Retail Tenancy Covid 2021 Update - VCAT Barrister

Retail Tenancy Covid 2021 Update

Retail Tenancies core jurisdiction is enabled by section 81 and 89 of the Retail Leases Act 2003.
1. Retail Leases Act 2003 is the mechanisms available to resolve disputes concerning leases of retail premises and promote greater certainty, fairness and clarity in the commercial relationship between landlords and tenants of retail premises.
Retail Tenancy disputes are basically disputing between landlord and tenants under or in respect of retail premises leases.
1. A retail tenancy dispute as defined in the Retail Leases Act 2003 but logical necessity also means it is a consumer trader dispute within the meaning of Consumer Law.
2. To put it another way, retail tenancy disputes are a sub-set of consumer trader disputes.
3. Again, it is a matter of discretion whether proceedings relative to retail tenancy disputes are heard in the Civil Claims List if commenced there or in the Retail Tenancies List.
  1. The discretion seems to be informed by the same considerations as I mentioned with regard to domestic building disputes.
4. Before any matter goes before the Retail Tenancies List the parties must attempt to settle at the Small Business Commissioner (SBC) (except with an injunction application):
  1. All Retail Tenancies dispute must first receive a certificate from the SBC that mediation was conducted before VCAT will hear the matter.
  2. SBC mediations are generally held about 8-10 weeks after the dispute.
  3. Of all the matters heard at the SBC, around 85% have been disputes referred under the Retail Leases Act.
  4. The length of a mediation is generally 3-4 hours with a success rate of settle disputes at 74%.
  5. Where SBC mediation fails, SBC gives a certificate enabling access to VCAT.
  6. The process on the Retail Tenancies List once the SBC stage has been tried is very similar to Civil List claims.
5. Around 25 per cent of retail tenancy disputes brought forward by landlords typically are matters of rent and outgoings.
6. The most common causes of disputes on Leases:
  1. Failure to pay rent;
  2. Tenant locked out of premises without adequate notice to rectify breach;
  3. Breach of Lease – tenant using the premises for a purpose other than that specified in the lease and permitted by the planning permit;
  4. Subletting tenancy without the permission of the Landlord;
  5. Damage to premises;
  6. Failure to maintain the premises by either the Landlord or Tenant;
  7. Repairs to premises;
  8. Relocation;
  9. Refusal to consent to assignment of leases;
  10. Unconscionable conduct.
  11. Commencing unauthorised works to premises;
  12. Tenant’s refusal to vacate at the conclusion of the Lease
  13. Landlord failing to provide Tenant with quiet enjoyment of the leased premises;
  14. Withholding security deposit (bond) at the conclusion of the lease term;
  15. Misunderstandings about outgoings – payment and interpretation;
  16. Rent Reviews – fixed increase, to market & CPI;
  17. Exercise of Options and Assignments – failure to notify within the prescribed timeframe.
7. A number of landlord and tenant disputes can be heard in the Retail Tenancies List or Consumer Law.
  1. For example disputes about leases of factories or disputes about short-term leases (sub 12 months) of shops and disputes about a licence as distinct from a lease arrangement should be heard under Consumer Law and the Civil List.
8. Commencement of proceeding is regulated by the Retail Tenancies Act and sections 67-72 of the VCAT Act.
  1. Similar to Domestic Building, the Retail Tenancies List use an online application form.
  2. The Retail Tenancies List commonly runs in a very formal manner, with counsel attending and presenting the case as they would to a Court.
  3. VCAT is loath to enter into pleading fights save where there is an argument about correct parties or insufficient details.
  4. Such arguments are usually taken up at directions hearing, or by bringing on an application for further directions.
  5. This is only usually allowed in larger or more complex cases.
  6. The Tribunal has discretion to timetable a case in any way it sees fit, so the larger the amount in dispute, the more Court like the procedures become.
9. Save in minor disputes it is customary to have the full range of interlocutory steps and the holding of purely summary hearings without pleadings or other preliminaries is the exception rather than the rule.
10. The tribunal can order a party to do something or not do something relating to the premises or the lease, for example:
  1. pay compensation;
  2. correct the lease;
  3. recovery of possession by the landlord.

