Commercial and Retail Leasing – When is a Premises a Retail Premises?

Michael McDonaldDirector, mdp Law

If you lease a premises to conduct your business, you should consider whether the Retail Leases Act (Vic) 2003 (the Act) applies to your lease. This is particularly important as parties cannot agree to exclude the operation of the Act, and in some cases, your lease may be silent on the issue or not reflect the true state of affairs.

Benefits of a retail lease

There are numerous benefits to tenants if the Act applies:

  • The Landlord cannot recover certain outgoings from the tenant, such as capital costs and land tax.
  • Before the landlord can recover any outgoings from the tenant, it must provide to the tenant a written and itemized estimate of the outgoings the tenant is liable to pay (this must be contained in the prescribed disclosure statement).
  • In certain circumstances, the tenant may withhold the payment of rent until the day the Landlord provides the tenant with a Disclosure Statement.
  • A lease that is under 5 years in duration will automatically have a term of 5 years, unless the landlord follows particular procedures set out in the Act.
  • The Act voids requirements for a tenant to indemnify the landlord in certain circumstances.

The Act imposes a number of obligations on Landlords, with negative consequences if some are not adhered to. For example:

  • Failure to provide a copy of the proposed lease at the commencement of lease negotiations and at least 7 days before a new retail premises lease is entered into, or the relevant information brochure, will each attract a fine (which could be over $7,000). Failure to do these things also gives the tenant a right to terminate the lease by notice in writing within a particular timeframe.
  • The landlord must provide the correct disclosure statement within a certain timeframe (this differs depending on the circumstance).
  • Essential safety measures must be maintained at the cost of the Landlord. If a tenant has been maintaining these at their cost, they can seek to recover that cost from you.
  • A penalty of $7,773 is payable where a landlord requires a tenant to pay key money.
  • The Landlord must maintain to a certain standard (which will differ in each circumstance) the structure of the premises, the fixtures of the premises, the plant and equipment of the premises, such as an a conditioning system, cooling tower and the like, and the appliances, fitting and fixtures which the landlord has provided under the lease relating to services such as gas, electricity and water, for example power boards, water pipes and hot water system.

Does the Act apply to my lease?

The Act defines retail premises as ‘premises…that under the terms of the lease relating to the premises are used or are to be used, wholly or predominantly for the sale or hire of goods by retail or the retail provision of services.’

The answer is simple where the tenant sells goods – it will be mostly the case, that the Act will apply. Parties can get caught out however, if the tenant is in a business which supplies services. Cases decided in the past few years have the effect that many leases where tenants provide services may be caught by the Act.

The relevant question to ask is whether the service the tenant provided from the premises was to the ultimate consumer, for fee or reward. Of the types of businesses caught under this test, there has been:

  • a patent attorney business;
  • legal professionals
  • medical professionals; and
  • a business that used the premises as conference rooms which were supplied to conference service providers – who in turn ran conferences from those rooms.

Even though some of these tenants rarely saw a member of the public, their activities still meant that the premises was deemed to be a ‘retail premises’. For instance, the patent attorney tenant ran its business mainly by phone. Additionally, the ‘ultimate consumer’ does not have to be a member of the public; businesses that provide services to another business as an input to an end service or product will also be a retail premise.

That said, exclusions in the Act narrow this very broad definition, as do certain Ministerial Determinations. For instance:

  • Premises where there is retail provision of services, which are on a level higher than the first three levels of a building (i.e. the ground floor, and levels one and two), are in most cases excluded from the definition of ‘retail premises’.
  • The premises of publicly listed bodies corporate and their subsidiaries will be, in many circumstances, deemed not to be retail premises.

While there are other exceptions, these two are the most common ones that would result in the exclusion of premises from the definition of ‘retail premises’ in circumstances where the tenant provides services.

We suggest that if you are a landlord or tenant and are concerned as to whether the Act applies to your lease, get in contact with us and we can assist you in this regard. If the Act does apply, we can also provide you with more information as to your rights and/or obligations imposed by the Act.