Best Practice
VCAT opinion blow to owners Advisory outcome an unwelcome surprise for landlords and likely to carry weight in negotiations. By REIV Corporate Solicitor Peter Lowenstern In May, VCAT delivered an advisory opinion which may impact on many retail and commercial property landlords.
T
he outcome of the Victorian Small Business Commissioner’s application to VCAT for an advisory opinion about outgoings recoveries in retail and commercial lettings comes as an unwelcome surprise to property owners. In a nutshell, VCAT has said: Essential safety measures (ESM) ❚ If a landlord must attend to a measure, he has to do so and pay for it; however ❚ if a landlord simply has to ensure a measure is attended to, but does not have to do so himself, he and his tenant can agree the tenant will attend to it. The landlord must still pay for it; and ❚ if a landlord has to attend to a measure, whether personally or not, and does not do so and the tenant attends to it and pays, a landlord obligation expense can be deducted. ❚ If the lease is for premises covered by the Retail Leases Act (RLA) – a landlord cannot require a tenant to provide, or maintain, an ESM if it is: part of the structure or a fixture; plant or equipment at the premises; an appliance, fitting or fixture provided under the lease by the landlord relating to gas, electricity, water, drainage or other services. But if an ESM has to be repaired because the tenant has misused it, the landlord may recoup the expense. If a lease obliges, or allows, a tenant to remove an ESM when the term ends, the landlord does not have the responsibility of maintaining it in the condition it was in, when the lease was entered into. ❚ If the lease is for premises covered by the RLA – providing or replacing an ESM is a capital expense. It cannot be offcharged to a tenant. ❚ If an ESM expense is a recoverable
34
The Estate Agent ❘ June 2015
‘It is well-reasoned and is very likely to be persuasive and set the scene for commercial letting negotiations in the future’ outgoing permitted by the RLA – the outgoings provision of the lease must conform to section 39 and the requirements of the Retail Leases Regulations (RLR) must be met, if the expense is to be recouped. ❚ Section 251 of the Building Act takes precedence over section 39 of the RLA. RLA section 51: what does “other expenses” mean? ❚ It means expenses arising in the course of providing the legal services mentioned in the section.
RLA section 52: landlord’s ability to recoup maintenance & repairs expenses ❚ They can be recouped if – section 251 of the Building Act does not apply and the Building Regulations oblige a landlord to pay the expense; the expenses are for things other than those for maintaining – – the structure of, and fixtures in, the premises; and – plant and equipment at the premises; and – appliances, fittings and fixtures provided under the lease by the landlord relating to gas, electricity, water, drainage or other services i n a condition consistent with the condition of the premises when the lease was entered into. n ot a capital expense; t he outgoings recovery clause in the lease complies with the RLA; and t he RLR requirements are met. The ramifications of the limitation of the recovery of outgoings expenses for building maintenance obligations are yet to be fully appreciated. What is the effect of the opinion? It is purely advisory and is not binding on property owners. Nor is it binding in other courts, in particular the Victorian Supreme Court. Nevertheless, it is well-reasoned and is very likely to be persuasive and set the scene for commercial letting negotiations in the future. What lies ahead? As the practical impact of the opinion on the day-to-day business of letting and managing premises controlled by the RLA become evident, the need for a thorough revision of the outgoings recoveries provisions of the legislation is likely to be required.