Victorian Retail Leases and Land Tax
In our last newsletter, we described a case between the Richmond Football Club and its landlord, before the Victorian Civil and Administrative Tribunal which decided that a lease could start out being for retail premises and subject to the Retail Lease Act, and later those premises could cease to be retail premises, and the RLA would then cease to apply.
In the case, the issue was whether the tenant would have to pay the landlord's Land Tax, and whether a ratchet could apply to the market rent review.
That case has been appealed by Richmond, and the original decision has been reversed.
The Richmond Football Club leased the site from Verraty. It is the site of the Wantirna Club, a club associated with the Richmond Tigers.
Recall from the VCAT decision:
- When the first lease was entered into in 1998, the Retail Leases Act (RLA) applied
- In May 2016, the occupancy costs for the next lease year exceeded $1,000,000 per annum – and so the Tribunal found that the RLA ceased to apply.
The landlord was successful at the Tribunal in relation to two clauses:
- An obligation for the tenant to pay the landlord's land tax; and
- A ratchet on the market rent review (minimum increase of 4%).
These clauses are prohibited by the Retail Leases Act. But when the RLA ceased to apply, the clauses sprang back into life.
Later in the lease, the landlord failed to provide an estimate of outgoings, meaning that occupancy costs (as per the definition in the RLA) went below $1,000,000 again. The tenant argued that the lease then became subject to the RLA. The Tribunal found that it was possible for a lease to start subject to the RLA, then jump out (as it did here) and later jump back in again, however the Tribunal disagreed with how the tenant has calculated occupancy costs. So the lease did not jump back in.
The Tribunal ordered that the tenant was required to pay the landlord's land tax and that the ratchet in the market review, providing for a minimum 4% increase was valid.
Richmond appealed the decision of the Tribunal to the Victorian Supreme Court. Two questions were relevant on the appeal:
- Can a lease jump out from being under the RLA?
Justice Croft in the Victorian Supreme Court found that if a lease was for retail premises (and hence subject to the Retail Leases Act) when it is entered into, then it will remain a lease for retail premises and subject to the RLA for its duration.
The main reason was that in the second reading speech when the RLA was passed by the Victorian Parliament, it was emphasised that "The government considers that the most effective way of minimising retail tenancy disputes is to ensure that the parties have sufficient information to make a sound business decision about entering and renewing a lease."
Justice Croft found that an interpretation of the RLA that enables a lease to jump out of the operation of the RLA mid-term does not achieve that purpose.
The main reason the Tribunal initially found that a lease could jump out, was because of the word 'only' in section 11(2) of the RLA:
"Except as provided by Part 10 (Dispute Resolution), this Act only applies to a lease of premises if the premises are retail premises (as defined in section 4) at the time the lease is entered into or renewed." (emphasis added)
The Tribunal found that the word 'only' permitted leases to start as subject to the RLA and jump out; but prohibited lease from starting outside the RLA and jumping in. The Tribunal thought that if the word did not import that meaning to the subsection, then there was no meaning imported by the use of that word.
The Supreme Court disagreed. The Supreme Court found that the word 'only' emphasised that the matters specified in subsection 2 were the only matters to consider. With this aspect of the Tribunal's decision set aside, the Supreme Court was able to look and focus on the intention of the legislation as described in the second reading speech.
- Does an estimate of outgoings need to be given to the tenant in order for occupancy costs to cause the lease to jump out (or remain out) of the RLA?
A lease will not be subject to the Retail Leases Act if the occupancy costs are greater than $1,000,000 per annum. Occupancy costs are defined as the sum of the rent and the outgoings as estimated by the Landlord.
The Tribunal found that the outgoings estimated each year would determine the occupancy costs for that year, and hence whether the RLA applied for that year. The Supreme Court found that the occupancy costs estimated for the first year, along with the rent, would determine whether the RLA applied for the whole term of the lease.
Richmond won the appeal. They were not required to pay the landlord's land tax, and the market rent review could not include the ratchet provision.
The effect of this case is that (for now) a lease that is subject to the RLA in its first year will remain subject to the RLA for the whole term. Further, it seems, that the rent and outgoings to consider for the purpose of section 4(2)(a) are the rent and outgoings for the first year. Provided they are less than $1,000,000 in the first year, the lease may be retail premises, even if the rent increases above $1,000,000 during the term of the lease. (However, this point is not entirely clear in the judgement.)
The facts of the case were that while the occupancy costs rose above $1,000,000 during the term of the lease, the rent remained below $1,000,000.
It is not entirely clear whether the case only relates to situations where the occupancy costs rise (or fall) as a result of outgoings (that are not known when the lease is entered into), or whether the case also applies to situations where it is known that the rent will rise above $1,000,000 during the term.
(I believe I am required to disclose an interest in relation to this case note: my cousin Kate plays for the West Coast Eagles AFLW team – Go West Coast!)
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.