What is the ultimate consumer test and how does it affect whether a lease is a retail premises lease?

CB COLD STORAGE
1.     This case arose out of a lease (“the Lease”) of premises between CB Cold Storage P/L (the tenant) and IMCC Group (Australia) P/L (the landlord).
 
2.     The tenant conducted the business of a cold and cool storage warehouse from the premises which accorded with the permitted use under the lease. The tenant’s customers ranged from large primary production enterprises to very small owner operated businesses. 
 
3.     Clause 4(a)(i) and (ii) of the Lease provided as follows (emphasis added):
4. The lessee hereby covenants with the lessor that the lessee will:
(a) (i) not use or permit to be used the Demised Premises or any part thereof for any purpose other than as set out in item 11 of the reference schedule or for any residential purpose whether temporary or permanent or as retail premises (as defined in the Retail Tenancies Reform Act 1998) nor permit or suffer any storage space forming part of the Demised Premises to be used for any purpose other than storage.
(ii) use the Demised Premises solely for the purpose of conducting the business or businesses permitted under this Lease.
 
Item 11 of the schedule states next to the words “Use of Premises”:
“Cold and cool storage warehouse and transport facility”
 
4.     Despite the wording of that term, the tenant issued a proceeding in VCAT, seeking to recover various sums that it had paid to the Landlord on the ground that, because the Premises are, it asserted, retail premises, those moneys are not payable.
 
5.     The prohibition on the tenant operating the premises as “retail premises” was irrelevant because the landlord agreed that that the tenant’s actual use of the premises accorded with the permitted use; this meant that the only question was whether the premises should be characterised as “retail premises” under theRetail Leases Act 2003.
 
6.     The term “retail Premises” is defined in section 4 of the Retail Leases Act 2003. The relevant part of that section is subsection (1)(a), which is as follows:
(1) In this Act, Retail Premises means Premises, not including any area intended for use as a residence, that under the terms of the lease relating to the Premises are used, or are to be used, wholly or predominantly for—
(a) the sale or hire of goods by retail or the retail provision of services;
 
7.     There was no suggestion that the Premises were ever to be used under the terms of the Lease for the sale or hire of goods. The issue was whether, under the terms of the Lease, they were used or to be used wholly or predominantly for the retail provision of services.
 
8.     VCAT listed a preliminary question for hearing before the substantial proceeding itself, namely:
Are the subject Premises retail Premises under the Retail Leases Act           2003?
 
9.     Senior Member R Walker of VCAT dealt with this case at first instance (see CB Cold Storage Pty Ltd v IMCC Group (Australia) Pty Ltd [2016] VCAT 1866).
 
10.  In reaching his decision, the Senior Member had to determine who was the ultimate consumer, in order to determine whether the premises in question were retail premises.
 
11.  At paragraph 55 and following, the Senior Member noted:
55.  The phrase “...the retail provision of services...” is not defined in the Act and those words have no special meaning. The words bear their ordinary meaning as English words and the word “retail” in the section must be taken to bear the meaning that it is commonly understood to have.
56.  The word retail is defined in the Macquarie Dictionary as:
n. 1. the sale of commodities to household or ultimate consumers, usually in small quantities (opposed to wholesale), adj. 2. Pertaining to, connected with, or engaged on sale at retail
57.  In the concise Oxford dictionary it is defined as:
sale of goods in small quantities at a time and usually not for resale
58.  In the Collins Dictionary and Thesaurus it is defined as:
n. 1. The sale of goods individually or in small quantities to consumers.
59.  In applying the definition the courts and the tribunal have looked to various indicia of “retail”, such as “ultimate consumer” and “open to the public” and these have been found to provide a valuable guide. However no indicium can be substituted for the words of the Act. In each case it is a mixed question of fact and law whether the predominant use of the premises under the lease is such that the Act applies. The question must be answered afresh each time.
 
12.  After analysing the various cases on point, he concluded (at paragraphs 66 and following):
66.  I do not accept Mr Hay’ submission that, virtually any supply of services will fall within section 4. The definition is not simply the provision of services but rather, the retail provision of services. Parliament has limited the application of the definition by the addition of the word “retail” and that word must have some meaning.
67.  In applying the definition one must look carefully at the facts of the particular case and decide as a matter of mixed fact and law whether, under the lease, the predominant use of the premises is, or is to be, the retail provision of services. The starting point will be to examine the lease to see what the permitted use of the premises in question is. In Humphries & Cooke the permitted use was that of an aircraft hangar and the tribunal said that there was nothing at all in that use about the retail provision of goods or services to anyone. Similarly, in Sofos v. Coburn the use was wholesale and export fish supply and Nathan J said that there was nothing in that use relating to the retail provision of goods or services.
68.  In the present case the use is that of cold and cool storage warehouse and transport facility, involving the receipt, storage and trans-shipment of goods for producers, manufacturers, distributors, importers and exporters. The customers to which the Tenant provides these services range from large primary production enterprises to very small owner operated businesses. Mr Clarke submitted that there was nothing about the provision of these services that would give it a retail character and I think that is right. That is not the ordinary meaning of “retail”. The Tenant’s services to those customers cannot sensibly be regarded as being a retail supply of services. Indeed, such an interpretation would give the word “retail” in the section no meeting at all.
69.  I therefore find that the Premises are not retail premises under the Act.
 
