William Buck (Vic) Pty Ltd v Motta Holdings Pty Ltd [2018] VCAT 15
1. This VCAT case (decided by Senior Member
Riegler) is important because the Tribunal held a lease could cease to be a “retail
premises lease” during its term.
2. The decision has the potential of narrowing the
application of the Retail Leases Act 2003 (Vic) serving as
some good news for retail landlords.
Does GST form a part of the occupancy
costs?
3. The first issue that Senior Member Riegler
had to decide was whether GST should be taken into account when calculating
occupancy costs for leases entered into before 22 April 2013. He decided yes.
4.
However,
that part of the decision is of limited application due to Retail Leases
Regulations 2003 which state that any lease which is to commence from
22 April 2013 is to exclude GST from total occupancy costs.
Background
5. On 19 December
2006, the Tenant originally entered into a written lease in respect of premises
located in Hawthorn East. It continued to occupy a part of those premises. The original
Lease provided for an initial term of eight years with two further terms of six
years each. The parties renegotiated the Tenant’s tenure upon the expiration of
the first term. A new lease was entered into, under which the Tenant occupied
less floor area than what was originally leased (and with less rent payable).
The parties agreed that the Retail Leases
Act 2003 (‘the RLA’) governed the current lease.
6. However, what was
in dispute was whether the original Lease was also governed by the RLA.
7. Under the terms
of the original Lease, the Tenant was required to pay land tax. According to
the Tenant, it paid $251,234.68 to the Landlord as reimbursement of land tax up
until 31 December 2014. However, if the RLA applied to the original Lease, then
the clause requiring the Tenant to reimburse the Landlord for land tax is
deemed to be void ab initio, pursuant to s 50 of the RLA.
8. The Tenant claimed
that the original Lease was governed by the RLA and as a consequence the
payment of land tax was paid under mistake of fact or law and it was entitled
to be repaid.
9. Whether the original
Lease fell within the provisions of the RLA depends on the amount of occupancy
costs payable under that Lease. Occupancy costs are
defined under s 4(3) of the RLA as:
(a) the rent payable under the lease, and
(b) the outgoings, as estimated by
the landlord, and
(c) any other costs of prescribed kind
10. If the occupancy
costs were more than $1 million, then under s 4(2)(a) of the RLA
and r 6 of the Retail Leases Regulations 2003 the leased premises
fall outside of the definition of retail premises and the RLA
does not apply.
11. The starting
rent under the original Lease was $802,795, plus GST. Prior to the
commencement of the Lease, and pursuant to s 46 of the RLA, the Landlord gave
the Tenant an estimate of the outgoings for the first year of the lease term.
That document stated that the estimated outgoings in the first year of the
first term of the Lease was $150,209 (‘the Estimate of Outgoings’).
12. Whether this
amount is inclusive or exclusive of GST, this document formed the basis
upon which occupancy costs were to be calculated, as at the
commencement of the Lease.
13. According to the
Tenant, if GST is not counted for the purpose of assessing occupancy
costs, then the occupancy costs amount to $953,004 and the RLA applies.
That would mean that the clause in the Lease requiring reimbursement of land
tax is void ab initio.
14. According to the
Landlord, if GST is added to the starting rent and Estimate of Outgoings, then
the occupancy costs amount to $1,048,304.40 and the RLA does
not apply. That would mean that there is no prohibition against requiring the
Tenant to reimburse the Landlord for land tax.
15. Senior Member
Riegler found that the aggregate occupancy costs at the time
when the original Lease was entered into exceeded $1 million and consequently,
the RLA did not apply to the original Lease.
16. He noted (in
paragraph 15):
… Where the rent payable under a lease is expressed as a base figure plus GST, it is the aggregate amount that constitutes the consideration for the taxable supply. In other words, expressing the rent as ‘$802,795 (plus GST)’ or simply as $883,074.50 constitutes the same consideration paid by the Tenant (by way of rent) for the taxable supply.
17. He concluded (at
paragraph 16):
Therefore, I am of the opinion that rent
payable under the lease means the sum payable by the Tenant to the Landlord for
rent, inclusive of GST and irrespective of the fact that some of that payment
will create a GST liability upon the Landlord. In other words, even if the
Lease expressly distinguishes between the base rent and the amount
of GST payable (by using words such as ‘plus GST’) does not mean that the
contractual rent payable by the Tenant is limited to the base rent.
This is because the Tenant does not pay the GST. GST is paid by the Landlord.
