Is your lease really a retail lease? New VCAT decision provides further clarity

Tenants are given an array of additional rights under a lease governed by the Retail Leases Act 2003 (Vic) (the Act) when compared to a non-retail commercial lease.

It is no surprise then, that in the recent VCAT decision Eastcombe Pty Ltd v Fagersta Steels Pty Ltd (Building and Property) [2022] VCAT 780 (Eastcombe) involving a landlord seeking a declaration that the Act did not apply to the lease and for the recovery of unpaid outgoings, the tenant sought a declaration that the Act did apply and for repayment of money paid to the landlord that is prohibited by the Act, including land tax.

At the commencement of the lease, both the landlord and tenant treated the lease as non-retail and the lease itself was titled ‘commercial lease’. The use of the premises was stated to be ‘warehouse for steel and associated uses and office complex’, which was not in dispute. However, the tenant subsequently ceased paying certain outgoings under the lease on the basis that the Act did apply.

The tenant’s evidence in respect of its use of the premises included:

1. the tenant sells stainless steel products to customers including members of the public from the premises;
2. the preferred method of selling is prearranged sales between customers and a salesperson at the Premises. Sales are also made to members of the public without prearranged sales meetings;
3. the external office door is a security door and locked for reasons of security and safety. When customers have a prearranged meeting, a salesperson usually meets them at the external office door in reception. Once greeted customers can access the warehouse through an internal door from reception to view products;
4. members of the public gain entry to the Premises through the warehouse doors which are opened between 6:30 am and 3:30 pm Monday to Friday;
5. customers are at all times escorted in the warehouse by a member of staff;
6. business signs are placed outside the warehouse doors and at the warehouse store. The warehouse store is situated inside the warehouse; and
7. products can be purchasers at the warehouse store and at the office.

Factors in determining whether the Retail Leases Act 2003 (Vic) applies

For the Act to apply, the premises must be deemed a retail premises, which means a premises that under the terms of the lease is used, or to be used, wholly or predominately for:

1. the sale or hire of goods by retail or the retail provision of services; or
2. the carrying on of a specified business or a specified kind of business that the Minister determines is a business to which the Act applies.

The factors to be considered to satisfy the above test were set out in Eastcombe and included:

1. the nature of the goods or service offered;
2. whether a fee is paid;
3. whether the goods or service is generally available to anyone willing to pay the fee;
4. whether the ultimate consumer test is satisfied;
5. whether the premises are open to the public in the required sense; and
6. whether the test is satisfied at the time the lease was entered into.

Two of these factors were prominent in rendering the lease a non-retail lease in Eastcombe:

Ultimate Consumer Test

The Ultimate Consumer Test is, put simply, to sell directly to the consumer uses the goods.

However, the tenant in Eastcombe acknowledged it was wholesaling from the Premises and was unable to provide evidence of proportion of customers who were the ‘ultimate consumer’ of the goods sold from the premises, including whether the products were used by the customer, on-supplied or used as an input into other goods or services.

In these circumstances, the Ultimate Consumer Test was deemed not satisfied.

Open to the public in the required sense

VCAT found that business signage is one factor to consider in determining whether a premises is open to the public.  The tenant in Eastcombe operated out of an industrial park. Importantly, the tenant’s name did not appear on the list of tenants in the industry park on the directory sign at the front of the park. Whilst there was one A4 sized sign on the front of the windows of the portable office at the Premises with the words ‘Cash Sales’, there was insufficient evidence that such a sign had been present since the commencement of the lease.

VCAT further found that whilst it was possible for a member the public to attend at the Premises during business hours to make a purchase, the method of access by customers was restricted, including that customers were to be accompanied by a staff member and wear special clothing when entering the Premises.

Taking into account these factors, the Premises was not deemed to be open to the public in the required sense.

Key take aways

For landlords

1. ensure a properly drafted lease is in place from the outset;
2. ensure your tenant’s intended use of the premises is clearly set out in the lease to confirm the applicability of the Act from the outset; and
3. liaise with your management agent and legal representatives throughout the term of the lease to ensure you remain aware of your tenant’s use of the premises and the applicability of the Act.

For tenants

1. seek legal advice before entering into a lease;
2. if you intend to provide goods or services from the premises:
   1. ensure the permitted use in your lease is sufficient for your intended usage;
   2. ensure signage is properly displayed from the premises;
   3. consider the Ultimate Consumer Test and whether the premises is open to the public in the required sense; and
   4. ensure the lease makes its clear the Retail Leases Act applies.

Generally, Eastcombe shows us that VCAT is taking a practical approach to determine whether a lease is a retail lease or not. Therefore, both tenants and landlords should be clear with their intentions in the negotiation stages of a lease agreement and ensure any agreement entered into, and subsequent usage of the premises, fits accordingly.

Leasing advice

Have a question regarding your commercial or retail lease? Get in touch with our corporate and commercial team at Coulter Legal today.