Supreme Court appeal - CB Cold Storage Pty Ltd v IMCC Group (Australia) Pty Ltd [2017] VSC 23
13.  Being unhappy with the Tribunal’s determination, the tenant appealed to the Supreme Court of Victoria on a question of law (pursuant to section 148 of the VCAT Act) early in 2017.
 
14.  Croft J heard the appeal in the Supreme Court of Victoria. He held that the Tribunal made two errors of law.
 
15.  The first was contained in the following passage from the Tribunal’s reasons:
In all of these cases the goods or services are rendered to persons variously described as members of the public or the ultimate consumer. The term “consumer” ... in the sense in which it has been used in the cases I think... means the person who uses the goods or services to satisfy his own personal needs rather than for some business or other purpose. The other characteristic is that the supply in each instance is usually in small quantities for use or consumption by the person to whom they are directly supplied.
 
16.  Croft J conducted his own analysis of the authorities, and decided that they did not support the Tribunal’s conclusion that a person who uses a service for a business or a purpose other than for personal needs cannot be a ‘consumer.’
 
17.  The Honourable Justice Croft observed that the proper approach was to precisely identify and characterize the ‘service’ that is being provided at the premises. He stated at paragraph 31:
… I am of the opinion that the Tribunal erred in holding that customers that used a tenant’s service for a business purpose are not ultimate consumers of the service. The service was, in conformity with the permitted use provisions of the Lease, to which reference has been made, provided to those persons—whether corporations or individuals—at the Premises and in terms of that particular service “ultimately consumed” by those persons as and when the goods stored at the Premises were removed. In my view, the Defendant’s submissions that these circumstances did not involve “consumption” of the services provided by the Plaintiff at the Premises should not be accepted; both on the basis of the authorities already considered and the clear analogy in this context in the use of the word “consumption”, with “use” or other synonyms which might be thought appropriate with respect to the provision of services. Moreover, as the services were “consumed” at the Premises, there was nothing for the recipients of these services to “resupply”.
 
18.  Croft J then addressed the argument that on his analysis, the word ‘retail’ with respect to ‘services’ had little work to do. He reasoned (at paragraphs 32 to 33):
Finally, it should be observed that it does not follow that this analysis, on the basis of the provisions of the Act and the authorities, is at odds with general principles of statutory interpretation because it may leave the word “retail” with respect to “services” in s 4(1) of the Act with little work—or little active work—to do. That it may be difficult to contemplate circumstances where the provision of services would be other than “retail” is no basis for an interpretation of these provisions of the Act at odds with the considerations discussed in these reasons and in the authorities which, in my view, indicate strongly the applicability of the “ultimate consumer” test with respect to the provision of “services”; where the nature of such services is precisely analysed. Additionally, this is consistent with the principles of statutory interpretation that words used in legislation are presumed to be used consistently. Though this presumption is rebuttable, there seems little doubt that the word “retail” as used in s 4(1) of the Act is intended to bear the same meaning with respect to both goods and services.
 
Concluding this discussion reference should be made to submissions on the part of the Defendant which would apply a different approach to the interpretation of the word “retail” with respect to services in s 4(1) of the Act on the basis, broadly speaking, that this would give the word “retail” a meaning—work to do—with respect to the provision of “services”. The approach advanced would consider how the premises were used by “invitees”—the tenant’s customers or service users—and on this basis, it appears, characterise the services as “retail” or not depending on whether the “invitee” was a wholesaler or, put another way, whether the services are “domestic or are they business”. It follows the Defendant submits, that the “ultimate consumer” test has no application to services. The problem with these submissions and this advocating a different approach to the meaning of the word “retail” with respect to services is that there is no basis for it in the language of s 4(1) of the Act. Rather, the language of these provisions requires, in my view, a consistent approach with respect to the meaning of “retail” as applied to both goods and services; a position which is also consistent with the general presumption that words in a statute are used consistently. This different approach is also inconsistent with both authorities, a number of which have been considered in detail, and also the language of these provisions of the Act. For these reasons I reject these submissions and, in particular, reaffirm the “ultimate consumer” test with respect to both goods and services.
 
