Are there any recent cases in 2016 about rent review clauses on the exercise of an option for a further term in Retail Leases in Victoria?

In the recent VCAT decision of MD & S Griggs P/L v DWH P/L [2016] VCAT 1718, Senior Member Riegler was called upon the determine the preliminary issue of whether the lease between the parties provided for a market review at the expiration of each term?

The retail premises were a country hotel in Victoria. The original lease, dated 2009, had expired, and the tenant had exercised the first option for a further 5 year term. 

In response to the exercise of the option, the landlord proposed a new rent for the second 5 year term. The tenant baulked, claiming that the express terms of the lease stipulate that there was to be no market review of the rent at the expiration of each term. Consequently, rent was to remain constant upon renewal, notwithstanding that if all options for renewal were exercised, rent would remain fixed at $18,200 per annum from the commencement date of 1 October 2009 until 30 September 2029.

The lease was in the form of a Law Institute of Victoria standard form lease (2006 Revision). Clauses 11 and 12 concern rent reviews. They state, in part:
11. RENT REVIEWS TO MARKET

11.1 In this clause “review period” means the period following each market review date until the next review date or the end of this lease.

The review procedure on each market review date is

11.1.1 each review of rent may be initiated by either party unless item 17 states otherwise but, if the Act applies, review is compulsory.

11.1.2 a party may initiate a review by giving the other party a written notice stating the current market rent which it proposes as the rent for the review period. Unless the Act applies, if the party receiving the notice does not object in writing to the proposed rent within 14 days, it becomes the rent for the review period.

...

FURTHER TERM(S)
...

12.2 The renewed lease –

12.2.1 starts on the date after this lease ends,

12.2.2 has a starting rent determined in accordance with clause 11, and

12.2.3 must contain the same terms as this lease but with no options for renewal after the last option for a further term stated in item 18 has been exercised.

The Retail Leases Act 2003 applied to the lease. 

The discourse over the question of rent review stems from what the parties have inserted in Items 16 and 17 of the lease schedule. In particular:
Item 16 Review date(s):

[2.1.1, 11, 18]

Market review: Not applicable

CPI review: Not applicable

Fixed review: Not applicable

Item 17 Who may initiate reviews:

[2.1.1, 11, 18]

Market review: Not applicable

CPI review: Not applicable

Fixed review: Not applicable

The Tenant submitted that the lease did not provide for any review of rental, either during each term or upon renewal. 

This situation arose because Clause 11 of the lease is predicated on a market review date being specified in the lease. Therefore, if the parties have not specified a market review date, Clause 11 has no work to do. The market review date is defined in the lease to be the date specified in Item 16 of the lease schedule. Item 16 of the lease schedule did not specify a market review date. It stated that the market review date is Not applicable.

The tenant submitted that Clause 12.2.2 is expressly tied to Clause 11 of the lease. Therefore, if no market review is required under Clause 11, then no market review is required under Clause 12.2.2. Consequently, it argued that the parties have, by engrossing Item 16 of the lease schedule with the words Not applicable, intended Clause 12.2.2 not to do any work.

Similarly, the tenant submitted that s 35 of the Act, which regulates how rent reviews are to be performed, has no application to the lease because the lease does not provide for a review of rent.

On behalf of the Landlord, I conceded that the express terms of the lease did not provide for any rent review during each term of the lease. 

However, I argued that the lease required a review to market upon renewal of each new term. 

The express words of Clause 11.1 state that the “review period” means the period following each market review date until the next review date or the end of this lease. The words "or the end of this lease" mean the end of each term because the renewal of the lease constitutes a fresh lease of itself. 

Therefore, it was clear from the words of the lease what the parties had agreed; namely, that there was to be no mid-term rent reviews but that after the expiration of the first term and upon renewal, rent would be set according to market.

