Insights Library
Proceed with Caution – 15 Year exemption from the Retail Leases Act 2003 (Vic)
Proceed with Caution – 15 Year exemption from the Retail Leases Act 2003 (Vic)
The primary purpose of the Retail Leases Act 2003 (Vic) in Victoria is to assist small and medium retail tenancies by regulating their leases with various protections. There are several exemptions to the Retail Leases Act 2003 (Vic); meaning some leases can be taken outside the reach of the legislation. This article focuses on one of the less common exemptions, being the “15 year” exemption.
The exemption was made by Ministerial Determination in August 2004 and it exempts leases that are for an initial term of 15-years or longer but it also has other criteria to meet which are often misunderstood by landlords and tenants and is thus fraught with danger.
In the past, the Victorian Small Business Commissioner would issue a Certificate upon request to confirm that a lease was exempted from the legislation but that practice has ceased for some time and so it is now up to the parties (and their legal representatives) to ensure that the criteria are met.
In summary, the ministerial determination states that a lease is not a retail lease if:
- The initial term of the lease is 15 years or more (excluding any options for renewal);
and
- The provisions of the lease
- impose an obligation on the tenant or any other person to carry out substantial work on the premises which involves the building, installation, repair or maintenance of the structure/fixtures/plant/equipment at the premises or of the appliances, fittings or fixtures relating to gas, electricity, water, drainage or other services; or
- impose an obligation on the tenant or any other person to pay any substantial amount in respect of the cost of any of the above works; or
- disentitles the tenant or any other person to remove any of the works at any time after the initial term of the lease.
The word “and” above is of the most importance as the three final criteria are often overlooked.
We have seen many leases purporting to apply this exemption (particularly in the childcare and education sectors) purely because the lease has an initial term of 15 years or more; but where the lease fails to clearly and precisely meet one of the other criteria. This misunderstanding could lead to costly disputes in future.
The wording creates much speculation over what constitutes a ‘substantial work/amount’ and whether ‘any other person’ might include the landlord. This is often determined on the facts of each lease.
Longevity is common in childcare and other education or medical leases given fit-outs of the premises are normally costly due to various factors. These types of leases are often entered into well before construction of the premises which allows the parties time to negotiate the obligations to ensure the exemption is met or avoided, as the case may be. The application of Retail Leases Act 2003 (Vic) is something that can impact many terms of the lease negotiations so it is ideally, the first question to consider.
There are obvious benefits to a landlord in exempting a lease from the Retail Leases Act 2003 (Vic) including the recovery of land tax and other prohibited outgoings, more flexibility on rent review methods and other tenant protections no longer applying. However the Victorian Small Business Commissioner (VSBC) is clear that the purpose of the Determination is (emphasis added):
“to exempt long term leases which impose substantial financial obligations on the tenant from the operation of the Act, where such exemption would be beneficial to both the landlord and the tenant…
However, it is not the purpose or intent of the Determination to exclude genuine small and medium retail tenants from the protections provided by the Act, where doing so would not be in the best interests of the tenant.”
Whilst it may assist to include an acknowledgment in the lease that both parties agree that the exemption criteria are met and the determination should apply, this too is not conclusive as the parties cannot simply agree to ‘contract out’ of the Retail Leases Act 2003 (Vic).
The parties intentions and knowledge of the exemption will likely not hold much weight in the event of a dispute if a tenant later sought the benefit of the protections of the Retail Leases Act 2003 (Vic) – something that may occur in the event of a dispute between tenant and landlord or upon assignment to a new tenant.
Similarly, since the Victorian Court of Appeal handed down its decision in CB Cold Storage Pty Ltd v IMCC Group Pty Ltd [2017] VSC 23, many landlords may have found that their leases were in fact governed by the Retail Leases Act 2003 (Vic) even if they did not intend for the legislation to apply.
In such circumstances, if the exemption was found to wrongfully have been applied the landlord may be open to significant claims for non-disclosures, unlawful rent reviews or recovery of prohibited outgoings (such as land tax) which were paid to the landlord in contravention of the Retail Leases Act 2003 (Vic).
We strongly recommend that both landlords and tenants seek expert legal advice at the time the lease is being negotiated to determine the potential application of this exemption.
About Best Hooper – Victoria’s Property, Planning and Land Development Advisory Law Firm
Best Hooper are the oldest and most prominent developer focused law firm in Victoria who have served our community since 1886. We are continuously recognised as industry leaders in property and planning law across a variety of publications, including Doyles Guide, Best Lawyers and Lawyers Weekly.
This article is general in nature, should you wish to seek expert legal advice please contact us.
Giancarlo and Helen are members of our Property Law and Transactions team, if you require more information please call Helen on (03) 9691 0255 or email on HAdoranti@besthooper.com.au or contact Giancarlo on (03) 9691 0220 or email on GRomano@besthooper.com.au