19.  The second error of law identified by Justice Croft was that the Tribunal had failed to hold that the Tenant’s customers were the ‘ultimate consumers’ of the service it provided. He noted (at paragraph 36):
If the Tribunal had correctly found that the Plaintiff’s customers were the ultimate consumers of the Plaintiff’s service, it would also have found that the Premises were “retail premises” within the meaning of the Act because:
(a) the Tribunal was satisfied of all other matters necessary to support a conclusion that the Premises were “retail premises”; and
(b) the Tribunal made no other findings that could support a conclusion that the Premises were not “retail premises”.
 
20.  Justice Croft allowed the appeal and ordered that the preliminary issue ‘Are the subject premises retail premises under the Retail Leases Act 2003?’ be determined ‘Yes’.
 
The Court of Appeal
21.  This time, the landlord was unhappy, and as a result, it appealed from the decision of Croft J to the Court of Appeal. Their decision is to be found at (IMCC Group (Australia) Pty Ltd v CB Cold Storage P/L [2017] VSAC 178. Warren CJ, Ferguson and Kaye JJA upheld Croft J’s decision.
 
22.  In summary the Court of Appeal found (at paragraphs 3 to 5):
3. … In summary, the phrase ‘retail provision of services’ has long been interpreted by reference (at least in part) to an ultimate consumer test; that is, are the services used by the person to whom they are sold or are the services passed on by the purchaser in an unaltered state to some third person? No distinction has been drawn between commercial and non-commercial users of the service. The Court should be slow to depart from the interpretation of the phrase given to it by the Court over many years. It would only be appropriate to do so if the interpretation was clearly wrong; but that is not the case. Moreover, the legislature has made amendments to the legislation, but has not made any change to the phrase ‘retail provision of services.’ Consequently, and while not conclusive, the Court may presume that the legislature adopted the interpretation consistently given to the phrase by the Court in the past.
4 Other relevant considerations that inform whether the service is ‘retail’ in nature include the type of service that is provided and whether it is generally available to any person for a fee.
5 Here, there is nothing in the nature of the services provided that would exclude them from being considered retail services. The services were used by the Tenant’s customers who paid a fee. Any person may purchase the services if the fee is paid. The Tenant’s customers do not pass on the services to anyone else. They are the ultimate consumers of the Tenant’s services.
 
23.  In paragraph 17, the Court quoted Nathan J in Wellington v Norwich Union Life Insurance Society Ltd [1991] 1 VR 333 (at page  336):
The essential feature of retailing, is to my mind, the provision of an item or service to the ultimate consumer for fee or reward. The end user may be a member of the public, but not necessarily so.
 
24.  The Court noted (at paragraphs 23 to 27):
23 What can be seen from the authorities is that the concept of the ‘retail provision of services’ in the Retail Leases Act and its predecessor legislation is that it involves close consideration of the service that is offered, whether a fee is paid, whether it is a service that is generally available to anyone who is willing to pay the fee and whether the persons who use the service are the ‘ultimate consumer’. On one view, to talk of an ultimate consumer of services may appear strained. Most services that are purchased are not susceptible to being passed on to a third person. This may be contrasted with a sale of goods where the difference between wholesale and retail is easily discernible. Nevertheless, the authorities that apply an ultimate consumer test as one indicia of the retail provision of services, are of long standing.
24 The phrase ‘retail provision of services’ has remained constant in the legislation. It appeared in the Retail Tenancies Act 1986. It was retained when that legislation was repealed and replaced by the Retail Tenancies Reform Act 1998. It appears in the current legislation. Re-enactment of a legislative provision in the same terms after it has been the subject of judicial consideration may not indicate that Parliament intended the provision to have the meaning ascribed to it by a court. But here, when enacting the Retail Leases Act (which replaced the Retail Tenancies Reform Act) the Parliament altered the definition of ‘retail premises’ to remove the restriction that once applied to exclude premises where the floor size exceeded 1000m² but it did not remove or alter the phrase ‘retail provision of services’. Taking that into account and given the pivotal role that the term ‘retail premises’ plays in the legislation and the attention that its definition (which incorporates the phrase ‘retail provision of services’) has attracted over many years, the legislature may be taken to have adopted its judicially settled meaning. 
25 This conclusion is more easily reached when account is taken of the fact that the legislature has made amendments to the definition of ‘retail premises’ in the current legislation (Retail Leases Act), but again has not made any change to the phrase ‘retail provision of services’ which appears in the definition. In this regard, the definition of ‘retail premises’ was amended in 2005 to include the words ‘not including any area intended for use as a residence.’ But the definition was not amended to alter the phrase ‘retail provision of services.’ Moreover, the 2005 amendments also gave the Minister power to determine that certain kinds of premises be excluded as retail premises. The Minister has subsequently made a number of such determinations including in respect of premises leased by a barrister from Barristers’ Chambers Limited. The Minister has not made any determination that would exclude from the definition of retail premises the kind of premises that are the subject of this case.
26 Finally, for many years, tenants and landlords have been able to proceed on the assumption that whether premises are retail premises will be affected by whether the ultimate consumer test is satisfied.
27 In the circumstances, the Court should exercise caution before discarding the interpretation that has been applied for so many years. A change in interpretation may be warranted if the earlier meaning given to the section were clearly wrong. But we are not persuaded that it is. Consequently, and while not conclusive, we would approach the task by presuming that the legislature adopted the interpretation consistently given to the phrase by the Court in the past.
 