I relied on a decision of Deputy President Macnamara (as he then was) in Dagles Trading Pty Ltd v Scamper Pty Ltd, [2006] VCAT 1220 where the Tribunal stated:

All this leads me back to the text of the 1999 lease which I have quoted or summarised above. As Mr Wikrama contends and Mr Golvan and Mr Borsky concede, the special condition at Item 22 of the schedule must prevail to the extent that it is inconsistent with the printed terms of the standard form. I accept the submission by Mr Golvan and Mr Borsky however that there is no inconsistency. Clauses 11 and 12 of the printed form deal with one subject matter, namely the renewal of the lease pursuant to the options to renew and the fixation of rent upon that renewal and special condition 1 deals with rental reviews ‘during’ that renewed term. In accordance with the distinction drawn by Phillips JA in the Ensabella case, reviews ‘during’ the term of the lease are mid-term reviews not the process of fixation of the initial rental. The words of special condition 1 have their own work to do. That is, to stipulate what rental reviews are to take place during the renewed term and those reviews are annual CPI indexation. The clause has the effect inter alia as Mr Golvan and Mr Borsky conceded of excluding any provision for a market review at the end of year four for year five of the review term.

Clause 11 read in conjunction with Item 16 and 17 of the lease schedule operated to prevent any rent review during the currency of each term of the lease. However, Items 16 and 17 of the lease schedule had no operation upon renewal, in which case the opening words of Clause 11.1 clearly stipulated that there was to be a review of rent at the end of this lease, being the end of each term.

The Tribunal accepted that the words "market review date" in Clause 11 refer to a point in time during the currency of the lease. Similarly, Items 16 and 17 of the lease schedule refer to mid-term reviews, not the process of fixing the initial rent at the commencement of each renewal.

The Tribunal concluded that Clause 12.2.2, which states that the renewed lease has a starting rent determined in accordance with clause 11, means that the mechanical provisions of Clause 11 are to be utilised to determine what the starting rent is to be for the renewed lease. This is because the opening words of Clause 11.1 contemplate that the review period will cease either at the next review date (if there is one) or alternatively, at the end of this lease. 

Therefore, the market review date refers to a point of time during the currency of the lease. The failure to specify a market review date in the lease schedule simply means that there will be no market review during the currency of any specific term. However, it does not therefore follow that there will be no market review to determine the starting rent of any renewal. Such an interpretation would be inconsistent with Clause 12.2.2 which requires that there be a determination of the starting rent of any new term. 

Counsel for the tenant submitted that there is no inconsistency when clauses 11, 12.2.2 and Items 16 and 17 of the lease schedule are read together. The Tribunal did not accept that submission. It concluded that such an interpretation leaves Clause 12.2.2 in a lacuna. In particular, Clause 12.2.2 contemplates that the starting rent of any new term is to be determined, rather than simply rolled over from the previous term. 

However, adopting the interpretation advanced by the tenant would prevent the procedure described under Clause 11 to operate, which would then frustrate the way in which starting rent was to be determined. This created a conflict between the two clauses, because on one hand, Clause 12.2.2 required the starting rent to be determined while on the other hand, the very procedure which would have allowed that to occur was removed from the lease.

The tenant submitted that because Clause 11 is inoperative (by reason of no market review date being specified), Clause 12.2.2 is also to be read as being inoperative. 

The Senior Member rejected that proposition. Clause 12.2.2 imposed a positive obligation on the parties to determine the starting rent of any renewed term. If the parties had intended for there not to be a review on renewal, Clause 12.2.2 could have been deleted. This had not occurred. 

The interpretation placed on Clause 12.2.2 by the tenant required the Tribunal to construe the clause as meaning that there will only be a determination of the starting rent if, and only if, the parties have specified that there is a market review date. However, such an interpretation ultimately led to disharmony between the two clauses. In particular, on one hand, Clause 12.2.2 requires that the starting rent be re-set; while on the other hand, the tenant’s interpretation of Clause 11 prevents that from occurring.


In the Tribunal's view, Clause 12.2.2 discloses an intention that the starting rent upon renewal was to be re-set. Therefore the reference to market review date in Clause 11.1 and Item 16 of the lease schedule is to be qualified by confining it to mid-term reviews. It cannot mean starting rent reviews. This is reinforced by the words of Clause 11.1 which contemplate that the market review date defines the review period from the market review date to either the next review date or the end of the lease. This assumes that the review period is re-set at the end of the lease.

The Tribunal concluded that the landlord and tenant had intended to review the rent to market for the leased premises at the commencement of each new term, if the tenant exercised its option. 

This decision by VCAT confirms that parties who use the standard form of lease in use in Victoria, and who wish to agree that there is to be no rent review for the entire period of the lease (including options), must be very specific in their agreement. If necessary, the standard form of lease should have clauses 11 and 12 specifically varied or excluded, to ensure that their intentions in this regard are made very clear. 

