Another win for the Richmond Football Club – The Victorian Supreme Court of Appeal upholds consistency for retail premises leases during the term

In Verraty Pty Ltd v Richmond Football Club Ltd [2020] VSCA 267, the Victorian Supreme Court of Appeal confirms that a retail premises lease cannot ‘jump out’ of application of retail legislation during the term. Whether or not the position can change on renewal remains uncertain.

The Initial Decision

The case finds its origins in the 2019 decision of Verraty Pty Ltd v Richmond Football Club Ltd [2019] VCAT 1073 where VCAT determined that a retail premises lease that was subject to the Retail Leases Act 2003 (Vic) (Act) at the time the lease was entered into could cease to be subject to the Act at a later point in time during the term.

As you are no doubt aware, the Act will not apply to a retail premises lease where the occupancy costs payable by the tenant under that lease exceed $1 million excluding GST.

In this case, the parties entered into a retail premises lease which included a provision entitling the landlord to recover land tax from the tenant. The provision was deemed to be void because the Act applied to the lease on commencement (the Act prohibits landlords from recovering land tax from tenants).

However, during the term the occupancy costs payable by the tenant under the lease increased to the point where they exceeded the threshold limit of $1 million excluding GST. The landlord subsequently claimed land tax from the tenant, arguing the relevant lease provision was no longer void because the Act ceased to apply to the lease from the point in time that occupancy costs exceeded the relevant threshold.

The landlord succeeded in its argument and VCAT ordered the tenant to pay the outstanding land tax, on the basis that:

• the lease no longer met the definition for a retail premises lease, therefore the Act no longer applied from that point in time; and
• any lease provisions deemed to be void because they were inconsistent with the Act were no longer void.

The decision carried with it significant consequences for recovery of outgoings and the parties’ repair and maintenance obligations and gave rise to uncertainty where terms could vary significantly if the lease could exit, or ‘jump out’ of the Act mid-term.

On Appeal – Supreme Court

On appeal to the Supreme Court the decision was overturned.

The Supreme Court held that if the Act applied to a lease on commencement it would continue to apply for the duration of the term, irrespective of whether a change in circumstances meant the lease ceased to meet the definition of a retail premises lease.

It placed emphasis on the “fluctuating uncertainty” created by the initial decision and remarked that the uncertain outcome was “completely at odds with a main purpose of certainty and fairness of retail leasing arrangements”.

The Supreme Court acknowledged the uncertainty of this decision with respect of renewals. Despite that the question was not directly before the Court, it suggested that whether the lease could jump out of application of the Act on renewal would depend upon the provisions of the lease that governed the renewal term.

On Appeal – Court of Appeal

Unsurprisingly, the landlord appealed to the Victorian Supreme Court of Appeal, where the Supreme Court’s decision to overturn the initial decision was upheld. The categorisation of a lease as a retail premises lease to which the Act applies cannot change from the position on commencement – if the Act applies on commencement, a change in circumstances (for example assignment to an ASX listed entity or the increase in occupancy costs exceeding $1 million excluding GST) during the term will not alter that position.

The Court of Appeal did not address the uncertainty with respect to reclassifying a lease as a retail premises lease to which the Act applies on renewal but further commentary suggested there should be no reason why clauses that were deemed void solely by application of the Act could not continue to operate once the Act no longer applies (i.e. such clauses would only be void in particular circumstances, so when those circumstances no longer exist, there would be no reason for the clauses to continue to be void).

If you have any queries, get in touch with our team of commercial and retail leasing specialists.

Authored by:

Alexandra Walker, Special Counsel