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Retail tenancy legislation: Have retail leases reached their use-by date?

Retail tenancy legislation: Have retail leases reached their use-by date?

By Norman Mermelstein

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Snapshot

  • Regulation should not protect retail tenants alone. Protection should also be afforded to wholesale, commercial and industrial business tenancies.
  • Introducing legislation to govern all non-residential leases makes the debate over what constitutes a retail lease irrelevant.
  • A business lease, as proposed, will significantly reduce disputes, save costs, provide greater equity and deliver certainty of contract.

Never in the history of retail tenancy legislation in Victoria has there been so much confusion over what constitutes a retail lease. There is a radical solution to resolve this uncertainty. By Norman Mermelstein

Purpose of retail legislation

There is much confusion concerning the current definition of “retail premises” in the Retail Leases Act 2003 (Vic) (the Act).1

Retail tenancies legislation was introduced in Victoria in 1986 “to protect small tenants, whom it was thought could not match the bargaining strength of large landlords”.2

The issue of small tenant protection was further considered in the 2001 Review of the Victorian Retail Tenancies Legislation: Issues Paper which noted the argument that all tenants, irrespective of size, wherewithal or character, should be subject to the Act and that this view has the advantage of removing uncertainty.3

Ultimately, however, the coverage of the Act did not extend to cover all business tenants. Small tenant protection prevailed, manifesting in the form of protection for retail tenants – it being considered that retail tenancies legislation should only protect small and medium-sized retail businesses.4 It was intended that the scope of the Act’s application be limited to small tenants using a retail test as a means of defining size.

Section 4(1) of the Act crystallises this intention by defining the Act’s coverage:

“In this Act, retail premises means premises, not including any area intended for use as a residence, 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;”

This begs the questions: What is so precious about retail tenancies and why should “retail” be the test that defines the Act’s application? Why should non-retail tenants not receive similar protection? Why restrict the protection to small business and not to business per se?

The focus of reform should, as noted in the 2001 Issues Paper, be on business and not on retail. This focus can be seen in the purpose of the Victorian Small Business Commission (VSBC) which was established to create a fair and competitive environment for Victorian small businesses to operate, grow and prosper through its four key functions – advocating on behalf of small business, resolving disputes, monitoring the small-business environment and engaging with the small-business community.5

There is no “retail” test limiting the application of the Small Business Commission Act 2017. In fact, many of the VSBC’s functions have application beyond “retail”. In September 2018, the VSBC introduced a two-page Retail Leases Fact Sheet6 to replace its former Information Brochure. The majority of its contents is applicable to all business tenants, not just retail tenants.

In contradiction to its small business focus, the Act has, at its heart in s4, a retail premises test that has been the subject of repeated litigation and confusion.

Why a retail lease is no longer appropriate

The definition contained in s4(1) of the Act and its application to premises leased for the supply of goods and services, whether wholesale or retail, has been determined differently both within VCAT and by the courts, as well as by legal practitioners. 

In Global Tiger Logistics Pty Ltd v Chapel Street Trust7 Member Roland held that: 

“Given the ultimate consumer test I find it difficult to conceive of any sale of a service which would be other than retail”. 

In CB Cold Storage Pty Ltd v IMCC Group (Australia) Pty Ltd8 Senior Member Walker rejected the submission that the Act applied to virtually any supply of services:

“The definition is not simply the provision of services but rather, the retail provision of services. Parliament has limited the application of the definition by the addition of the word ‘retail’ and the word must have some meaning”. 

The Act applies where premises are used wholly or predominantly for the sale or hire of goods by retail, or the retail provision of services. It is not clear how the word “predominantly” is measured, whether it has been correctly applied, or applied at all, in a number of decisions. 

In 1991, Nathan J in Wellington v Norwich Union Life Insurance Society Limited9 said: 

“I call in aid not only common sense but the Macquarie Australian Dictionary which defines retail as being a sale to an ultimate consumer, usually in small quantities. When the verb is used in the transitive form, it is to sell directly to the consumer”. 

In 2017, Croft J in CB Cold Storage Pty Ltd v IMCC Group (Australia) Pty Ltd10 said: 

“. . . words such as ‘retail’ have received considerable judicial attention and it is really simplistic and unhelpful now to suggest that the proper interpretation of these critical provisions of the Act is merely a matter of applying dictionary definitions”.11 

This case classified that the provision of services between business providers is retail (subject to those services being within the permitted use of the premises in the lease). It has broadened the application of the Act beyond what many previously thought. 

