Is your Industrial Property a ‘Retail’ Property?

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August 30, 2017

Is your Industrial Property a ‘Retail’ Property?

Supreme Court Ruling

Re: CB Cold Storage Pty Ltd v. IMCC Group (Australia) Pty Ltd

The classification of a retail service in Victorian legislation has for several years sparked confusion and dispute. The Supreme Court has recently laid down a rather unexpected decision that affects many current and prospective owners and tenants of Victorian commercial property. Importantly for stakeholders the decision confirms that some premises (e.g. cold storage facilities and warehouse/ logistics facilities) previously thought to have not fallen under the Act may now be considered as retail premises and are therefore regulated under the Act if statutory exclusions do not apply.

By way of a brief background, in April 2016 CB Cold Storage Pty Ltd as Tenant (the “Tenant”) of a refrigerated storage warehouse in Laverton owned by IMCC Group (Australia) Pty Ltd (the “Landlord”) sought to recover monetary amounts from the Landlord based on the argument that the Premises were retail premises under the Retail Leases Act 2003 (Vic) (the “Act”).

In short:

  • The dispute was heard in the Victorian Civil and Administrative (“VCAT”) in August 2016, with the tribunal determining that the Premises did not constitute retail premises under the Act;
  • In February 2017 Justice Croft of the Supreme Court upturned the VCAT decision. Importantly, Justice Croft reviewed previous decisions where the meaning of the term retail was analysed. Justice Croft ruled that the VCAT should have determined that the Tenant’s customers were ultimate consumers of the Tenant’s services, and therefore by meaning of the Act the Tenant’s premises were retail premises.

In July 2017, the Court of Appeal upheld the decision set down in CB Cold Storage Pty Ltd v. IMCC Group (Australia) Pty Ltd in February 2017 that in the circumstances, the use of the facility as a “cold and cool storage warehouse and transport facility” and the provision of cold storage services to business customers who used the services for business requirements did constitute the retail provision of services. The lease is therefore subject to the provisions of the Act. The decision will therefore affect how retail premises are considered by all participants in the industry, and will predominantly affect the industrial property submarket.

 

So what are the Key Consequences?

There are a number of important consequences that flow from this decision which generally favour the tenant. Significantly, if the Act applies to a lease the tenant cannot be required to pay Land Tax (i.e. the landlord cannot recover this amount). Additionally:

  • A rent review clause cannot include a ‘ratchet’ (i.e. a limit below which a reviewed rent cannot fall);
  • The landlord must satisfy disclosure requirements at the outset which, if not satisfied, create qualified termination rights for the tenant;
  • Subject to prescribed qualifications, the term of the lease must be at least 5 years.

In addition, it should be noted that in some circumstances tenants might be disqualified from the Act’s umbrella by way of a statutory exclusion.

Notwithstanding the above, it will likely remain a grey area for some time with confusion and disputes between landlords and tenants a direct product; a slight resemblance to a similarly confused and ambiguous sentiment experienced by the Australian public that coincided with the introduction of GST in 2000.

Legal, lending and property professionals are likely to face many questions in the short term regarding ambiguous treatment and consequences of the decision, including (but not limited to):

  • How far mistreated payments (e.g. Land Tax) will be backdated; or
  • Who may be responsible for any possible loss in a property’s value.

 

What Should Tenants and Their Agents Do?

It will be important to identify the application of the Act to determine:

  1. For prospective tenants: Whether there are rights that will apply due to regulation of the Act based on their business to avoid dispute and ambiguity in future;
  2. For sitting tenants: Whether any claims may be applicable following the decision (i.e. reimbursement of non recoverable outgoings such as Land Tax) and how these may be treated retrospectively and through any future renewal process.

 

What Should Landlords and Their Agents Do?

It is equally as important for prospective and current landlords and their agents to review existing or proposed lease documentation prior to purchase.

If a lease is now considered to possibly fall under the Act:

  1. For prospective landlords: Assessment of any breaches or possible tenant claims should be identified, the type of business operating from the premises should also be properly determined to discover whether the premises are considered retail, and in any event appropriate guarantees and statements indicating regulation or non-regulation of the Act should be understood and agreed to, all prior to a decision to purchase;
  2. For current landlords: By the same logic, existing landlords should review current and proposed lease renewal documents and ensure the same as above, whether it be in a sell or retain scenario. If issues arise proper legal representation and understanding should be obtained.

 

What Are Some Thoughts of the Industry?

Recent discussions with property industry professionals including specialist commercial and retail valuers and agents has suggested that many prospective and current owners and tenants don’t have a grasp of how the decision may effect their property interests – a likely key product of the decision, certainly in the short term, being further uncertainty in the market.

Importantly, new market uncertainty will add to the readily expanding basket of concerns for investors, including tightening lending conditions and funding, foreign investment taxes and restrictions, concerns of possible interest rate rises and compressing yields. This in turn could begin to deter investors from certain asset types, with direct consequences for the market a real possibility. For example, from an investment standpoint it is possible that prices for some assets may feel downward pressure as a result of the lower net income position of a property that now falls under the Act (i.e. factoring non-recoverable Land Tax into a valuation).

Not only should professional legal advice be sought, existing or future commercial property stakeholders who may be affected can also best address the uncertainties and complexities resulting from this decision through the engagement of a highly skilled team of consultants such Performance Property Advisory’s (“PPA”) Commercial Acquisitions and Advisory team. To discuss how PPA can assist with your commercial acquisition and accommodation solution enquiries, please contact myself or one of PPA’s other skilled advisors.

 

*We note that in completing this article reference has been made to relevant Victorian Case Law and Legislation