When does the Retail Leases Act Apply?

Many business owners sign what they think is a standard commercial lease, only to later discover that the Retail Leases Act 2003 (VIC) (RLA) applies. This discovery often occurs in the middle of a dispute, and can have a major impact on the rights and obligations of both landlords and tenants. This is why, understanding whether your lease is legally considered as a retail lease becomes crucial.

Misclassifying a lease can:

• expose parties to regulatory non-compliance;
• invalidate rent review processes;
• prevent recovery of land tax and certain outgoings;
• alter maintenance & repair responsibilities; and;
• change dispute resolution forums and procedural pathways.

A common misconception is that the application of the RLA can be contracted out or determined by election or agreement. No, the RLA applies by force of statute and whether a lease is 'retail' depends on the statutory definition and the factual use of the premises, not the title or label on the document.

This article covers when the RLA applies, key exemptions, and the practice implications for landlords and tenants at the entry, renewal and dispute stages. It also a reminder of why consulting a property lawyer early can help avoid costly mistakes.

Overview of the Retail Leases Act 2003 (RLA)

What Is the Retail Leases Act 2003?

The RLA regulates leases of 'retail premises' in Victoria. The main purpose of this Act is to promote fairness and transparency in retail leasing relationships, and to provide a standardised and structured framework for resolving disputes and regulate risk.

It governs matters such as:

• Mandatory pre-lease disclosure and information requirements
• Rules governing rent review mechanisms and prohibitions on certain ratchet clauses
• Statutory restrictions on recovering certain outgoings (including land tax in many cases)
• Maintenance and repair allocation
• Dispute resolution through the Victorian Small Business Commission (VSBC)

If the RLA applies, it materially alters the commercial risk profile of the lease between the landlord and the tenant.

Definition of retail premises

Under Section 4(1) of the RLA, premises are considered 'retail premises' if they are used or are to be used, wholly or predominantly for:

• the sale or hire of goods by retail; or
• the retail provision of services.

A lease will generally be considered a retail lease where the permitted use and actual use of the premises involve supplying goods or services directly to end users.

Courts and VCAT often examine substance over drafting and labels, and consider (among other things):

• whether goods or services are supplied to the ultimate consumer;
• whether the service and / or premises is available to members of the public; and
• the nature of the business conducted and whether the premises are customer-facing or primarily storage / production based.
• In IMCC Group (Australia) Pty Ltd v CB Cold Storage Pty Ltd (2017) VSCA 178, the Court of Appeal held that premises used for industrial, warehouse, business-to-business (in short, any storage business) purposes could fall within the RLA depending on the nature of services provided. Although most customers were businesses, they were the ultimate consumer of the storage service. This demonstrated that location and zoning alone are not determinative whether a lease is a retail lease.

The practical takeaway is that industrial appearance, business-to-business services or 'commercial' drafting would not reliably prevent the RLA from applying if, in substance, the use is retail.

Amendments to Retail Leasing: Retail Leases Amendment Act 2020

The 2020 amendments to the RLA have clarified aspects of the RLA, reinforcing disclosure requirements and refining certain obligations relating to landlords and tenants. This means lease and disclosure templates prepared prior to those amendments require updating as they remain a recurring source of dispute. However, the core definition of 'retail premises' was not altered.

Exemptions

Not all leases fall within the ambit of RLA. Common exclusions include:

1. Short-term leases: less than one year that are not ongoing continuous or renewed in a manner which brings it within the RLA.
2. Leases exempted by ministerial determination.
3. Leases of certain storey space.
4. Other specifically exempt leases under the legislation.

Whether an exemption applies depends on the specific facts and lease structure. A lease starts as a retail premises lease cannot cease to be one during its term, however, its status may need to be reassessed upon renewal.

The effect of 'contracting out' acknowledgements in Leases

It is common to see clauses where the tenant 'acknowledges' that the RLA does not apply. However, section 94 of the RLA general prevents parties from contracting out the RLA, as seen applied in Access Solutions International Pty Ltd v Gamet Pty Ltd [2017] VCC 1563, where such clause carried little weight once the factual use met the statutory definition.

As mentioned above, drafting the permitted use to exclude 'retail' is also unreliable. In Koga Nominees Pty Ltd v Locsam Australia Pty Ltd & Ors [2018] VSC 455, the Victorian Supreme Court indicated that excluding retail use in the lease was not decisive. Then, in Bulk Powders Pty Ltd v Seicon Pty Ltd (Building and Property) [2018] VCAT 2000, VCAT placed weight on the fact that the premises were not open to the public and were mainly used for production and storage, despite online sales to consumers.

What this means in practice for tenants

Having a retail lease under the RLA can unlock statutory protections including in relation to:

• Pre-lease disclosure and provision of the VSBC information brochure.
• Minimum lease term in some cases.
• Restrictions on certain outgoings (including land tax in many retail leases).
• Processes and rules around rent review.
• Rights on lease renewals, assignment and termination.
• Access to a lower-cost dispute resolution through the VSBC.

Practical steps retail tenants should take include:

• Keeping clear records of negotiations, disclosure and any representations about use or turnover.
• Diarise or track key dates - options, market reviews, expiries and critical notice periods.
• Obtaining advice before signing, varying or renewing a lease, or before taking an assignment.

What this means in practice for landlords

For landlords, mis-categorising a lease can lead to disputes, unrecoverable charges and forensic scrutiny of standard documents. Non-compliance with the RLA can affect:

• Recovery of certain outgoings and costs (including land tax).
• Enforceability of some lease provisions (eg. prohibited rent review structures).
• The timing and process of rent reviews and renewals.
• The forum and dynamics of any dispute which may be determined by VCAT, the courts or the mandatory VSBC mediation.

Landlords should ensure:

• Compliance with disclosure obligations.
• Careful assessment of the proposed and actual use of the premises before entering into a lease.
• Clear understanding that labelling a lease as "commercial" does not avoid the RLA.
• Proper legal advice is obtained before asserting that the RLA does not apply, or before withholding protections on that basis.

Disputes about market rent - appointing a specialist retail valuer

Where market rent is disputed under a retail lease, the RLA provides for the appoint of a specialist retail valuer. Such valuers are required to assess current market rent in accordance with criteria set out in the legislation and any applicable regulations.

For both the landlord and the tenant, involving a specialist retail valuer early can reduce the scope of the dispute and avoid prolonged arguments over methodology and comparables.

Obtain legal advice to protect your position

Determining if the RLA applies to your commercial lease requires careful legal and factual analysis - it is rarely a 'tick-box' exercise. Experienced leasing lawyers at PCL Lawyers regularly assist landlords and tenants in reviewing and drafting retail and commercial leases and advise on compliance and lease disputes.

If you are entering into, renewing or disputing a lease and you are unsure whether the RLA applies, it is prudent to obtain advice before you sign or take your next step. Early advice can prevent costly mistakes and help you structure a lease that reflects the real risk and cost allocation you intend.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.