The Retail Leases Amendment Act 2020 (Vic) (Amendment Act) regarding essential safety measures took effect from 23 September 2020.

First tabled in Parliament back in October 2019 before being delayed by COVID, the Amending Act makes a number of changes to the Retail Leases Act 2003 and the Building Act 1993.
1. Retail Leases Amendment Act 2020 (the Amending Act) received royal assent and passed into law in Victoria yesterday (22 September 2020).
2. The balance of the amendments take effect from 1 October 2020.
The Amending Act makes a number of key changes to the retail leasing framework in Victoria.
1. The majority of these changes impose additional obligations on landlords.
2. Accordingly, leasing processes and documentation must be updated immediately to ensure compliance.
Deposits returned within 30 days. The Amending Act amends section 24(1)(d) of the Retail Leases Act, now requiring a landlord to return any security deposit to the tenant within 30 days of the end of the lease provided the tenant has performed all of their obligations under the lease. This replaces the previous requirement, which was merely that any security deposit be returned “as soon as practicable.” The RLA does not expressly deal with bank guarantees, other than prohibiting landlords from refusing a bank guarantee in lieu of a security deposit. In this regard, it is arguable that the requirement to return security deposits within 30 days of lease expiry does not apply to bank guarantees. However, in the absence of judicial guidance, landlords would be sensible to align their processes for the return of both security deposits and bank guarantees.
1. However Landlords can recover costs of essential safety measures from tenants. In a reversal of the 2015 VCAT advisory opinion, the Amendment Act amends both the Building Act and the RLA to clarify that, provided the parties agree as such in the lease.
2. landlords can recover from tenants:
  1. ‘the cost of repairs or maintenance work in respect of an essential safety measure’; and
  2. ‘in respect of an essential safety measure…the cost of carrying out an installation relating to fit out of the retail premises’; and
3. Tenants can be required to carry out ‘repairs or maintenance work in respect of an essential safety measure on behalf of the landlord’.
4. Landlords should note that the carrying out of repairs or maintenance work by a tenant does not affect the obligations of the landlord as a building owner under the Building Act (including regulations). Accordingly, even with an appropriately drafted lease provision passing the repair and maintenance obligations to a tenant, landlords must regularly inspect the premises to ensure compliance with their statutory obligations.
Disclosure obligations. Prior to the Amending Act, landlords were required to give a tenant a disclosure statement and copy of the proposed lease at least seven days prior to the lease commencing, but the consequences of non-compliance with the seven day requirement were virtually non-existent.
1. This has now been amended to require a disclosure statement and draft lease be provided 14 days prior to the commencement of the lease and to amend the commencement date of the proposed lease to be 14 days after disclosure is given.
2. The Amending Act also requires that, for the purposes of disclosure, the proposed lease now must be particularised with details of the rent, the term and the tenant’s details (so an agent cannot be armed with a pro-forma proposed lease during negotiations as has previously been practice).
3. If a proposed lease is given to a tenant and contains any changes to a previous proposed lease then the landlord must notify the tenant of the changes.
4. The legislation is ambiguous but it would seem that the 14 day period will commence from the date the final copy of the proposed lease is given to the tenant (even if amendments have been borne out of negotiations and requests by the tenant).
5. The Amending Act also removes the word ‘substantially’ from section 17(7) (so new disclosure will be required where a lease follows an agreement for lease if the lease itself is on any different terms to the agreement for lease).
6. This means Landlords must provide tenants with a disclosure statement and a copy of the proposed lease at least 14 days (previously this period was 7 days) before entering into the lease. If a landlord fails to do so, the term of the lease is taken to commence 14 days after the required documents are provided to the tenant. Landlords should immediately update processes to ensure compliance with this new time requirement.
7. Tenants must also be notified if the proposed lease given to the tenant contains any changes to a previous copy of the lease that was provided to the tenant. Similarly, the disclosure statement provided on renewal of a lease is now required to set out any changes to the previous disclosure statement given to the tenant. These obligations should be easy to comply with if parties adopt the common practice of using mark ups and document compares.
8. Section 17(7) of the RLA has also been amended by removing the word ‘substantially’. While a subtle drafting change, the effect of this is that if a lease entered into pursuant to an agreement for lease is not ‘strictly’ in accordance with the earlier agreement for lease’ a further disclosure statement must be provided to the tenant. As stated in the explanatory memorandum to the Amendment Act, this amendment is intended to remove uncertainty regarding the extent to which the lease must be in accordance with the earlier agreement for lease.
Essential Safety Measures. The most relevant changes brought in by the Amending Act for most landlords and tenants will be the amendments in relation to charging for Essential Safety Measures (ESMs). Following a 2015 advisory opinion from VCAT, the generally accepted position has been that the costs of ESMs are not able to be passed on by a landlord to tenants under a retail lease. This position is now reversed by the Amending Act.
1. The Amending Act amends the definition of outgoings that may be paid by a tenant to include “the cost, or part of the cost, of repairs or maintenance work in respect of an essential safety measure.” It also amends the Building Act 1993 to remove a tenant’s right to withhold rent in respect of expenses incurred complying with ESM obligations.
2. The cumulative effect of these changes is the reversal of the existing position with regards to ESMs.
3. The Amending Act also inserts a new Part 15 into the Retail Leases Act 2003 that makes these ESM amendments retrospective and applicable to existing retail leases. This Part means that any clause in a retail lease entered into before the commencement date of the Amending Act that allows ESMs to be passed on to tenants will be effective.
4. The costs themselves may not be backdated and may only be sought from a tenant from the 23 September 2020. Landlords under a lease that allows them to recoup the cost of ESMs will still have to pay for those costs incurred before the commencement of the Amending Act.
Early rent reviews. If a lease provides for a market review of rent on commencement of a further term, tenants may now request an early rent review following receipt of a Renewal Notice. Tenants must make this request in writing within 28 days after receiving the Renewal Notice.
1. If a valuer is appointed to determine the market rent (and this determination is not provided before the last date on which the option can be exercised) the last date by which the option can be exercised is extended to the date 14 days after the tenant is notified of the valuer’s determination of the rent. This automatic extension provides significant incentive for landlords to provide a Renewal Notice as early as possible and will increase the importance of selecting an appropriate valuer who can provide the determination within the time required.
2. The cost of the valuation must be shared equally between the landlord and tenant.
Cooling off period. Tenants now have the benefit of a 14 day cooling off period where:
1. an option to renew a lease has been exercised; and
2. no request for an early rent review has been made.
3. Tenants may provide written notice to the landlord that they no longer wish to exercise the option to renew in the cooling off period. If the tenant provides such notice:
  1. the term is extended by 14 days;
  2. the lease is not renewed; and