WG Stark 
Hayden Starke Chambers 

Are there any recent cases in 2016 about short stay apartments in Victoria? - Part three

1.     In the final post in this series, I will examine a case about a landlord who leased an apartment in Fitzroy St, St Kilda to a tenant, who then sub-leased that apartment to short stay tenants. The landlord applied to VCAT for an order for possession of the apartment, to evict the tenant, alleging the sub-lease was a breach of the lease.

Tenant allowing property to be used for Air B’N’B is a breach of the lease

2.  In Swan v Uecker [2016] VSC 313, the Supreme Court of Victoria (Croft J) (on appeal from VCAT pursuant to s 148(1) of the Victorian Civil and Administrative Tribunal Act 1998) was called upon to decide whether the use of a property by a tenant for letting to Air B’N’B clients was a breach of the tenant’s lease. 

3.  Ms Swan owned a two bedroom apartment in Fitzroy Street, St Kilda (“the Apartment”). In August 2015, she leased the Apartment to the Respondents pursuant to a residential tenancy agreement for a term from 20 August 2015 to 19 August 2016 (“the Lease”).

4.  The Applicant sought an order for possession in VCAT on the basis that the Respondents had sublet the Apartment in breach of the provisions of the Lease. The Applicant’s case was that the Respondents granted leases to third parties (“AirBnB guests”) who stayed in the Apartment. The Respondents conceded before the Tribunal that AirBnB guests stayed at the apartment for short-term stays, booked through the AirBnB website.

5.  The AirBnB listings for the Apartment offered two distinct occupancy options. The first involved making the entire Apartment available for AirBnB guests at the rate of $200 per night, and the second involved making only one bedroom available for AirBnB guests at the rate of $102 per night. It is, however, only the AirBnB agreement for occupation of the entire Apartment that is relevant for the purposes of the appeal. The minimum stay under this agreement was three nights and the maximum five nights.

6.  S 253(1) of the Residential Tenancies Act, 1997 provides that:

A landlord may give a tenant a Notice to Vacate rented premises if the tenant has assigned or sublet or purported to assign or sublet the whole or any part of the premises without the landlord’s consent.

7.  The tenants argued that the agreement between them and the AirBnB guests did not mean that the latter were granted “exclusive possession” of the Apartment.

8.  VCAT agreed, and dismissed the application on the basis that the Respondents had only granted licences to occupy to the AirBnB guests, but not leases. Consequently, the Tribunal found that they had not sublet the Apartment and were therefore not in breach of the Lease/Act.

9.  On appeal, Croft J analysed the test to determine whether the AirBnB guests occupied the premises pursuant to a lease or a licence.

10.  He noted (at paragraph 31, quoting from several relevant cases): 

It is well accepted that, as a matter of law, the test to be applied to distinguish between a lease and a licence is whether or not what is granted is exclusive possession.…In deciding, in such cases, whether what has been granted is the right to exclusive possession, the court, in the process of construction, has in practice looked, inter alia, to two things: the nature of the rights which, in terms, have been granted; and the intention of the parties. Party intention in this context is to be determined objectively on the basis of the terms of the particular agreement under consideration and having regard to surrounding circumstances to the extent that is permissible according to the ordinary rules of construction. Whether the transaction creates a lease or a licence depends upon intention, only in the sense that it depends upon the nature of the right which the parties intend the person entering upon the land shall have in relation to the land … And how is it to be ascertained whether such an interest in land has been given? By seeing whether the grantee was given a legal right of exclusive possession of the land for a term or from year to year or for a life or lives. If he was, he is a tenant. And he cannot be other than a tenant, because a legal right of exclusive possession is a tenancy and the creation of such a right is a demise.

11.  In the circumstances of the case, Croft J held that, yes, the exclusive use of the property by Air B’N’B clients was properly characterised as a lease; this made the arrangement a sub-lease, and therefore in breach of the lease between the tenant and the landlord, allowing the landlord to terminate the lease.

