Can your retail lease stop being a retail lease under the RLA?

Established Property
How to safely expand your portfolio
January 19, 2018
foreign investment
How a reduction in foreign investment will hurt the market
July 3, 2018

Can your retail lease stop being a retail lease under the RLA?

VCAT Ruling

This question was recently considered in the Victorian Civil and Administrative Tribunal (VCAT) case of William Buck (Vic) Pty Ltd v Motta Holdings Pty Ltd and it appears there may finally be some good news for landlords after the recent decision in the CB Cold Storage Pty Ltd v. IMCC Group (Australia) Pty Ltd case – http://performanceproperty.com.au/2017/09/industrial-property-retail-property/

The William Buck case considered two questions:

  • Does the $1 million occupancy cost exemption include or exclude GST?; and
  • Do leases which start under the jurisdiction of the Retail Leases Act 2003 cease to be under the RLA if one of the statutory exemptions apply during the lease term?

Background

Under the Retail Leases Act 2003 (the Act) landlords are prohibited from recovering land tax from their tenants. However, amongst a number of other statutory exemptions, the Act does not apply to Leases where the total occupancy costs exceed $1 million p.a. The Act considers ‘Total Occupancy Costs’ as rent and outgoings and for some Leases, GST is also included depending on the whether the date of the Lease was entered into is before 22ndApril 2013.

In this VCAT case, the tenant William Buck claimed their Lease fell under the Act and that the landlord of their Hawthorn East office building had incorrectly sought reimbursement of its land tax costs in the order of $251,000.

Firstly, does the $1 million occupancy cost exemption include or exclude GST?

The determination in the William Buck case held that when considering the $1 million occupancy cost exclusion, occupancy costs included GST payable under the lease on rent and outgoings provided the lease was entered into prior to 22 April 2013. The reasoning for this is the initial Retail Leases Regulations 2003 that established the $1 million threshold were replaced by the Retail Leases Regulations 2013 which commenced operation on 22 April 2013.

The current (2013) Regulations provide that the ‘occupancy costs’ are to be calculated as $1 million exclusive of GST.

Secondly, can there be a late entry / exit from the provision of the RLA?

Since the Act came into effect it has been assumed that if the Act applies at the commencement of the Lease, it applies for the entire term of the Lease, until the next renewal opportunity.

However, in this particular decision nearly 15 years since its inception, VCAT ruled in favour of the landlord determining that whilst the total occupancy costs were below $1 million in the first year of the Lease, the threshold was exceeded in subsequent years which put William Buck’s lease outside the Act and therefore enabled the landlord to seek reimbursement for Land Tax from the tenant.

This determination suggests that it may be possible for an exit from the Act to occur mid-way through a Lease if statutory exemption requirements are triggered after lease commencement.

So, what does all this mean?

This could be very good news for ‘retail’ landlords as it could mean that leases which are treated by all parties as being under the operation of the Act, could cease to be under the jurisdiction of the Act. Whilst the determination is not binding, it will be relied upon by other members within the tribunal until such time as the decision is tested by a higher court.

If the Retail Leases Act doesn’t apply, there are obviously considerable benefits for a landlord as they may:

  • recover land tax from the tenant;
  • recover some types of maintenance and management costs and all legal costs from the tenant;
  • have less disclosure requirements, including in relation to outgoings;
  • have lease terms of less than 5 years;
  • have less stringent maintenance, fitout, relocation and demolition provisions apply;
  • have means of rent reviews during a term i.e. CPI the higher of 5%;
  • incorporate Ratchet provisions in rent reviews to ensure that the market rent cannot fall below that of the preceding year; and
  • Avoid VCAT or Victorian Small Business Commissioner’s resolution channels that are perceived to be more favourable to the tenant and apply to a Court.

What Should Tenants and Landlords Do?

Not only should professional legal advice be sought for any leasing matters, 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 as Performance Property Advisory’s (“PPA”) Commercial Advisory team. To discuss how PPA can assist with your commercial accommodation matters, please contact me or one of PPA’s other skilled advisors.