Outgoings Disclosures and s 52 of the Retail Leases Act

Outgoings Disclosures and s 52 of the Retail Leases Act

Under s 39 of the Retail Leases Act 2003 (Vic) (“the Retail Leases Act”) a Landlord may recover building outgoings, such as council and water rates and building insurance and public liability insurance, so long as those costs as disclosed to the Tenant prior to entering into the Retail Lease.  The prescribed method of disclosure under the Retail Leases Act is a Lease Disclosure Statement.  Essentially, this document itemises the annual rent, length of the lease term, additional options, and importantly all of the building outgoings that the Tenant must contribute to or reimburse the Landlord for during the term of the Lease.

Under s 52 of the Retail Leases Act, the Landlord is responsible for repairs and maintenance of plant equipment (air conditioning or heating installed in the building) and fixtures relating to utility services (i.e. electrical cabling, plumbing, water pumps and the like).  However, section 52 of the Retail Leases Act also mentions that “Section 39 regulates the ability of the Landlord to recover outgoings (including the cost of repairs)”.[1]  In light of this wording, it was regularly assumed by Landlords and many legal practitioners that the maintenance costs of those fixtures, but not the improvement of those fixtures could be passed onto the Tenant; so long as they were disclosed to the Tenant in the prescribed Lease Disclosure Statement.

However, a Victorian Civil and Administrative Tribunal (“VCAT”) case in 2006, Chen v Panmure Hotel Pty Ltd[2] (“Chen’s case”) casts doubt on this assumption.  In that case, the Tenant disputed whether it should be obliged to pay towards the maintenance of smoke detectors, even though this outgoing was disclosed in the standard form lease disclosure statement.  It was VCAT’s view that s 52 of the Retail Leases Act should be interpreted in light of s 251 of the Building Act 1993 (Vic) (“the Building Act”).  Importantly, this section of the Building Act requires the owner to reimburse the Tenant for expenses relating to building work, which was performed by the Tenant (but deemed the responsibility of the owner under the Building Act).  Because, the maintenance of smoke detectors falls within the Building Act, VCAT held that the Tenant should be reimbursed by the Landlord, for the Tenant’s expense of maintaining the smoke detectors.  In effect, VCAT cancelled out a cost that the Landlord had tried to allocate to the Tenant under the Retail Lease.

It should be noted that this decision is not an anomaly.  In McIntyre & Anor v Kucminska Holdings Pty Ltd[3] (“McIntyre’s case”), the Tenant argued that it should not have to pay for the cost of fire safety equipment and maintenance under the Lease.  VCAT agreed and held that because fire safety equipment falls within the scope of s251 of the Building Act, the Tenant should not have to pay for the costs of the fire safety equipment and maintenance, and that the responsibility lies with the Landlord.

These cases raise the issue as to whether, other Landlord’s installations fall within the scope of s 251 of the Building Act.  For example, does the Landlord have to pay for maintenance of heating and air-conditioning, even when the Landlord passes on the cost to the Tenant under a Retail Lease?  In short, the answer is quite possibly.  The Law Institute of Victoria (“the LIV”), discussed this issue in light of the previously mentioned VCAT cases.[4]  The LIV were of the opinion that the Building Act Regulations makes reference to regular inspections and maintenance of property heating and cooling systems.[5]  As such, based on VCAT’s interpretation of the Retail Leases Act in conjunction with the Building Act, the LIV were of the opinion that a Landlord would not be able to pass on the costs maintaining and servicing heating and air-condition systems onto the Tenant[6].

It should be noted, there has been some legal opinion critical of VCAT’s Tenant friendly approach.  The barrister Robert Hay in his property blog, picked on the issue of s 52 and the cases of Chen’s Case and McIntyre’s Case.  Mr Hay was of the opinion that the expansive approach taken by VCAT may be counter to the intention of the Retail Leases Act.  In particular, he noted that

“In my view there is nothing in the Act that suggests that Parliament intended to interfere with the Landlord’s right and a Tenant’s right to bargain about the recovery of costs”.[7]

However, Landlords and Tenants need to be aware that the Victorian Small Business Commissioner, the government body which is in charge of monitoring the application of the Retail Leases Act, and resolving retail lease disputes between Landlords and Tenants; has adopted VCAT’s Tenant friendly view of s 52.[8]

So where does this leave Landlords and Tenants?  Unless s 52 is further amended by the Victorian Parliament, it appears that Chen’s Case and McIntyres’ Case represents the current understanding of the law.  In real terms, this means that Landlords are responsible and liable for the cost of maintaining air-conditioning and heating systems, essential safety systems (such as smoke alarms and fire extinguishers), and that these costs cannot be passed on to the Tenant; even when the Landlord attempts to disclose the outgoings as the Tenants responsibility in the standard Lease Disclosure Statement.

In light of these changes to the interpretation of s 52 of the Retail Leases Act, we advise all Landlords to Tenants to seek legal advice with respect to their Retail Lease, and in particular what outgoings can and cannot be passed onto the Tenant.

Should you have any questions about Retail Leasing, please feel free to contact our office to arrange an appointment to see our commercial & property lawyer, Mr Jamie McCallum.

[1] Retail Leases Act 2003 (Vic) s 52.

[2] Chen v Panmure Hotel Pty Ltd [2007] VCAT 2464.

[3] McIntyre & Anor v Kucminska Holdings Pty Ltd [2012] VCAT 1766.

[4] Law Institute of Victoria Journal, Tenants beware: Don’t get hit by safety maintenance costs (April 2012) Law Institute of Victoria <http://www.liv.asn.au/Mobile/Home/Law-Institute-Journal/Article?NodeID=237930&NodeParentID=237922>.

[5] Ibid, n 2.

[6] Ibid, n 2.

[8] Office of the Victorian Small Business Commissioner, Repairs and Maintenance <http://www.vsbc.vic.gov.au/retail-leasing-matters/repairs-and-maintenance>.

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