the tenant is unable to exercise the option to renew.

This creates a period of uncertainty for landlords and will require proactive engagement with tenants.

Landlord’s obligations regarding further terms. Landlords are now required to provide substantial additional information to a tenant prior to the tenant exercising an option for a further term. This information must be provided at least three months before the last date on which the tenant is entitled to exercise the option to renew. These changes apply to new leases and to leases already in existence unless the last date to exercise the option is earlier than 1 January 2021 (previously this article indicated changes would apply where the lease ended at any time after 1 January 2021)
1. The Act previously required landlords to notify tenants of their last date to exercise an option at least 6 months and no more than 12 months before the last date. That has now been amended to no less than 3 months prior to the last date to exercise.
2. The wording of Section 28 in this regard has been amended from requiring a landlord to “notify” the tenant, to requiring the landlord to “give the tenant written notice” – meaning because of previous Court decisions the word “notify” has now been removed and replaced with notice.
3. The notice must also set out a proposed rent for the first 12 months and details of early rent review process and cooling off options together with an updated disclosure statement. These are more onerous requirements than previously applied.
4. Once the notice referred to above has been provided to the tenant, the tenant may request an early rent review within 28 days – that will see the ordinary rent review provisions applied and, if the matter is referred to a specialist retail valuer, the time for the tenant to renew extended until 14 days after rent is determined.
5. The term of the lease will be extended as necessary to allow the tenant that 14 days and, if the tenant does not renew, the term of lease will be extended to end three months after the tenant’s amended last date to exercise option (to allow landlords and tenants time to make alternate arrangements).
6. If a tenant is eligible for but does not request an early rent review and otherwise elects to renew the lease, that tenant now has a 14 day period within which to ‘cool-off.’ If they elect to exercise their cooling off rights, the renewed term of the lease will not apply and the existing term is extended by 14 days.
7. The following information must be provided (by way of written notice) to tenants:
  1. the last date by which the tenant must exercise its option to renew;
  2. the rent payable for the first 12 months of the further term;

