Expanding the scope of Victorian retail leasing legislation: CB Cold Storage Pty Ltd v. IMCC Group (Australia) Pty Ltd [2017] VSC 23

Victorian Supreme Court finds that a cold storage facility is a retail premises for the purposes of the Retail Leases Act 2003 (Vic)

To the surprise of tenants and landlords, a recent decision of the Victorian Supreme Court may bring a significant number of leases under the realm of the Retail Leases Act 2003 (Vic) (RLA). Tenants and landlords should revisit their leasing arrangements to determine whether the business occupying the premises is in fact a retail business and therefore regulated by the RLA.

The RLA regulates significant aspects of leases for retail businesses. Its application is critical for both tenants and landlords to consider when negotiating the commercial terms of any lease.

The RLA only applies to retail premises. The meaning of retail has been the subject of considerable dispute before the Victorian courts. In the recent case of CB Cold Storage Pty Ltd v. IMCC Group (Australia) Pty Ltd, the tenant, CB Cold Storage, provided cold storage services to business customers who used those services for business needs. Despite this, the Court found that CB Cold Storage's business was a retail business because its customers were the ultimate consumers of the cold storage services.

Impact of the decision in identifying retail premises

The key points of the decision are:

  1. The definition of retail is the provision of goods or services to the ultimate consumer (regardless as to whether the goods or services are consumed for personal or business purposes).
  2. Determining who exactly is the ultimate consumer is a matter of construction. However, a business may be held to be the ultimate consumer even where it uses the goods or service as an input so long as the output is to create or provide a different good or service.
  3. Unless a statutory exclusion applies, leases relating to warehousing and logistics that are wholly or predominantly used for retail purposes may be regulated by the RLA. (Key examples of statutory exclusions include where the rent exceeds USD 1 million per annum (exclusive of GST); term is less than one year and tenant not in possession for 1 year or more; listed companies and their subsidiaries, leases for term of 15 years or longer, premises above the third story.)

The key impact of the decision is that a number of businesses may unexpectedly now enjoy the consumer protection provisions of the RLA, including, for example:

  1. Retail tenants cannot be required to pay land tax or the landlord's legal costs associated with preparation of the lease.
  2. Retail tenants cannot be required to carry out structural or capital repairs or alternations, or make any payments of a capital nature relating to the premises.
  3. The landlord of retail premises must maintain the premises in a condition consistent with the condition of the premises at the commencement of the lease (unless the tenant's misuse caused the need for repair or the tenant is entitled to remove the item at the end of the term).
  4. Implied statutory protections where the landlord seeks to relocate a retail tenant or terminate the lease on grounds of proposed demolition of the building.

Background to the dispute

CB Cold Storage leased a warehouse from IMCC Group (Australia) Pty Ltd under a written lease entered into in 2012. CB Cold Storage's customers were primarily businesses themselves. CB Cold Storage commenced an action against the landlord in the Victorian Civil & Administrative Tribunal (Tribunal) seeking to recover payments it had mistakenly made to the landlord, including land tax relating to the leased premises.

Tribunal's decision at first instance

At first instance, the Tribunal considered that the definition of retail was the supply of goods or services to the ultimate consumer, but that the consumer must use the goods or services for personal needs. The Tribunal's reasoning is summarised in the passage below:

"The term 'consumer' … in the sense in which it has been used in the cases I think it means the person who uses the goods or services to satisfy his own personal needs rather than for some business or other purpose."1

CB Cold Storage appealed the Tribunal's decision to the Supreme Court of Victoria.

Croft J reviewed a number of earlier decisions where the Court had examined the meaning of the phrase retail. Those decisions supported the proposition that a consumer could be a person who uses goods or services for business purposes or a purpose other than for personal needs, so long as they were the ultimate consumers of the goods or service. Croft J repeated the reasoning found in his earlier decision of Fitzroy Dental Pty Ltd v. Metropole Management Pty Ltd (which concerned the lease to a firm of patent attorneys):

"the fact that the [goods or services] may pass through the hands of an intermediary to the ultimate consumer or end user was not regarded as significant, provided it came into the hands of that person in a form that could not be amended and hence remained the product … of the deliverer…
the fact that a good or service is provided to a person who uses the good or service as an input in that person's business for the purpose of producing or providing a different good or service to another person does not detract from the possible characterisation of the first person as the "ultimate consumer" of the original good or service."2

The key issue for the Court is the proper characterisation of the transaction to determine whether or not the purchaser is in fact the ultimate consumer. Croft J then examined the operation of the business of CB Cold Storage and made the following findings as to the nature of those services:

"The service was … 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."3

Accordingly, CB Cold Storage was found to be operating a retail business from the premises and the lease was therefore regulated by the RLA.

For Landlords

Landlords should review their leases to identify potential breaches of the RLA and potential exposure to claims by tenants arising as a result.

If landlords find themselves unexpectedly being caught by the RLA, this decision will adversely impact Landlords as:

  1. Retail tenants are likely to be entitled to recover amounts mistakenly paid to the Landlord in respect of the retail premises including land tax, repair and maintenance costs and other outgoings. (The RLA prevents landlords from recouping or seeking reimbursement of such amounts from tenants.)
  2. The commercial terms of the lease will likely have been negotiated on the premise by both parties that the RLA did not apply.
  3. Issues will arise regarding whether a proper disclosure statement was provided to the tenant prior to execution and commencement of the lease or any renewed term of the lease, as is required by the RLA.

For new leases being negotiated, Landlords should be vigilant in understanding whether the proposed tenant is operating a "retail" business. If the premises is not intended to be used for retail purposes, Landlords should include tenant warranties to this effect and make it clear that use of the premises for retail purposes is an event of default by the tenant.

For Tenants

Tenants should consider the nature of their customers to determine whether those customers are the ultimate consumers of their goods or services. If so, unless an exemption applies, the lease is likely to be regulated by the RLA. This means that the tenant may be entitled to enforce statutory remedies under the RLA and to seek reimbursement of any sums mistakenly paid to the landlord, including any outgoings which the landlord was not entitled to pass on or seek reimbursement from a retail tenant.

Please see link for original article's footnotes