A recent VCAT decision has confirmed that retail premises leases can ‘jump out’ of the Retail Leases Act (RLA) if occupancy costs exceed the $1 million threshold during the lease term. The decision contradicts previous assumptions that if the RLA applies to a lease at its commencement, it will continue to apply until the term expires.

Section 11 of the Retail Leases Act 2003 (Vic) provides that the RLA applies to a retail premises lease that is entered into after the commencement of section 11 (ie after 1 May 2003) or renewed after if the lease was entered into before that date. Section 11(2) states further that the RLA only applies to a lease if the premises are retail premises at the time the lease was entered into.

There are a number of well-known exceptions to the application of the RLA to a lease that otherwise would be considered a retail premises lease. For example, if the tenant is a publicly listed company, or a subsidiary of a publicly listed company, then the RLA does not apply. Another example, which was relevant to this case, is that if total occupancy costs exceed $1 million then the RLA does not apply.

In Verraty Pty Ltd v Richmond Football Club Ltd [2019] VCAT 1073 the landlord sought orders declaring that the RLA does not apply to a lease on the basis that occupancy costs exceeded $1 million. Richmond Football Club (the tenant) argued that section 11 of the RLA was to be interpreted on the basis that the only time a lease is assessed as being a lease to which the RLA applies is at the commencement date of the lease.

Senior Member Forde rejected that argument and stated:

If a lease at any stage falls outside of the definition of a retail premises lease, then on the plain and unambiguous wording of s 11 of the RLA, it is no longer subject to the RLA

In setting out her reasons for the decision, Senior Member Forde commented that for the RLA to apply, a lease must continue to have all the essential characteristics of a retail premises lease throughout its term. If one of those characteristics is missing (in this case, the occupancy costs exceeded $1 million per annum) then on a plain reading of section 1,1 the RLA no longer applies.

The finding poses one interesting and immediate question – can a landlord take into account an amount of land tax payable by the tenant which would cause occupancy costs to exceed the $1 million threshold? And if so, is it necessary for that landlord to comply with the other provisions of the RLA, most notably section 46, which requires the landlord to provide the estimate of outgoings?

On the face of it, the answer to that question is yes, provided the landlord still gives an estimate of the outgoings in accordance with section 46 of the RLA. However, the recoverability of land tax will obviously depend on the wording within the respective lease.

This decision is likely to be appealed but, before that, it throws open the possibility that any of the other exclusions to the RLA, for example if the tenant is acquired by a publicly listed parent company during the term of the lease, would cause a retail premises lease to fall outside the operation of the RLA.

While the Tribunal did not consider whether the lease would fall back within the operation of the RLA if occupancy costs subsequently decreased below the $1million threshold, based on this recent decision it would not be difficult to argue that a lease is able to fall back within operation of the RLA provided it qualified as a retail premises lease at the time it was entered into.

Care needs to be taken when drafting any lease to ensure the provisions reflect the intention of the parties even if the RLA no longer applies, particularly where total occupancy costs are close to the $1million threshold.