the availability of an early rent review (see comments at 5 below);

the availability of a cooling off period (see comments at 6 below); and
any changes to the most recent disclosure statement provided to the tenant, excluding rent-related changes (Renewal Notice).
If a landlord fails to provide the Renewal Notice in the time required, the date by which the option to renew must be exercised is extended to the date three months (previously six months) after the tenant receives the required notice.

Aside from the changes to the essential safety measures regime, which should be welcomed by landlords, the amendments are largely tenant-protection measures and impose additional obligations on landlords. Landlords should ensure that their internal processes, particularly regarding the issuing of disclosure statements and notices regarding further terms, are updated as a priority. Lease documentation should also be reviewed to ensure that the amendments are reflected in both new leases and renewals of existing leases.
An issue of increasing importance not addressed in the Amendment Act is the ever increasing scope of the RLA and the leases which, although not “retail” in a traditional sense of the word, are technically subject to the RLA. The additional obligations now imposed on landlords as a result of the Amendment Act only increases the importance of this issue for landlords.

COVID-19 Omnibus (Emergency Measures) (Commercial Leases and Licences) Regulations 2020

The Regulations will be extended in the same form as they presently stand. Relevantly, an extension on the same terms can be expected:
1. To require tenants to make a new rent relief request relating to the period post-31 December (including by provision of evidence of decline in turnover for the quarter ending 31 December 2020);
2. To entitle tenants to post-31 December relief only from the date the new request is made;
3. To require landlords to offer rent relief 1 January – 28 March 2021 that is at a minimum proportional to the tenant’s decline in turnover in the December 2020 quarter; and
4. To push back the commencement date for repayment of any deferred rent so that repayments commence 29 March 2021.
There are a few challenges that come from the continuation:
1. During the Christmas/new year break tenants may find it difficult to promptly produce the evidence necessary to make a fresh request until well into the new year – denying them the benefit of relief for that period.
  1. Tenants would be well advised to speak to their accountants now about what they can do to speed up that process in the new year.
2. It is unclear at this stage whether the prohibition on terminations extends to both termination for non-payment of rent and termination for not trading, but it is likely to cover both.
3. Fresh rent relief requests might now be necessary and proportional rent relief is a minimumrather than a fixed empirical requirement – a tenant might legitimately and candidly argue for a higher percentage of rent relief than the loss of turnover it has actually experienced.
4. The prohibition will not apply in ‘specific circumstances’. That seems to be new and at this stage it is not clear what those circumstances will be.
5. The Victorian Small Business Commission ‘will now also have greater capacity to make an order on rent relief if a landlord refuses to respond to rent relief requests.’
6. One of the areas of uncertainty in the Victorian Regulations is what power the Courts or VCAT have resolve requests for rent relief that do not settle at mediation. This announcement suggests that the VSBC will have some kind of power to make an order for rent relief. This is new, as the VSBC does not have such a power under the current version of the Regulations.
7. There will be increased land tax relief and funding for commercial landlords – up to $3,000 per tenancy – and eligible small businesses that own commercial property will be able to benefit from land tax relief.

