Commercial tenants: Are you paying unnecessary costs?

Until recently, industrial tenants have entered into leases that are not governed by the Retail Leases Act 2003 (Act).

Until recently, industrial tenants have entered into leases that are not governed by the Retail Leases Act 2003 (Act). Industrial tenants would occupy industrial premises for purposes of storage, transport facilities or warehousing and it is in the strong interest of the landlord that the lease falls outside the Act. It’s worth knowing about the Ultimate Consumer Test, because this is one of the key indicators when considering whether services offered are retail in nature, and the benefits of having a retail lease in place.

Ultimate Consumer Test

Following the recent and what many might consider a surprising Court of Appeal decision in CB Cold Storage Pty Ltd v IMCC Group (Australia) Pty Ltd [2017] VSC 23 (CB Cold Storage), both landlords and tenants should be aware of the ramifications of the case when deciding if an industrial tenant should sign a lease governed by the Act. In determining this, CB Cold Storage applied the “Ultimate Consumer Test”, as follows, in addition to examining the permitted use of the premises:

1. What is the service being offered?

2. Is there a fee payable?

3. Is the service available to anyone willing to pay the fee?

4. Is the tenant’s business open during normal hours?

5. Are the persons who use the services the ultimate consumer, rather than the service being passed onto a third person in the chain who is the ultimate consumer?

In CB Cold Storage, the Court of Appeal held that the purchasers of the cold storage services were buying and using the services at the premises, and were not instead resupplying them to third persons. Although the tenant’s office did not have any point of sale advertising, the tenant’s cold storage services were available to generally anyone willing to pay the fee. As the purchasers were the ultimate consumers of the services, the Court of Appeal held the premises in that case were deemed “retail” for the purposes of the “Ultimate Consumer Test”.

Benefits of the Retail Leases Act 2003

There are a number of significant consequences that flow from CB Cold Storage, as a retail tenant is afforded the following protections from the Act (not an exhaustive list):

1. The tenant is not required to pay land tax;

2. The landlord must provide a disclosure statement to the tenant at the outset which clearly identifies amounts of outgoings to be paid by the tenant, as well as other critical information, including whether there are options for further terms, occupancy costs for leasing the premises, tenant’s fit-out requirements or if there are any relocation or demolition clauses;

3. The Act will override any “ratchet” clauses that prevent rent from decreasing following a rental review;

4. The landlord cannot pass on costs in relation to essential safety measures of the premises;

5. The Act will override restrictive assignment provisions;

6. The landlord cannot pass on legal costs for preparation of the lease at the outset to the tenant;

7. The landlord is responsible for complying with certain general and maintenance obligations and cannot pass on such costs for compliance; and

8. The landlord is required to maintain the structure, plant and equipment and the landlord’s fixtures in a condition consistent with the condition of the premises when the lease was entered into.

For Tenants

If you are an industrial tenant, it is vital that you ascertain whether your premises are retail in nature (despite the lease stating otherwise) as you may be eligible for the protections afforded by the Act.

If your lease is non-retail in nature and the Act applies, you may be entitled to reimbursement of any sums mistakenly paid to the landlord, including any outgoings which the landlord was not entitled to pass on, including, significantly, land tax.

For more information on leasing and purchasing commercial property, contact DE today for a full and frank discussion.

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