Some of you might be aware of the ongoing dispute between Richmond Football Club (RFC) and its landlord, Verraty Pty Ltd (Verraty) regarding the application of the Retail Leases Act 2003 (Vic) (RLA) and whether a lease can effectively 'jump out' of operation of the RLA.
In 1998 RFC and Verraty entered into a new 10 year lease (with one 10 year option) for a pokies centre in Wantirna, commencing 7 May 1998. In 2004 the lease was varied by extending the original term to 20 years which, at law, operated as a surrender and re-grant. Accordingly, a new retail premises lease was entered into in 2004. That date is important as it causes the lease to fall within the operation of the RLA (and not the preceeding legislation).
The relevant provisions of the RLA are:
- Section 4(2)(a) – retail premises do not include premises where annual occupancy costs exceed $1 million.
- Section 11(2) –the RLA only applies to a lease of premises if they are 'retail premises' at the time the lease is entered into or renewed.
- Section 35(3) – which renders a ratchet provision (preventing rent from decreasing on review) in a retail lease void.
- Section 50 – any provision of a retail lease that makes the tenant liable to pay an amount for land tax is void.
2011 - RFC challenge Land Tax Payments
The lease required RFC to pay land tax and also contained ratchet provision on a market review. In 2011 RFC challenged the obligation to pay land tax as void pursuant to section 50 of the RLA. At first instance, VCAT held that the 2004 variation was, at law, a new lease which operated under the RLA and as such RFC was not obligated to pay land tax.
Verraty was ordered to repay all amounts that RFC had paid in respect to land tax.
2016 – Verraty claim RLA no longer applies
During the term of the lease, Verraty issued estimates of outgoings (as it was obligated to do under the RLA), which showed that on and from 7 May 2016 the total occupancy costs exceeded $1 million. Verraty took the view that as occuapncy costs were now above the legislative threshold for operation of the RLA, the lease was no longer a 'retail lease' and sought recovery of land tax from RFC.
This led to a further ongoing dispute between the parties, resulting in 2019 VCAT proceedings.
2019 – RFC challenge non-application of RLA
In 2019, VCAT held in favour of Verraty and that as a result of the lease no longer being a 'retail lease' due to occupancy costs exceeding the staturoty million dollar threshold.
Effectively, VCAT declared that a lease can 'jump out' of the operation of the RLA if occupancy costs exceed the nominated threshold and disqualify the lease as being a 'retail lease' for the purposes of the RLA.
Due to VCAT's decision, RFC had to pay land tax as required under the lease and the market review on renewal in 2018 was subject to the ratchet provision (which was no longer void as the RLA did not apply from 7 May 2016).
2020 – Supreme Court are Tigers fans
(not really – but they found in favour of RFC) - RFC appealed VCAT's findings and the Victorian Supreme Court held that:
- the wording in section 11(2) of the RLA does not envisage a lease falling out of operation of the RLA, rather it simply fixes the date for determining whether the RLA applies to any specific lease; and
- notwithstanding that the occupancy costs under this lease now exceeded the $1 million threshhold, this lease remained a retail lease and accordingly;
- the ratchet provision was invalid; and
- RFC was not required to pay land tax.
Verraty appealed and on 16 October 2020 the Court of Appeal upheld the decision in favour of RFC, stating:
“… 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’.
Key Take Homes from Occur of Appeal Decision
- The time for determining whether the RLA applies is at the commencement or renewal of the lease.
- If at its inception a lease is a retail lease, it remains a retail lease even if during its term or on its renewal the the premises no longer fit the definition of "retail premises"
- It is not possible for a lease to no longer be a retail lease for the purposes of the RLA during the term of the lease. The landlord and tenant have certainty when negotiating a lease as to the application of the RLA during the term.
- It remains unclear what impact the other qualifying factors for a retail lease under the RLA would have – for example a lease to an ASX listed tenant would remain outside operation of the RLA following an assignment to a 'mum and dad' tenant – but what about if that mum and tenant then exercised an option to renew? On the face of it, it would appear the RLA would apply to the lease for the renewed term, however the Supreme Court judgement isn't clear on this issue and it would appear to hinge on the wording within the specific lease.