Victoria’s Commercial Tenancies Cases 2020:

Although a different jurisdiction Justice Robb in the NSW Supreme Court made two decisions that discuss the effect implementation in NSW. The decisions are:
1. Sneakerboy Retail Pty Ltd trading as Sneakerboy v Georges Properties Pty Ltd[2020] NSWSC 996, (31 July 2020); and
2. Sneakerboy Retail Pty Ltd trading as Sneakerboy v Georges Properties Pty Ltd(No 2) [2020] NSWSC 1141 (26 August 2020).
Sneakerboy is a tenant in rent arrears and the landlord called on the bank guarantee and terminated its lease at the beginning of the COVID-19 pandemic but before the Code was brought into law in NSW. After a delay the tenant sought relief from forfeiture and to revive the lease. However the lease was terminated before the Code became law in NSW, termination was not prohibited. So the tenant seeking relief from forfeiture was required to cure all relevant breaches and comply with the terms of the lease.
The application of the Code to the lease once revived would alter the tenant’s obligations under the lease. One of the issues under the Victorian Regulations is what orders VCAT can make to determine a dispute between a landlord and tenant who cannot agree on the amount of rent relief. In particular, it is by no means clear that VCAT can substitute with its own decision. In the second Sneakerboy case it was doubtful that the Tribunal has the necessary powers to resolve a dispute arising out of a failed renegotiation, even though it is possible that the drafters of clause 8 of the COVID-19 Regulation intended that disputes could be resolved in the Tribunal.
1. This is important for the Tribunal to have the power to finally resolve disputes, especially when the issues are complex or one party is being unreasonable and it helps parties understand the alternatives to an agreement (hearing) when considering offers at mediation.
A VCAT case C B Buffet (Burwood) Pty Ltd v Delloyd Pty Ltd (Building and Property) [2020] VCAT 1234 was determined by Member Kincaid with similar facts in substance to the Sneakerboy
1. The tenant operates a Chinese buffet restaurant and its trade was adversely affected by COVID-19 as early as January 2020.
2. It fell into rent arrears and the landlord terminated the lease for non-payment of rent on 27 March 2020.
3. The tenant argued that the lease was an eligible lease under the CTRS and that it was protected from re-entry by reg 9 of the Regulations.
4. Member Kincaid rejected that argument to the basis that the lease was terminated on 27 March 2020 and the CTRS was not in effect at that time, so could not have prohibited the re-entry.
5. In the alternative, the tenant sought relief from forfeiture. The tenant argued that relief from forfeiture should take into account the tenant’s entitlement to rent relief under the CTRS. However, Member Kincaid rejected that argument and required the tenant to pay all rent payable under the lease as a condition of the grant of relief from forfeiture.
6. One of the interesting issues in this case was Member Kincaid was not referred to the Sneakerboy case and in some ways may have made a decision without considering the tenants relief from forfeiture argument as he accepted the landlords position that it was not an “eligible lease” within the meaning of section 13 of the Act and so not entitled to any rent relief or relief from and liabilities under the Covid-19 legislation.
7. If he had been then he would have considered what Robb J in the NSW Supreme Court said in Sneakerboy that relief from forfeiture revives the lease and that the tenant whose lease is terminated before the Code was published is still entitled to rent relief over the period after termination but before relief from forfeiture is granted.
We can expect these sort of issues to continue as many retailers are being locked out by landlords for failue to pay rent. For example Westfield shopping mall owner Scentre has begun locking non-rent-paying retailers out of their stores in a dramatic escalation of tensions between major landlords and their retail tenants.
Another interesting case was The Court of Appeal’s decision is Verraty Pty Ltd v Richmond Football Club [2020] VSCA 267.
1. It allows Richmond to rely on the Retail Leases Act to save on land tax and reduce rent increases.
The decision confirms that a ‘retail premises lease’ once entered or renewed will not change its legal character during its term by reason of extraneous circumstances (such as rent increases). This is important because the Act gives various protections to tenants of ‘retail premises’ including (at s. 50) voiding any requirement in a lease that the tenant effectively pay its landlord’s land tax. These protections commonly make the question of whether a particular lease relates to ‘retail premises’ within the meaning of s. 4 of the Act financially significant for tenants and landlords.