The reality is that retail tenancy law in Victoria has reached a degree of sophistication beyond the understanding of most professionals, let alone other stakeholders, to the extent that reform is strongly mooted within both the legal profession and regulatory bodies. Legislation in other Australian states, including listing particular classes of business as retail, is problematic and not popular in Victoria.

The vagary of ministerial decisions as to what constitutes a retail tenancy is not well understood. 

The Act applies to a premise on any of the first, second or third level of an office complex involved in the retail provision of services or the sale or hire of goods by retail. However, above the third level, the Act applies to the sale or hire of goods by retail, but not the retail provision of services.12 This has many baffled.

The determination of a publicly listed company similarly caused consternation when particular stock exchanges overseas ceased to function, and a new definition was required.13

The above examples fuel an urgent need for legislative change.

Definition of business lease

According to Nathan J, the essential feature of retailing is the provision of an item or service to the ultimate consumer for fee or reward.14 But business does not encompass retail alone.

The fundamentals of leasing involve a covenant between a landlord and a tenant, to receive rent and the payment for outgoings in return for a promise to provide premises that are safe, watertight and well maintained for the term of the lease. Such fundamentals should apply to all business leases.

By changing the regulation of retail leasing to include all business leasing, the “ultimate consumer” test loses relevance.

It is often said that large business does not require the protections afforded by the Act. In the author’s experience, a tenant not protected by the Act (for example, a listed public company or a subsidiary of a listed public company), can negotiate similar protections by way of special conditions in their lease.

As large businesses can obtain the majority of the Act’s protections in contract, it seems futile to favour a lease for small business over a lease for all business. The protections that are unavailable include, for example, s87 of the Act (referral to the Victorian Small Business Commissioner), because the lease is not a retail lease and the Act does not apply. Government can always target large businesses with provisions in the Act or by ministerial determinations.

The Property Law Act 1958 (PLA), Transfer of Land Act 1958, Supreme Court Act 1986 and Australian Consumer Law and Fair Trading Act 2012 are examples of other important legislation that affects the operation of leases in Victoria. Whether these authorities should be merged within a business lease is beyond the scope of this article. Of significance is the fact that these legislations apply equally to all tenants irrespective of their nature (eg, relief against forfeiture provisions in the PLA).

Advantages of a generic business lease 

The terms and conditions of a business lease cover both retail tenancies as well as non-retail non-residential use.

The VCAT case of William Buck (Vic) Pty Ltd v Motta Holdings Pty Ltd (2018)15 decided that a lease that is subject to the Act can subsequently fall outside the definition of retail premises during the term of the lease. This can happen when, for example, gross operating expenditure exceeds $1 million (exclusive of GST).16 In such situation, the parties to a stand-alone retail lease would be stranded, whereas a business lease need not be changed.

Premises cannot become retail if they are not retail premises when the lease is entered into or renewed, but the reverse can apply (s11(2)). For example, a company becomes a listed public company. 

A landlord may avoid the provisions of the Act by requiring the permitted use to be “any use permitted in Victoria, but not the sale or hire of goods by retail or the retail provision of services”. A tenant that rents a warehouse may believe that its use is not retail. Any finding of retail use would render the tenant in breach of this agreement. This manipulation cannot occur under a business lease.

A problem with current leases where the Act applies is that both tenants and landlords do not fully understand the terms and conditions of their lease, especially when a provision is said to apply “unless the Act applies”. Parties cannot be expected to be conversant with the Act, yet they deserve to be able to have a reasonable understanding of their contract. 

The lack of understanding also applies to real estate agents and solicitors that are not specialist practitioners in retail tenancy law. A business lease will address these issues.

Legislation that applies universally avoids having to determine whether the Act applies to a particular lease, let alone the significant cost factors in litigating a dispute. The adoption of a regulated lease under universal legislation for all non-residential tenancies would minimise disputes over definitions.17

Any consideration of the competing interests of landlords and tenants must acknowledge that the majority of landlords are also small business owners.

Further attributes of a business lease

Current legislation provides circumstances where the Act does not apply. A business lease may adopt similar provisions, for example, where operating expenses exceed $1 million (ex-GST),18

 outgoings under the lease includes land tax.

A business lease need not impose any new conditions on shopping centre leases.

