Uncertainty on costs of essential safety measures under the Retail Leases Act 2003 (VIC) soon to be resolved

The Retail Leases Amendment Bill 2019 aims to increase certainty in retail leasing arrangements about who pays for costs relating to the installation, repair and maintenance of essential safety measures and to make retail leases fairer and easier to understand.

In this update we will look at a key change proposed – the freedom for parties to a retail lease to agree that the tenant will be responsible for the cost of the landlord carrying out essential safety measures on the leased premises.

The Bill amends the Retail Leases Act 2003 and Building Act 1993 and was introduced into the Victorian Parliament on 30 October 2019. The changes will come in to effect when the Bill receives Royal Assent, which is likely to happen in early 2020.

VCAT Advisory Opinion 2015

Since the Victorian Civil and Administrative Tribunal’s (VCAT’s) Advisory Opinion issued in May 2015, there has been uncertainty as to whether a landlord can recover from the tenant the costs of taking essential safety measures (ESM) in leased premises, even if the lease terms expressly allow such recovery.

VCAT took the view that section 251 of the Building Act precludes such recovery on the basis that this section allows an occupier of a building (eg a tenant) to step in and carry out necessary work if the owner fails to, and then recover the cost of doing so as a debt due. If an occupier is entitled to this cost recovery, then it followed, according to VCAT, that a landlord could not recover ESM costs from a tenant under a lease, regardless of the lease terms.

This caused a fair degree of concern for landlords who had routinely been passing on these costs to tenants, and uncertainty for all involved in commercial and retail leasing given that the VCAT opinion, while persuasive, does not have the weight of a court judgment and is not binding on VCAT or superior courts.

Changes to the Building Act

Now the Victorian Government has stepped in to clarify the issue. However, it is important to note that the new Bill governs retail leases only, not commercial leases which fall outside the Retail Leases Act (RLA). For those leases, the uncertainty remains and it seems there is little appetite to make changes in this largely unregulated space.

The new Bill does not alter the requirement that building owners are required to maintain ESM under the Building Act. ESM are defined in the Building Regulations 2018 to include certain building infrastructure such as sprinklers and fire detection and alarm systems, fire doors, fire-rated structures.

The Bill amends section 251 of the Building Act to provide that an occupier cannot recover from a building owner expenses relating to the installation, repair or maintenance of ESM that the occupier has agreed to bear under a lease to which the RLA applies.

This addresses the situation where a tenant has stepped in to perform the required ESM work after the landlord has failed to do so. The tenant pays out to have the work done, but cannot recover the cost from the landlord if the tenant has agreed to pay such expenses under the lease.

Changes to the Retail Leases Act

While the changes to the Building Act just deal with cost recovery, the Bill goes further by amending the Retail Leases Act to permit an agreement for the tenant to be responsible for ESM as well as allowing a landlord to recover costs of ESM compliance.

The Retail Leases Act is proposed to be amended by:

• adding the cost of repairs or maintenance work for an essential safety measure or an installation specifically as a ‘recoverable outgoing’ under a retail lease.
• amending section 41 which provides that capital costs are not recoverable under a retail lease. A provision in a retail premises lease is void if it requires the tenant to pay an amount for capital costs of the building, plant and equipment. If the Bill is passed, there will be an exception to the capital costs exclusion, which will allow recovery of, for an essential safety measure, the cost of the landlord carrying out repairs or maintenance work or an installation relating to fit-out of the retail premises which the tenant has agreed to pay for.
• adding to section 52 which is the section dealing with a landlord’s liability for repairs. A landlord is responsible for maintaining in a condition consistent with the condition of the premises when the retail premises lease was entered into as well as the structure of, and fixtures in, the retail premises, plant and equipment at the retail premises and the appliances, fittings and fixtures provided under the lease by the landlord relating to the gas, electricity, water, drainage or other services. This section will now provide:
  • A tenant may agree with the landlord to carry out repairs or maintenance work for an ESM on behalf of the landlord.
  • If the tenant does agree to carry out that work, though, this agreement does not affect any obligation of the landlord as an owner of the building to comply with any requirement under the Building Act 1993 or regulations made under that Act.
  • This does not limit any obligation of a tenant under a retail premises lease to contribute to outgoings for repairs or maintenance work for an essential safety measure.

Commencement and transitional provisions

The amendments relating to ESM will apply to retail leases that were entered into before the amendments commenced if the lease contains a provision setting out that the tenant must pay the landlord, as a contribution to outgoings, the cost of installation, repairs or maintenance work for an essential safety measure. So, existing leases with provisions that allow the landlord to recover costs from the tenant for ESM are enforceable.

The provisions do not operate retrospectively, so these amendments do not permit a landlord to recover costs for ESM incurred before the amendments began.

The changes will come in when the Bill reaches Royal Assent, expected in early 2020.

Considerations for landlords

For those owners of retail assets whose standard leases already refer to recovery of ESM costs from a tenant, no changes are necessary. If cost recovery has been suspended since the VCAT opinion, recovery can resume once the Bill is passed.

For standalone retail premises where the tenant is responsible for repairs and routine maintenance, a specific reference can be made in the lease to the tenant carrying out necessary ESM works at its cost. Owners must bear in mind, however, that they remain liable under the Building Act for ESM, so it is crucial to ensure the necessary work is done – by the tenant or otherwise.

Finally, there is no resolution as yet to the ESM cost question under leases outside the Retail Leases Act.

Considerations for tenants

The changes to the Retail Leases Act only mean that a provision in a lease requiring the tenant to pay for or carry out ESM is not void. It does not mean that a landlord can mandate tenant compliance. Tenants need to be aware that they seek to negotiate out of such obligations when settling the terms of the lease with the landlord. In reality, ESM costs are regularly wound up in to outgoings recovery provisions and sometimes are not separately identifiable in lease provisions or outgoings budgets.

Tenants should seek clarity from landlords about the cost of ESM to be passed on and assess whether this has a material impact on its net operating costs, bearing in mind that capital expenses remain excluded from outgoings.

If the lease requires that the tenant undertake the ESM work, consider whether it is the tenant or if it is the landlord who is best placed to carry out that work.

Please contact the Hall & Wilcox leasing team if you have you require assistance or advice in the drafting or negotiation of your next commercial lease.

Written by Jane Baddeley and Nik Dragojlovic