Where words such ‘plus GST’ are used to describe the rent payable under a
lease, a tenant must pay the base rent plus ten per cent. The
aggregate of those amounts then constitutes the contractual rent payable under
the lease. Of that sum, the Landlord is liable to pay an amount equal to 10 per
cent of the base rent, by way of GST.
18. He went on to
analyse whether the definition of occupancy costs under s 4(3)
of the RLA excluded GST from the calculation of the rent payable under
the lease, and concluded (at paragraph 20) that the reference to the
word taxes, when read with paragraph (b)(ii) of the definition
of outgoings must also include GST.
19. He was
reinforced in holding that view by the fact that GST is expressly referred to
in s 47(6) of the RLA, which states, in part:
(6) However, the outgoings statement given
under subsection (3)(b) need not be accompanied by an auditor’s report if it –
(a) does not relate to any outgoings other
than –
(i) GST; and
...
20. In the Senior
Member’s view, the reference to GST as an outgoing in s 47(6) of the RLA
indicates Parliament’s intention to treat GST as a component of outgoings.
21. The relevant
regulation was amended in 2013. However, the Senior Member decided that the
amending regulation did not clarify what was the case prior to 2013. Rather, it
changed the meaning of r 6, as it existed prior to 2013. At that time, the
prescribed amount was simply stated as $1 million.
22. Senior Member Riegler was
not persuaded that the words of r 6, as they existed prior to 2013, indicated
an intention to assess occupancy costs exclusive of GST. He
noted that such an interpretation seemed to be at odds with the definition
of outgoings set out in s 3 of the RLA, which
includes taxes payable by the landlord.
Can premises cease to be Retail Premises
during the term of the lease?
23.
The more
noteworthy comments from the decision are those relating to late exit from the
RLA.
24. In that respect,
s 11(2) of the RLA states:
(2) Except as provided by Part 10 (Dispute
Resolution), this Act only applies to a lease of premises if the premises are
retail premises (as defined in section 4) at the time the lease is entered into
or renewed.
25. At paragraph 56,
Senior Member Riegler concluded:
Therefore, if leased premises do not fall within the definition of retail premises at the time that the parties entered into the lease (or its renewal), the premises cannot become retail premises later (for example if the occupancy costs reduced to under $1 million during the term of the lease). However, that does not prevent the reverse scenario. For example, if the occupancy costs were under $1 million at the time the parties entered into the lease, then the premises fall within the definition of retail premises. However, if the occupancy costs subsequently increased to over $1 million during the term of the lease, then the premises would no longer fall within the definition of retail premises.
26.
While the
opinion is not legally binding, it is likely to persuade other VCAT members
until it is confirmed or rejected by the Supreme Court in an appeal from VCAT.
27.
The effect
of this decision is that if one of the statutory exemptions to the application
of the RLA is triggered during the term of a 'retail' lease (such as the
occupancy costs), the lease could then 'exit' the RLA regime.
28.
Therefore,
all landlords and tenants should consider this decision during any negotiations
relating to the terms of the lease. This is particularly relevant in situations
where:
(a)
The occupancy
costs at the commencement of a lease fall just below the threshold of $1 million
(excluding GST) but will increase above the threshold during the term of the
lease as a result of rent reviews;
(b)
The lease
may be assigned from a retail tenant to an entity which is listed on a stock
exchange (or is a subsidiary of such an entity);
(c)
The
existing tenant itself may list on the stock exchange during its tenure, or be
bought by a corporation that is so listed; and
(d)
The permitted
use of the premises is changed during the term of the lease (by variation or
assignment) to a use which does not satisfy the definition of a 'retail
premises' (this may not be as relevant after the recent CB Cold Storage decision).
Potential
impact
29.
The
following issues are different for commercial leases that are not covered by
the RLA:
(a)
A
landlord is able to recover land tax from a tenant;
(b)
The rent
review provisions could include clauses such as the old ratchet provisions, a
provision which states that the rent shall not decrease during the tenant’s
tenure, or “the higher of …” types of rent review clauses (all of which are not
applicable under the RLA);
(c)
Disputes
can be heard in courts rather than VCAT;
(d)
The landlord
does not have the same onerous disclosure obligations in relation to outgoings
for further terms;
(e)
A tenant
and a guarantor are not released automatically upon the assignment of a lease; and
(f)
A
landlord could include difficult relocation, demolition and repair and maintenance
provisions into the lease.
Hayden Starke Chambers
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