Landlord and tenant obligations require certainty. For example, a lease (or legislation) should require that the landlord’s obligation to maintain premises in the same condition as at the commencement of the lease, includes changing washers in taps and toilet cisterns and repairing faults in equipment such as the electrical supply. A tenant’s obligations may include changing light bulbs, fluorescent tubes and regular clearing of gutters.

The list need not be exhaustive but should include items that are always mentioned in dispute resolution cases. Such a list can be sourced from practitioners and organisations such as the VSBC. Further contribution will be received if government seeks public opinion via a Regulatory Impact Statement.

Legislation should remove the uncertainty of whether a landlord can escape the obligation to pay for essential safety measures items required under the Building Act 1993 (Vic).

Make good provisions in a lease need not be legislated, but legislation should require a disclosure statement that advises the terms of such provisions and that such terms are negotiable.

Giving VCAT exclusive jurisdiction over all leasing disputes eliminates jurisdictional issues.19

Conclusion

There exists a balance of convenience between those, mainly landlords, that agitate for deregulation and the freedom to contract (mainly on their terms), and legislation that protects the interests of tenants regardless of the nature of their business. 

The emergence of an amended and renamed Act from the chrysalis of the 2003 iteration would achieve business protection by removing the unintended confusion that resulted from “retail” supplanting a definition of “small-business”. An extended Act would better achieve its intention which is stated as being to “enhance the certainty and fairness of . . . leasing . . .” (s1). In contradiction to its intention, the Act has at its heart in s4, a retail premises test that has been the subject of repeated litigation and confusion.

Removing this confusion would provide the conditions for certainty to flourish. A new standard business lease for all non-residential tenancies could then be designed to minimise any adverse impact on current wholesale, commercial and industrial operations and concurrently advance existing retail tenancies.

Norman Mermelstein is the principal of Law Ink Pty Ltd, a member of the LIV Property and Environmental Law Section Leases Committee, Property Law Committee and Succession Law Committee. He is an accredited mediator, REIV accredited owners corporations specialist and a licensed estate agent.

The author expresses gratitude to Mark Schramm for his skilful understanding of the small business environment and his valued advice on issues discussed during the preparation of this article. He is a solicitor and senior manager, Dispute Resolution at the Victorian Small Business Commission, and a member of the LIV Property and Environmental Law Section Leases Committee.

1. All sections refer to the Act.

2. Nathan J in Wellington v Norwich Union Life Insurance Society Ltd [1991] VR 27; [1991] 1 VR 333 (25 July 1990).

3. The Review of Victorian Retail Tenancies Legislation: Issues Paper January 2001 Department of State and Regional Development at p18.

4. Retail Tenancies Legislation Discussion Paper October 2001 at p21.

5. Victorian Small Business Commission website.

6. Retail Leases – Important Facts For Tenants, Victorian Small Business Commission September 2018.

7. Global Tiger Logistics Pty Ltd v Chapel Street Trust (unreported, VCAT, Member L Rowland, 8 November 2012), at [17].

8. CB Cold Storage Pty Ltd v IMCC Group (Australia) Pty Ltd (Building and Property) [2016] VCAT 1866, at [66].

9. Wellington v Norwich Union Life Insurance Society Ltd [1991] Vic Rp 27.

10. CB Cold Storage Pty Ltd v IMCC Group (Australia) Pty Ltd [2017] VSC 23 (7 February 2017), at [22].

11. Croft J set aside the decision of VCAT; the decision was upheld by the Court of Appeal. Leave to appeal to the High Court was refused.

12. Ministerial determination dated 30 April 2003, Victoria Government Gazette.

13. Ministerial determination dated 18 August 2016, Victoria Government Gazette.

14. Note 2 above.

15. William Buck (Vic) Pty Ltd v Motta Holdings Pty Ltd (Building and Property) [2018] VCAT 15 (16 January 2018).

16. Retail Leases Regulations 2013, Section 6: Excluded retail premises.

17. The VSBC website lists 34 relevant VCAT and Court decisions including appeal hearings. The issue in 17 of those cases (50 per cent) depends on whether the Act applies. If the Act applied to small-business leases as proposed, these cases would not have arisen and signifies the waste of resources. 

18. Note 16 above.

19. Section 29 of the VCAT Act 1998 permits written authority to be given to judges of the Supreme Court and County Court to hear a matter for which VCAT has jurisdiction.


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