12.  It is notable that Justice Croft made some remarks about the effect of this decision on AirBnB more generally; he stated that the case was determinative only of the particular arrangement between these parties. At paragraph 80, he noted:

First, this is not a case on the merits of AirBnB arrangements. Neither is it a case on whether or not AirBnB arrangements might be said to be “illegal” — either in some particular or some general, non-legal, sense. Rather it is a case, on appeal, which raises for determination — directly or indirectly — the legal character of this particular AirBnB arrangement and any consequences this characterisation may have in the context of the terms of the lease of the apartment concerned. Secondly, the context provided by the terms of the particular apartment lease are important. Although this apartment lease is a residential lease, many commercial leases restrict the tenant from sub-leasing, assigning the lease, granting any licence to occupy all or part of the leased premises or otherwise parting with possession without the landlord’s prior consent. Broad terms such as this would prevent, for example, sub-letting or licensing without the landlord’s consent and would avoid the need — as in the present case — to characterise the nature of the same arrangement like the AirBnB arrangement for occupation of the whole of the leased premises as a sub-lease or a licence.

13.  This case is possibly of relevance to the Watergate operator, as they utilise 14 apartments, although they apparently only own one (apparently 9 are leased, with 4 available on a commission basis). Therefore, the owners of the 9 leased apartments may now try to terminate their leases.

14. Of the three methods tried to control short stay apartment usage in Victoria, this seems to be the most likely to succeed. However, it will not apply to owners of apartments who let their properties out for short term stays. 

15. I understand that the Victorian government is currently considering whether to amend the relevant property legislation to allow Bodies Corporate to have some control over this type of apartment usage within the buildings under their control. Stay tuned for further developments! 

WG Stark 

Hayden Starke Chambers

Are there any recent cases in 2016 about short stay apartments in Victoria? - Part two

Short stay accommodation

1. In the second post in this series, I will look at the attempt by the Body Corporate at the Watergate Apartments to outlaw so called ‘short stay’ use of apartments within the building complex under their control.

Body Corporate Rules – can they outlaw short stay accommodation?

2. Apparently in respect of the same operators as I wrote about in part one of this series, in Owners Corporation PS 501391P v Balcombe [2016] VSC 384, the Supreme Court of Victoria (Riordan J) (on appeal from VCAT) was called upon to decide the validity of Body Corporates rules that outlawed ‘short stay’ use of apartments within the building complex under their control.

3. Justice Riordan sets out his conclusion in summary in paragraph 1 of his reasons, as follows (emphasis added):

The main question in this appeal is whether owners corporations (previously called bodies corporate) have the power to make a rule prohibiting short-term letting of apartments. I have found that, under both the Subdivision Act 1988 (Vic) (see paragraphs [99] to [124] below), the Owners Corporations Act 2006 (Vic) (see paragraphs [145] to [188] below) and the regulations made under those Acts, Parliament did not demonstrate an intention to confer such extensive powers on owners corporations principally for the following reasons:

(a)   A review of the development of strata title legislation indicates the principal role of the body corporate or owners corporation was to manage and administer the common property of a strata subdivision.

(b)  The relevant legislation does not disclose any intention for owners corporations to have power to substantially interfere with lot owners’ proprietary rights; or for owners corporations to effectively have an unappellable right to overrule uses permitted under planning legislation.

(c)   A parliamentary intention to provide to owners corporations powers that could substantially inhibit the conduct of lot owners on their own lot would need to be expressed in clear and unambiguous language.

I have further found that the relevant rule, in this case, was not deemed to be valid by s 27(2C) of the Subdivision Act 1988 (Vic) (see paragraphs [128] to [132] below), or the transitional provisions of the Owners Corporations Act 2006 (Vic) (see paragraphs [136] to [144] below).

4. Justice Riordan then embarked on an extensive historical review of bodies corporate under the relevant Victorian property legislative enactments.

5. At paragraph 114, Riordan J concluded:

If this construction is correct, then the appellant had no power to make conduct rules and its power, with respect to conduct matters, was limited to enforcing the Standard Rules. In those circumstances … the appeal must fail.

6. Riordan J went on to examine the particular rule in question, and then determined (at paragraph 123):

In my opinion, the breadth of Rule 34 has caused it to exceed the scope of what was intended by the subdivision legislation and, in particular, the Subdivision (Body Corporate) Regulations 2001 (Vic) …

7.  And at paragraph 124:

In summary, I do not consider that the Parliament conferred powers on bodies corporate for the Statutory Purpose of substantially interfering with rights and privileges usually attendant upon freehold owners. … Accordingly, I consider that Rule 34 was not sufficiently directly or substantially connected with the Statutory Purpose to be a real exercise of the rule making power.

