25 September 2017 - General Commercial, Leasing, Legal Updates Cold Storage: Landlord of retail premises ‘left out in the cold’

Landlords and tenants are on high alert following the decision of the Victorian Court of Appeal in IMCC Group Pty Ltd v CB Cold Storage Pty Ltd (2017) (‘Cold Storage’). The Court has affirmed the earlier decision of the Supreme Court which found against the landlord and held that the Retail Leases Act 2003 (Vic) (‘Act’) did apply to a lease of warehouse premises.

Although these decisions have clarified the application of the Act, we are likely to see further “retail lease creep” in the Victorian property market as a result. In addition, leased industrial properties in Victoria may become subject to the retail premises legislation despite an ‘industrial’ zoning of the land.

The significance of a lease being a “retail premises” lease under the Act is the imposition of certain rights and obligations on the parties. Tenants, in particular, are afforded a number of protections (eg. they have the right to pre-lease disclosure by the landlord, and landlords are not permitted to pass on land tax). If a lease is wrongly classified by the parties, and it is in fact a retail premises, there can be significant consequences for both parties, especially landlords.

Litigation history

The tenant, CB Cold Storage Pty Ltd, entered into a lease for warehouse premises in an Industrial 2 zone. The lease permitted the tenant to use the premises to operate its business providing cold and cool storage refrigeration and logistics services. It had mostly business customers, but private individuals could also use its services. In 2016 the tenant commenced VCAT proceedings against the landlord to recover sums it had incurred over more than one 12 month period, including $115,000 in outgoings (for which an estimate was provided), and $58,000 comprising land tax, water and council rates (for which no estimate was provided). The tenant contended that the Act applied and that it was therefore entitled to recover all or some of these amounts.

VCAT decided that the warehouse premises were not “retail premises” and that the Act did not apply. The tenant appealed this decision and it was overturned by the Supreme Court. The Supreme Court applied the “ultimate consumer test” to determine whether the tenant was engaged in retailing its storage and logistics services from the premises. If it was, then the premises would be a retail premises, provided this use was permitted by the lease.

The Court was satisfied that this test was met because the tenant’s business customers purchased the services as the end user of the services. In contrast, for example, a wholesaler of goods is not the end user because it resupplies the goods. The tenant’s services qualified as retail and as the provision of these services was a permitted use under the lease, the Act was held to apply. The Court of Appeal upheld this decision on appeal by the landlord. The landlord is now seeking special leave to appeal the decision to the High Court.

Practical Implications

Cold Storage confirms the “creeping” application of the Act to a range of premises involving tenants selling (or hiring out) goods or services, that might not ordinarily be considered “retail premises”. This case indicates that leases in respect of industrial properties in Victoria may, somewhat surprisingly, attract the application of the retail lease legislation.

This decision means that a lease will be a “retail premises” lease (unless an exemption applies) where the tenant uses the premises, and is permitted to do so under the lease, for the purpose of selling (or hiring out) goods or services:

1. to individual consumers for personal use; and/or
2. to businesses (and other organisations), provided that those goods or services are supplied to the business as the ultimate consumer of those goods or services (and not merely to a business for the purpose of resale without alteration).

If the Act does apply, the landlord must adhere to a number of significant requirements, including:

1. pre-lease disclosure statement requirements, particularly relevant where an offer to lease document may not be binding due to non-compliance;
2. certain outgoings or charges are not recoverable from the tenant—eg. land tax, legal costs of lease negotiation and preparation;
3. the landlord is responsible for maintaining structural elements in their condition at the start of the lease (subject to exceptions);
4. rent review mechanism limitations, such as no ratchet clause on a market review and no multiple methods for determining rent;
5. minimum lease term (including options) of 5 years except in limited circumstances; and
   the landlord must give appropriate notice of the final date for exercise of an option for a further term, or of non-renewal.

Landlords should be aware of the potential for retrospective claims against them by tenants in instances where the lease should have been treated as a retail premises lease.

This development can apply to current leases in operation and new leasing transactions.

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