William Buck (Vic) Pty Ltd v Motta Holdings Pty Ltd  VCAT 15
1. This VCAT case (decided by Senior Member Riegler) is important because the Tribunal held a lease could cease to be a “retail premises lease” during its term.
2. The decision has the potential of narrowing the application of the Retail Leases Act 2003 (Vic) serving as some good news for retail landlords.
Does GST form a part of the occupancy costs?
3. The first issue that Senior Member Riegler had to decide was whether GST should be taken into account when calculating occupancy costs for leases entered into before 22 April 2013. He decided yes.
4. However, that part of the decision is of limited application due to Retail Leases Regulations 2003 which state that any lease which is to commence from 22 April 2013 is to exclude GST from total occupancy costs.
5. On 19 December 2006, the Tenant originally entered into a written lease in respect of premises located in Hawthorn East. It continued to occupy a part of those premises. The original Lease provided for an initial term of eight years with two further terms of six years each. The parties renegotiated the Tenant’s tenure upon the expiration of the first term. A new lease was entered into, under which the Tenant occupied less floor area than what was originally leased (and with less rent payable). The parties agreed that the Retail Leases Act 2003 (‘the RLA’) governed the current lease.
6. However, what was in dispute was whether the original Lease was also governed by the RLA.
7. Under the terms of the original Lease, the Tenant was required to pay land tax. According to the Tenant, it paid $251,234.68 to the Landlord as reimbursement of land tax up until 31 December 2014. However, if the RLA applied to the original Lease, then the clause requiring the Tenant to reimburse the Landlord for land tax is deemed to be void ab initio, pursuant to s 50 of the RLA.
8. The Tenant claimed that the original Lease was governed by the RLA and as a consequence the payment of land tax was paid under mistake of fact or law and it was entitled to be repaid.
9. Whether the original Lease fell within the provisions of the RLA depends on the amount of occupancy costs payable under that Lease. Occupancy costs are defined under s 4(3) of the RLA as:
(a) the rent payable under the lease, and
(b) the outgoings, as estimated by the landlord, and
(c) any other costs of prescribed kind
10. If the occupancy costs were more than $1 million, then under s 4(2)(a) of the RLA and r 6 of the Retail Leases Regulations 2003 the leased premises fall outside of the definition of retail premises and the RLA does not apply.
11. The starting rent under the original Lease was $802,795, plus GST. Prior to the commencement of the Lease, and pursuant to s 46 of the RLA, the Landlord gave the Tenant an estimate of the outgoings for the first year of the lease term. That document stated that the estimated outgoings in the first year of the first term of the Lease was $150,209 (‘the Estimate of Outgoings’).
12. Whether this amount is inclusive or exclusive of GST, this document formed the basis upon which occupancy costs were to be calculated, as at the commencement of the Lease.
13. According to the Tenant, if GST is not counted for the purpose of assessing occupancy costs, then the occupancy costs amount to $953,004 and the RLA applies. That would mean that the clause in the Lease requiring reimbursement of land tax is void ab initio.
14. According to the Landlord, if GST is added to the starting rent and Estimate of Outgoings, then the occupancy costs amount to $1,048,304.40 and the RLA does not apply. That would mean that there is no prohibition against requiring the Tenant to reimburse the Landlord for land tax.
15. Senior Member Riegler found that the aggregate occupancy costs at the time when the original Lease was entered into exceeded $1 million and consequently, the RLA did not apply to the original Lease.
16. He noted (in paragraph 15):
… Where the rent payable under a lease is expressed as a base figure plus GST, it is the aggregate amount that constitutes the consideration for the taxable supply. In other words, expressing the rent as ‘$802,795 (plus GST)’ or simply as $883,074.50 constitutes the same consideration paid by the Tenant (by way of rent) for the taxable supply.
17. He concluded (at paragraph 16):
Therefore, I am of the opinion that rent payable under the lease means the sum payable by the Tenant to the Landlord for rent, inclusive of GST and irrespective of the fact that some of that payment will create a GST liability upon the Landlord. In other words, even if the Lease expressly distinguishes between the base rent and the amount of GST payable (by using words such as ‘plus GST’) does not mean that the contractual rent payable by the Tenant is limited to the base rent. This is because the Tenant does not pay the GST. GST is paid by the Landlord. Where words such ‘plus GST’ are used to describe the rent payable under a lease, a tenant must pay the base rent plus ten per cent. The aggregate of those amounts then constitutes the contractual rent payable under the lease. Of that sum, the Landlord is liable to pay an amount equal to 10 per cent of the base rent, by way of GST.
