time.  It is the unintuitive result that a warehouse lease falls under the Act, which has attracted attention.  The decisions mean the “Ultimate Consumer Test” is the determinative test in deciding what is “retail” or not.

4.                  Conclusion

From now leases will fall under the Act, if taking into account all relevant circumstances:

(a)                the actual use is a “Permitted Use” under the Lease; and

(b)                that use satisfies the “Ultimate Consumer Test”.

It does not matter if the result does not fit within our intuitive understanding of what a ‘retail’ activity is. 

The Courts have been explicit in allowing the lease of commercial and industrial premises to fall under the Act.

Landlords and tenants should both seriously consider if leases they now enter into will fall under the Act (regardless of what the lease says about the application of the Act). 

Existing leases will now also require careful review to consider if there are additional burdens for landlords, or opportunities for tenants.  

If you require any further information about this, please contact David Welner at dw@meerkinapel.com.au  or by phone on 9510 0366.