1. The Act’s definition of ‘retail premises’ focuses on the retail supply of goods and services but it has several carve-outs.
2. One of the exclusions is that premises with ‘occupancy costs’ of over$1 million per year are not ‘retail premises’. But what happens if the proper categorization of premises as ‘retail premises’ changes during the life of a lease? This was the issue that arose between Richmond and its landlord, Verraty.
3. Since (at least) 2004, Richmond had leased a Wantirna pokies venue from Verraty. In 2004 the venue constituted ‘retail premises’ within the meaning of the Act.
4. The written lease included a requirement that the tenant reimburse the landlord its annual land tax but, because the lease was a ‘retail premises lease,’ that requirement was unenforceable by reason of s. 50 of the Retail Leases Act.
5. Over time the property’s rent and outgoings increased. By May 2016 the tenant’s annual occupancy costs ticked over the $1 million mark. Did the fact that the occupancy costs now exceeded $1 million mean that the premises ceased to be ‘retail premises’ within the meaning of the Act and that the hitherto-void land tax clause hence suddenly became enforceable against Richmond?
The landlord took that argument to VCAT and won – see Verraty v Richmond Football Club[2019] VCAT 1073. Richmond then appealed to the Supreme Court (Croft J in his final case before retirement from the bench) and won – see Richmond Football Club v Verraty [2019] VSC 597. Verraty then appealed to the Court of Appeal. There Justices Kyrou, Kaye and Sifris dismissed Varraty’s appeal in a joint judgment. The nub of it is in para 8:
1. “… if a lease is a ‘retail premises’ lease at the commencement of the lease, it remains subject to the Act even if the premises cease to be retail premises. In short, the text, context and purpose of the Act strongly support the view that it is not possible [for a lease] to jump in and out of the Act from time to time depending on whether the premises continue to fall within the definition of ‘retail premises’.
Confirms Croft J’s final Supreme Court judgment but not on the question of whether leasing relationships can ‘jump’ in or out of the Act when leases arerenewed (during a lease term). This question did not squarely arise in the Richmond v Verraty matter but Croft J nevertheless ventured an opinion on it in his judgment. He suggested (at paras 74 – 78) that whether premises could change their ‘retail premises’ characterization upon renewal of a lease depended upon the lease provisions regarding such renewals.
It is now settled that whether a lease is or is not a ‘retail premises lease’ is established on a ‘once and for all’ basis upon its entry or renewal. Its character won’t change during its term.
Another interesting case is Nowrozi v Plains Properties Pty Ltd (Building and Property) [2020] VCAT 322. This deals with s.28(1) of Retail Leases Act 2003 and the option to renew lease as the applicants did not notify in writing after option was no longer exercisable; and if so does the lease remains on foot.
1. It reinforced the consequences of the 2008 Supreme Court Decision Xiao v Perpetual Trustee Company Ltd (Xiao).
2. Section 28 of the Retail Leases Act requires a landlord to give a tenant six months’ notice of the tenant’s last date to exercise its option to renew. If the tenant has no options available Section 64 requires the landlord to give the tenant six months’ notice of the landlord’s intention at the end of the lease (either to bring the lease to an end or to offer the tenant a further option).
3. It is not sufficient for a landlord to merely serve the relevant notice on its tenant.
4. The obligation is on the landlord to notify the tenant of its last date. It is that word, notify, that Vickery J in Xiao determined went further than merely serving the document. Rather, the obligation to notify was determined to encompass ‘making the prescribed information available to the tenant through physical supply of the written document containing the relevant information such that it is actually provided to and received by the tenant’.
5. In Nowrozi v Plains Property Pty Ltd (Nowrozi), there was not an overwhelming weight of evidence to suggest that the notice had not been served. Rather, the tenant claimed not to have received it, yet lacked the evidentiary compulsion that was shown in Xiao. Regardless, Section 28 was deemed to not have been fulfilled. Relevantly, Member Enquist’s decision states that the landlord ‘could not rely upon mere posting of the letter to achieve deemed delivery’.
6. It is recommend that any landlord serving a Section 28 or Section 64 notice take the time to hand deliver the notice to the tenant to be sure that it has been received. Alternatively, a notice could be served by registered post requiring a signature upon receipt (so as to remove the argument on the part of a tenant that a notice may have been sent, but was never actually received).

Daniel Epstein of Counsel