Victorian Retail Leases – A Costs Guide for Beginners

Retail Lease Agreements are becoming increasingly common in Victoria, but what happens when things go wrong? Retail Lease Agreements can be quite complex to navigate for both tenant and landlord alike, especially when deciding who exactly is responsible for paying what.

Is the Agreement covered by the Retail Leases Act?

The first (and most important) question is whether the Lease is governed by the Retail Leases Act 2003 (Vic) (“the RLA”).

To fall under the RLA, the subject of the Lease must be a retail premises, as defined by the RLA. The legislation defines a retail premises as premises used, wholly or predominantly, for the sale or hire of goods by retail or the retail provision of services.

Whilst this seems simple, this application of the RLA should never be treated as automatic, and tenants and landlords alike should ensure that they receive appropriate advice before making assumptions.

Further, there are different implications for premises which are defined as retail premises AND are part of a retail shopping centre. We will discuss the implications of this in a later post.

Outgoings

Outgoings pursuant to the RLA include (but are not limited to) expenses related to repair or maintenance for essential safety measures, rates, taxes, levies, premiums or charges payable by the landlord.

Outgoings can only be recovered from a retail tenant in the first instance, where these costs have been covered and contemplated by a provision in the specific Lease and are then disclosed in the Disclosure Statement. This Lease must also state:

• Which outgoings the landlord regards as recoverable

• How these outgoings will be determined, and how they will be apportioned to the tenant

• How the outgoings may be recovered by the landlord

It is important to note that compliance with the above does not automatically mean that outgoing becomes recoverable – as will be discussed below, there are prohibitions on the recovery of certain outgoings.

Some examples of outgoings that are generally recoverable from a tenant include:

• Council rates

• Insurance premiums

• Owners’ corporation fees

Utilities

It is important that outgoings are not confused with utilities. Utilities include the standard bills that might come to mind, such as electricity, gas and water usage.

Whilst nothing prevents a landlord from covering these costs for tenants, this is not common practice.

Retail tenants should generally expect to be responsible for their own utilities. In some instances, when entering a new Lease, these services may not be set up. Retail tenants are entitled to procure these services in their own names, and of course, be responsible for any consumption-based charges they accrue.

Capital Costs

Capital costs or expenses are expenses that provide long-term benefits to a property. Capital costs generally improve the value of the property or work to develop the structural integrity of the property. Some examples of capital costs include replacing the walls of the property, replacing the roof or building a new deck.

The general position of the RLA is that any provision included in the Lease which purports to allow the Landlord to recover or pass on capital expenses to the tenant is void. This is because the general view is that capital costs provide a long-term benefit, primarily reaped by the landlord rather than the tenant.

There are, of course, exceptions to this position. These may arise where a tenant has been the reason a capital repair is required, or is in breach of the RLA or the Lease in some other way.

Depreciation

Depreciation refers to a decline in value of an asset.

Some examples include:

• A tenant paints the walls green

• The flooring of the property has been changed

• The property itself depreciates due to the location, market or wear and tear

Regardless of the reason for the depreciation, what matters in the context of RLA, is that a landlord cannot recover any amounts for depreciation. Any provision included in a Lease requiring a tenant to pay an amount for depreciation is held to be void at law.

It is important to note that any changes made to the property which may cause depreciation, such as the example of a tenant painting the walls green, are assumed for the purposes of this information to have been undertaken after consultation with, and approval from, the Landlord.

Land Tax and Commercial and Industrial Property Tax (CIPT)

Land Tax is an annual tax on the total value of taxable land owned in Victoria. Land tax is not paid on your home, but may become payable where you own investment properties, holiday homes or vacant land.

Commercial and Industrial Property Tax is an annual tax on the value of the land of commercial and industrial properties in Victoria.

Where a landlord includes provisions in a Lease that require the tenant to contribute to either of these amounts (if applicable), the provision will be void.

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Retail Lease Agreements, whilst common, can be complicated to navigate, for tenant and landlord alike. The above information is general in nature and can vary significantly depending on specific agreements. We encourage you to contact our office on 03 9450 9400 to speak with one of our lawyers should you require specific advice.