8.  In those circumstances, Riordan J concluded that the VCAT decision was correct, and that the Body Corporate rule that purported to outlaw short-stay letting of apartments within the building complex was invalid.

9.  As a result of this decision, it is unlikely that this will be an effective method of stopping AirBnB usage within apartment complexes in Melbourne and Docklands.

WG Stark

Hayden Starke Chambers 

Are there any recent cases in 2016 about short stay apartments in Victoria? - Part one

Short stay accommodation

1.     This area of property law has generated a large amount of media attention. Solutions to what is seen as a problem have been attempted on at least three fronts.

2.     In today's post, I write about the Melbourne City Council taking a relatively large-scale operator in Docklands (at the Watergate Apartments, 18 Waterview Walk, Docklands) to the Building Appeals Board to have an order made that these types of arrangements breached the Building Code.

Building Appeals Board

5.     In 2011, the City of Melbourne served building orders on the owners of 42 units who were using or permitting their units to be used for Short-Term Letting (including the operator in question). The orders required the owners to cease to use the apartments as ‘short term commercial accommodation (hotel) or the like’, which it was alleged rendered such apartments a Class 3 building under the Building Code of Australia. Thirty-one of the 42 affected unit owners challenged the orders in the Building Appeals Board.

6.     On 22 March 2013, the Building Appeals Board upheld the orders of the City of Melbourne’s Municipal Building Surveyor on the basis that ‘the use of the apartments for commercial short time stays is not a use which is permitted under the existing occupancy permit for Class 2 (which involved the operation of a business)’.

7.     The respondent owners appealed to the Supreme Court and, on 30 May 2013 (See: Salter v Building Appeals Board & Ors [2013] VSC 279), Beach J set aside the Building Appeal Board’s decision and remitted the matter back to the Building Appeals Board for determination.

8.     On 12 December 2013, the Court of Appeal dismissed the appeal by the City of Melbourne from the decision of Beach J (See: Genco & Anor v Salter & Anor [2013] VSCA 365) and held that that the Building Appeals Board had misdirected itself in concluding that ‘ordinarily a dwelling is not a building used for short term accommodation’. Accordingly, the matter was remitted for reconsideration to the Building Appeals Board where ultimately the matter was settled and orders were made by consent on 30 October 2014 in the following terms:

With the consent of the parties, and without the Board determining the merits, it is ordered pursuant to section 149(1)(c) of the Building Act 1993 (Vic) (“the Act”) that:

1. The building orders dated 19 October 2013, to which these proceedings relate, are varied by way of replacing paragraphs 6 and 7, with a new paragraph 6 as follows:

You must carry out the following within 30 days of the date of this order (being the date of the varied order):

a. install a smoke alarm that complies with AS3786 inside each bedroom of the apartment and interconnected in accordance with AS3786 with each smoke alarm within the apartment;

b. affix an emergency evacuation plan to the rear of the entry door of the apartment to the nearest fire isolated exit stair in accordance with AS3745; and

c. provide the municipal building surveyor, Melbourne City Council, with a certificate under section 238 of the Act confirming compliance with this order and the building regulations.

2. Pursuant to section 149(4) of the Act, the Board orders that:

The municipal building surveyor, Melbourne City Council, review the compliance of the “Exit” signs in the common corridors that provide access and egress to the apartments that are the subject of these proceedings, having regard to the report of Mr Adrian Lee titled “City of Melbourne Watergate Apartments Further Report, Issue 1 dated 17 September 2014”, with a view to issuing a building notice on the relevant Owners Corporation without delay, should the exit signs be found to be non compliant with the BCA Part E4.8(b).

3.  The municipal building surveyor, Melbourne City Council, review whether a written record of the tenants acknowledging the receipt of safety/evacuation induction should be kept on the premises and whether it should be noted as an essential safety measures item referenced in the maintenance determination appurtenant to the occupancy permit. Should the municipal building surveyor determine that such a requirement is appropriate he should take appropriate measures to seek to have it implemented.

4. No order as to costs.

9.     As a result, the owners were effectively allowed to continue to operate as AirBnB’s within the Watergate building, provided they complied with these minor requirements.

10.  The Melbourne City Council has stated that it will review other short-stay cases "on their merits" as they arise. 

11. Therefore, the first 'solution' to the 'problem' of short stay apartments was mostly unsuccessful. 

WG Stark 
Hayden Starke Chambers