25.  The Court of Appeal noted that in all cases it is necessary to consider whether the premises are “open to the public”  – that is there are no restrictions on access to the service and who can use it.
 
26.  The characteristics of the user – that is whether the use is an individual or a business is not relevant.
 
27.  At paragraph [50] the Court of Appeal said:
In summary, the services were used by the Tenant’s customers who paid a fee. Any person could purchase the services if the fee was paid. The Tenant’s business was open during normal business hours. The Tenant’s customers have not passed on the services to anyone else. They were the ultimate consumers of the Tenant’s services. In isolation, none of these features would suffice to constitute the premises as retail premises. Conversely, the absence of one or more of them, would not necessarily result in a finding that the premises were not retail premises. However, in the circumstances of this case, when all of those features are taken together, the conclusion must be that the premises are retail premises.
 
28.  As a result, the premises were held to be subject to the provisions of the Retail Leases Act 2003.
 
29.  The High Court of Australia refused the landlord’s application for special leave to appeal.
 
Conclusion
30.  The main points to draw from the decision are:
(a)  The test to determine whether the sale of goods or supply of services is retail for the purposes of the Retail Leases Act 2003 remains the ‘ultimate consumer’ test (discussed in the decision of Nathan J in Wellington Union Life Insurance Society Limited [1991] 1 VR 333);
(b)  The Retail Leases Act 2003 can apply to premises from which goods or services are supplied business-to-business, provided that those goods or services are supplied to the ultimate consumer of those services.
(c)   Unless another statutory exclusion applies, warehousing and logistics businesses are likely to be treated as retail premises;
(d)  The reach of the ‘ultimate consumer’ test is very broad; and
(e)  The ‘ultimate consumer’ test applies also to the supply of goods business-to-business, provided that the goods are used as an input into the second business, rather than re-supplied.
 
31.  There are likely to be a significant number of leases in the community that are regulated by the Retail Leases Act 2003despite the parties belief that they are not.
 
32.  The most significant effect of the application of the Retail Leases Act 2003 is likely to be the prohibition on the recovery of land tax as an outgoing in a retail premises lease under s 50 of the Retail Leases Act 2003. No doubt, practitioners will recall VCAT authority that suggests that a tenant of retail premises is entitled to recover from its landlord land tax mistakenly paid as an outgoing (see Richmond Football Club Limited v Verraty Pty Ltd (Retail Tenancies) [2011] VCAT 2104 – but only for the six year statute of limitations period).
 
33.  Another significant factor will be the repair provisions (and the ability to pass on those costs) in sections 41 and 52 of the Retail Leases Act 2003. In a commercial lease, a tenant is likely to be responsible for repairs to the leased premises, even if they are capital in nature. However, in a retail premises lease, a landlord can have a significant liability for repairs, to bring premises up to standard, under section 52, and cannot pass on the cost of those repairs if they are capital in nature (under section 49).
 
34.  Practitioners acting for tenants should consider reviewing their client’s non-retail leases to determine whether:
(a)  Their leases are in fact leases of retail premises under the ‘ultimate consumer’ test; and
(b)  Land tax or other outgoings, and capital repair costs mistakenly paid may be recoverable from the landlord.
 
35.  Practitioners acting for landlords should be aware of the breadth of the ‘ultimate consumer’ test and advise their clients accordingly when preparing their leases.
 
36.  If there is doubt about the status of a lease, it is prudent to treat the lease as a lease of retail premises to avoid the risk of losses to the landlord down the track.
 

WG Stark 
Hayden Starke Chambers

The original post can be found on Bill's BLOG here - http://melbournepropertylaw.blogspot.com.au/2018/03/what-is-ultimate-consumer-test-and-how.html?utm_source=feedburner&utm_medium=email&utm_campaign=Feed:+MelbournePropertyLawBlog+(Melbourne+Property+Law+Blog)

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