Thinking | 7 April 2021

A retail premises sub-lease: what does that mean about the head-lease?

By David Dickens, Natalie Bannister, Emily Kyriacou, Jane Baddeley and Alexandra Lane

If a sub-lease is a retail premises lease, does that mean the head-lease is also a retail premises lease?

The recent Victorian Civil and Administrative Tribunal decision of Izett St Pty Ltd v Applgold Pty Ltd [2021] VCAT 174 provides important guidance when assessing whether a lease (or a sub-lease) is governed by the Retail Leases Act 2003 (Vic) (RLA).

The Tribunal held that a sub-lease being a retail lease does not also definitively determine whether or not the head lease is also a retail lease. On the particular facts, the Tribunal held that the head lease was not a retail lease.

We explain the decision and its impact below.

Facts

The respondent (Landlord) owned a three storey-commercial building at 29-31 Izett Street, Prahan (Premises). The applicant (Head Tenant) leased the Premises from the Landlord in 1996 which, at that time, was described as being ‘dilapidated and uninhabitable.’ The Head Tenant then spent $1.2 million redeveloping the Premises and converted it into a combination of lettable and residential areas. The Head Tenant’s core business centred upon subleasing parts of the Premises to other tenants.

The Landlord and Head Tenant entered into a Deed of Renewal of lease on 7 May 2018. At the time of the renewal:

  • the ground floor of the Premises had been various subleased and used as café or retail food outlets since 2013;
  • the first floor of the Premises could be configured and fitted out to accommodate the specific requirements of the subtenant and had been used as an office space since 2011; and
  • a director of the applicant and his family had subleased and resided on the second floor of the Premises.

By 1 July 2020, the director and his family had vacated the Premises. The second floor was then sublet as an office space.

The matter was referred to VCAT as the Head Tenant sought reimbursement of monies paid to the Landlord for essential service costs and costs of a capital nature. The Head Tenant argued that it was not liable for these costs as the lease was a retail lease subject to the provisions of the RLA.

There was no dispute that the sublease arrangements were ‘retail leases’ and, in any event, these matters were irrelevant. However, VCAT was asked to determine as a preliminary question whether the head lease between the Landlord and the Head Tenant was a ‘retail premises lease’. In considering this question, the analysis centres on whether the Premises as a whole (as opposed to each of the individual sub-tenancies) was used wholly or predominantly for the retail provision of services.

Submissions made

The Head Tenant argued that the Premises were leased for the business purpose of providing subleasing services and that the ultimate consumers of this service were the subtenants. The Head Tenant asserted that the Premises were predominantly used for the retail provision of services because the subleases were retail in character. As a result, the Head Tenant contended, the head lease was a retail lease falling within the ambit of section 4 of the RLA.

The Landlord rejected that the head lease was a lease of retail premises. The Landlord asserted that the ultimate consumer test confirmed in CB Cold Storage requires an assessment of whether the Premises are ‘open to the public’ (ie that any member of the public can attend the premises to buy a good or service).

The Landlord argued that the Premises were not open to the public because the right to exclusive possession transferred to the subtenants through the subleased agreements, which excluded the Head Tenant and other members of the public from lawfully being in the Premises without invitation.

Decision

Senior Member Forde did not accept the Landlord’s argument that because the head lease was not open to the public, it was not a retail premises lease. Rather, the Member found that the Premises were in fact ‘open to the public’. This conclusion was reached on the basis that any member of the public was able to enter into the premises between sub-leases being entered into (presumably to inspect them).

The Member confirmed that being ‘open to public’ is only one of the factors for consideration under the ultimate consumer test, noting that ‘[n]o one factor is determinative of whether something is a retail service’ and that a premises being accessible to the public on a ‘walk in basis is ‘not the litmus test for whether premises are ‘open to public’.

However, ultimately the Member found in favour of the Landlord on other grounds. The Member concluded that the Premises were not retail premises and the lease was not a retail premises lease. The Member considered the text of section 4(1) of the RLA which provides that:

  • ‘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:
    • the sale or hire of goods by retail or the retail provision of services; or
    • the carrying on of a specified business or a specified kind of business that the Minister determines under section 5 is a business to which this paragraph applies… (emphasis added)’

In considering this language, the Member concluded that the right to exclusive possession which passed to the subtenants under the sublease agreements excluded the Head Tenant from use of the Premises entirely. For this reason, the arrangement fell outside of the scope of section 4(1) of the RLA.

Finally, the Member suggested in obiter that if the Head Tenant offered licences instead of subleases, the use of the Premises would be more akin to the provision of service which may fall within the scope of the RLA.

Key takeaways

  • On the facts, the head lease in question was not a lease of retail premises under the RLA despite the various sub-leases operating under it being retail premises leases. The retail activities of the subtenants were not taken to characterise the use of the premises by the Head Tenant under the Head Lease as retail.
  • When considering whether a lease is in fact a ‘retail lease’ under section 4 of the RLA, all the features of the premise in question must be considered together (as required by the leading authority CB Cold Storage). The Tribunal has again emphasised that in making an assessment of whether a premises is retail and subject to the RLA, no single feature is determinative.
  • Head landlords and head tenants must consider carefully the effect of sub-licence or lease arrangements on the characterisation of a head lease under the RLA.
  • Interposing a sub-landlord can have significant consequences, and it may be difficult to achieve a ‘pass through’ of all obligations such that the sub-tenant in effect carries out all of the sub-landlord’s obligations to the head landlord. This is because the RLA may restrict the sub-tenant’s obligations, but if the head lease is not subject to the RLA, the head tenant/sub-landlord will still be liable for these obligations to the head-landlord - for example, the payment of land tax.


This article was written with the assistance of Gabriella Fee, Law Graduate.

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