Thinking | 10 December 2020

Roaring to victory: Victorian Supreme Court of Appeal provides guidance on ‘jumping’ in and out of retail leases

By David Dickens and Alexandra Lane

In a second win for the Richmond Football Club this year, the Victorian Supreme Court of Appeal in Verraty Pty Ltd v Richmond Football Club Ltd [2020] VSCA 267 has emphatically upheld Justice Croft’s earlier decision in Richmond Football Club Ltd v Verraty Pty Ltd [2019] VSC 597.

The Court of Appeal held that a retail premises lease subject to the Retail Leases Act 2003 (Vic) (RLA) when it is entered into, does not ‘jump out’ from being subject to the RLA during its term if it ceases to meet the criteria for a retail lease as set out in the RLA.

This decision gives important guidance when assessing whether a lease is governed by the RLA provisions.

Issue

The proceedings considered the operation of section 11(2) of the RLA. Section 11(2) states that the operation of the RLA ‘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’.

The RLA goes on to define a retail lease as including any lease where 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’. There are also various exceptions, including where ‘occupancy costs’ (being rent plus estimated outgoings) under the lease exceed $1 million per year. If an exception applies, the lease will not be characterised as a retail lease and subject to the RLA.

Leases can run for many years, and a question then arises – what happens if circumstances change during the life of a lease, such that the lease no longer satisfies the definition of a ‘retail lease’ under the provisions of the RLA?

Facts

In 1998, Richmond Football Club (Tenant) had leased a gaming venue from Verraty Pty Ltd (Landlord) for a term of 10 years with an option for a further term of 10 years. In 2004, the parties varied the lease by extending the initial term from 10 to 20 years commencing when the lease was first entered into on 7 May 1998. At that time, it was agreed that the premises constituted ‘retail premises’ within the meaning of section 4 of the RLA.

Critically, the lease included a requirement that the Tenant reimburse the Landlord its annual land tax payable in respect of the premises. However, because of the application of the RLA, this requirement was unenforceable by reason of section 50 of the RLA which prohibits such arrangements.

Over time, rent and outgoings for the premises increased. By May 2016, the Tenant’s annual occupancy costs exceeded the $1 million threshold prescribed by the RLA. If applicable, this would mean that the exception to the definition of a ‘retail lease’ under the RLA was enlivened. Accordingly, the question arose that – because the occupancy costs now exceeded $1 million – was the lease no longer subject to the provisions of the RLA and was the Tenant liable to pay the Landlord’s annual land tax?

The matter was heard at first instance in VCAT. Put simply, the Landlord argued that, due to the increase in occupancy costs, the lease was no longer a lease of ‘retail premises’ subject to the protections afforded by the RLA. Underscoring this argument was the contention that a lease could effectively ‘jump out’ of the RLA and ‘jump back in’ again based on changing circumstances impacting on the lease over time.

VCAT found in favour of the Landlord at first instance.

First appeal

On appeal, the Supreme Court of Victoria overturned the first instance decision, and found in favour of the Tenant. Relevantly, the Court held that:

  • whether or not the RLA applies to a lease is determined at the time the lease was first entered into; and
  • this characterisation is then not able to be changed over the duration of the lease (despite changing circumstances affecting the lease).

The Court held that, to find otherwise would increase uncertainty, which would undermine the stated purpose of the RLA which is to enhance certainty and fairness between landlords and tenants. This would give rise to an undesirable situation where parties may not be aware of their ever-changing rights and obligations under a lease.

Accordingly, the Tenant was found not liable to pay the Landlord’s annual land tax pursuant to the terms of the lease. This finding was made on the basis that the premises satisfied the definition of ‘retail premises’ at the time the lease was first entered into in 1998 and again when the lease was varied in 2004 as the estimate of occupancy costs at those times fell below the $1 million threshold.

Court of appeal decision

The Landlord appealed the first instance decision to the Court of Appeal. Justices Kyrou, Kaye and Sifiris unanimously dismissed the Landlord’s appeal and upheld the decision of Justice Croft. The crux of the judgement is summarised in paragraph [8] where it is stated that:

‘… if a lease is a “retail premises” lease at the commencement of the lease, it remains subject to the Act even if the premises cease to be retail premises. In short, the text, context and purpose of the Act strongly support the view that it is not possible [for a lease] to jump in and out of the Act from time to time depending on whether the premises continue to fall within the definition of “retail premises”.’

Section 11(2) of the RLA provides that the RLA applies to a ‘retail premises’ lease at the time it is ‘renewed’. The Court of Appeal was silent as to whether a ‘retail premises’ lease could ‘jump out’ of the RLA upon renewal (as opposed to during the term). However, Justice Croft at first instance suggested that the answer to this question would depend on the relevant provisions of the lease regarding such renewals.

Finally, for completeness the Court of Appeal indicated that if there were circumstances where the RLA did cease applying to a lease, then any clauses rendered inoperable by reason of the RLA would be re-enlivened.

Key takeaways

  • A lease which was a retail lease under the RLA upon commencement will remain a retail lease, even if it subsequently does not meet the criteria. An example of how a lease can cease to meet the criteria includes where the occupancy expenses exceed $1 million, the tenant changes its use of the premises to not provide for the retail provision of services or the tenant becoming a subsidiary of an ASX-listed company.
  • Uncertainty remains as to whether a variation or option could allow the criteria to be re-assessed, such that the lease could then ‘jump out’ of the RLA. This will likely turn on the terms of the document in question. If a lease originally met the RLA criteria, and no longer does, the parties should carefully turn their minds to the effect of varying the lease or exercising an option, as this may cause the lease to ‘jump out’ of the RLA.
  • For existing leases where the parties have incorrectly assumed that the RLA ceased to apply, parties should be alert to potential retrospective claims being made against them in reliance on this decision.

This article was written with the assistance of James Pavlidis, Law Graduate. 

Contact

You might be also interested in...

Turnaround & Corporate Renewal | 18 Nov 2020

China’s trade sanctions: what Australian industries need to consider

While most of our attention this year has been focused on the COVID-19 situation, the trade difficulties that have been unfolding between Australia and our leading importer, China, have escalated.

Litigation & Dispute Resolution | 11 Nov 2020

Tenant evicted for failure to pay rent: pre-pandemic breach not covered by COVID-19 rent relief leasing changes, NSW Supreme Court finds

In the wake of Justice Robb’s decision to grant relief against forfeiture in the Sneakerboy decision, Justice Stevenson recently refused a similar application by a commercial tenant for the reinstatement of its lease.