18. He went on to analyse whether the definition of occupancy costs under s 4(3) of the RLA excluded GST from the calculation of the rent payable under the lease, and concluded (at paragraph 20) that the reference to the word taxes, when read with paragraph (b)(ii) of the definition of outgoings must also include GST.
19. He was reinforced in holding that view by the fact that GST is expressly referred to in s 47(6) of the RLA, which states, in part:
(6) However, the outgoings statement given under subsection (3)(b) need not be accompanied by an auditor’s report if it –
(a) does not relate to any outgoings other than –
(i) GST; and
20. In the Senior Member’s view, the reference to GST as an outgoing in s 47(6) of the RLA indicates Parliament’s intention to treat GST as a component of outgoings.
21. The relevant regulation was amended in 2013. However, the Senior Member decided that the amending regulation did not clarify what was the case prior to 2013. Rather, it changed the meaning of r 6, as it existed prior to 2013. At that time, the prescribed amount was simply stated as $1 million.
22. Senior Member Riegler was not persuaded that the words of r 6, as they existed prior to 2013, indicated an intention to assess occupancy costs exclusive of GST. He noted that such an interpretation seemed to be at odds with the definition of outgoings set out in s 3 of the RLA, which includes taxes payable by the landlord.
Can premises cease to be Retail Premises during the term of the lease?
23. The more noteworthy comments from the decision are those relating to late exit from the RLA.
24. In that respect, s 11(2) of the RLA states:
(2) Except as provided by Part 10 (Dispute Resolution), this Act only applies to a lease of premises if the premises are retail premises (as defined in section 4) at the time the lease is entered into or renewed.
25. At paragraph 56, Senior Member Riegler concluded:
Therefore, if leased premises do not fall within the definition of retail premises at the time that the parties entered into the lease (or its renewal), the premises cannot become retail premises later (for example if the occupancy costs reduced to under $1 million during the term of the lease). However, that does not prevent the reverse scenario. For example, if the occupancy costs were under $1 million at the time the parties entered into the lease, then the premises fall within the definition of retail premises. However, if the occupancy costs subsequently increased to over $1 million during the term of the lease, then the premises would no longer fall within the definition of retail premises.
26. While the opinion is not legally binding, it is likely to persuade other VCAT members until it is confirmed or rejected by the Supreme Court in an appeal from VCAT.
27. The effect of this decision is that if one of the statutory exemptions to the application of the RLA is triggered during the term of a 'retail' lease (such as the occupancy costs), the lease could then 'exit' the RLA regime.
28. Therefore, all landlords and tenants should consider this decision during any negotiations relating to the terms of the lease. This is particularly relevant in situations where:
(a) The occupancy costs at the commencement of a lease fall just below the threshold of $1 million (excluding GST) but will increase above the threshold during the term of the lease as a result of rent reviews;
(b) The lease may be assigned from a retail tenant to an entity which is listed on a stock exchange (or is a subsidiary of such an entity);
(c) The existing tenant itself may list on the stock exchange during its tenure, or be bought by a corporation that is so listed; and
(d) The permitted use of the premises is changed during the term of the lease (by variation or assignment) to a use which does not satisfy the definition of a 'retail premises' (this may not be as relevant after the recent CB Cold Storage decision).
29. The following issues are different for commercial leases that are not covered by the RLA:
(a) A landlord is able to recover land tax from a tenant;
(b) The rent review provisions could include clauses such as the old ratchet provisions, a provision which states that the rent shall not decrease during the tenant’s tenure, or “the higher of …” types of rent review clauses (all of which are not applicable under the RLA);
(c) Disputes can be heard in courts rather than VCAT;
(d) The landlord does not have the same onerous disclosure obligations in relation to outgoings for further terms;
(e) A tenant and a guarantor are not released automatically upon the assignment of a lease; and
(f) A landlord could include difficult relocation, demolition and repair and maintenance provisions into the lease.