VCAT advisory opinion outlines limits on recovery of certain landlord outgoings

In brief

A recent advisory opinion from the Victorian Civil and Administrative Tribunal outlines certain limits on the maintenance, repair and compliance costs that a landlord can recover from tenants under Victorian leases, particularly retail premises leases. Partner John Beckinsale, Special Counsel Christine Adamson and Law Graduate Jo Sampford consider the implications.

Key points

• In VCAT's opinion, a landlord can require a tenant to undertake some (but not all) essential safety measures (ESM) required under the Building Act 1993 (Vic) and Building Regulations 2006 (Vic), provided that the tenant's costs will be recoverable from the landlord.
• In VCAT's opinion, the Retail Leases Act 2003 (Vic) and the Building Act 1993 (Vic) prevent a landlord from passing on certain maintenance and repair costs to tenants.
• While the opinion is not binding on courts or tribunals, it will clearly influence VCAT practice in resolving retail premises leasing disputes. The opinion also contains an analysis of the relevant legal principles, which may be useful when considering the interpretation of outgoings recovery clauses in Victorian leases.

Background

A long-debated issue in the retail and commercial leasing area is the extent to which a landlord can recover from a tenant the cost of compliance with the landlord's maintenance and repair obligations imposed under statute, including ESM obligations. ESM obligations for a building are required under the Building Act and Building Regulations, and include measures such as sprinkler systems, smoke alarms, emergency lifts and fire protections.

In May 2014, the Victorian Small Business Commissioner requested VCAT to provide an advisory opinion on landlords' and tenants' respective rights and responsibilities in respect of:

• provision and maintenance of ESM for buildings; and
• the cost of maintenance and repair of premises and landlord's installations, under the Retail Leases Act.

The advisory opinion

In an advisory opinion published on 1 May 2015, Justice Garde, President of VCAT, reached the various conclusions noted below.

Responsibility for ESM obligations

The Building Act creates the following types of ESM obligations:

• ESM obligations that must be complied with by the landlord itself, for example, installing smoke alarms and smoke detection systems – these obligations must be met by the landlord or its contractors, at the landlord's cost.
• ESM obligations that require the landlord to ensure a particular result or standard is achieved; for example, arranging an ESM report – these obligations can be met by either the landlord or the tenant (by agreement), at the landlord's cost.

Where the landlord fails to provide or maintain an ESM as required, the tenant may carry out the work and recover the cost from the landlord, or set off the cost against rent.

Any lease provision inconsistent with the purpose or policy of the Building Act is void. Any lease provision that requires the tenant to pay or contribute to the cost of performing either of the types of ESM obligations noted above is inconsistent with the purpose or policy of the Building Act (in particular is inconsistent with section 251 of the Building Act) and is therefore void.

When is a lease inconsistent with the Building Act or Retail Leases Act?

VCAT considered four possible tests that might be adopted to determine whether a lease provision might be inconsistent with a statutory provision, and ultimately decided to use a High Court test¹ which focuses on inconsistency between the lease provisions and the 'purpose or policy' of the statute. This was one of the widest potential tests considered by VCAT. VCAT notes that the Shopping Centre Council and REIV had submitted to VCAT that a more direct or literal test of inconsistency should have been used instead.

VCAT noted that determination of the test to be adopted in deciding inconsistency was a pivotal issue for VCAT in arriving at its conclusions.

Interaction with Retail Leases Act

The Retail Lease Act contains a number of provisions that potentially restrict recovery by a landlord of outgoings from a tenant under a retail premises lease. VCAT's opinion concludes that a landlord under a retail premises lease cannot require the tenant to provide or maintain an ESM in any of the following circumstances:

• s52(2) of the Retail Leases Act applies and the landlord is responsible for providing or maintaining the ESM in order to maintain the retail premises in a condition consistent with the condition of the premises when the retail premises lease was entered into, and the ESM:
  • forms part of the structure of, or is a fixture in the retail premises;
  • constitutes plant or equipment at the retail premises; or
  • is an appliance, fitting or fixture provided under the lease by the landlord relating to the gas, electricity, water, drainage or other services,
    unless the need for the repair of the ESM arises out of misuse by the tenant, or the tenant is entitled or required under the retail premises lease to remove the ESM at the end of the lease; or
• provision or replacement of the ESM is a capital cost under s41 of the Retail Leases Act relating to the building, or plant in a building in which the retail premises are located or any building or plant in a retail shopping centre in which the retail premises are located, or are used in association with a building in which the retail premises are located or any building in a retail shopping centre in which the retail premises are located; or
• the requirements of s39 of the Retail Leases Act for the recovery of outgoings from a tenant are not satisfied, with the result that the tenant is not liable to pay the amount claimed by the landlord in respect of outgoings; or
• the requirements of the Retail Leases Regulations 2013 (Vic) are not met, with the result that the amount of outgoings cannot be recovered, or that the amount of outgoings that can be recovered is limited.

This leaves the following circumstances when, in VCAT's opinion, a landlord could require a tenant under a retail premises lease to contribute to the cost of maintenance and repairs to the premises or the landlord's installations as outgoings:

• s251 of the Building Act does not apply and the relevant Building Regulation requires the cost to be paid by the landlord;
• s52(2) of the Retail Leases Act does not apply;
• the cost incurred is not a capital cost within the meaning of s41 of the Retail Leases Act;
• the landlord satisfies the requirements of s39 of the Retail Leases Act for the recovery of outgoings; and
• the landlord satisfies the requirements of the Retail Leases Regulations 2013 (Vic) concerning outgoings.

Implications

This is the first advisory opinion from VCAT, and one of only a handful that have been produced by Australian tribunals in judicial history. As a quasi-judicial body, VCAT's opinion is not binding, and, as it was decided without reference to a dispute between particular parties, and without regard to the drafting of the provisions of a particular lease, it is of limited precedent value. VCAT's opinion itself makes it clear that the matters it considered gave rise to complex legal issues of interpretation, and are difficult to apply in some factual circumstances.

VCAT does, however, hear a large volume of applications by landlords and tenants of retail tenancies, and the decision will clearly influence VCAT practice and dispute resolution.

Landlords should review the types of maintenance and repair costs currently levied through outgoings and other charges under leases in light of this opinion. Landlords should, in particular, review the extent to which their leases seek to impose ESM compliance obligations or costs on tenants, as such provisions may not be enforceable.

Landlords may also consider moving to gross leases in Victoria.