It’s a scenario becoming all too common across Victoria: a landlord and tenant sign what appears to be a standard commercial lease. All seems well for years until a dispute arises, or the tenant, facing rising costs, makes a startling claim: the lease is, in fact, a retail lease governed by the Retail Leases Act 2003 (Vic).
This isn’t just a legal technicality. An unexpected reclassification can fundamentally shift the financial and legal responsibilities of the lease, often to the landlord’s significant disadvantage. A recent seminar paper by Sam Hopper SC and Ben Kelly offers a crucial guide for navigating this complex and often counter-intuitive area of Victorian law.
So, what exactly turns a commercial lease into a retail one, and why is it so critical for landlords to understand the difference?
The “Ultimate Consumer” Test: Broader Than You Think
The heart of this issue often lies in the “ultimate consumer test.” Many landlords and agents assume “retail” is confined to traditional shops in a shopping centre. However, Victorian courts have interpreted the term far more broadly. A lease can be deemed “retail” if the premises are used to provide goods or services to an “ultimate consumer.”
The surprising part for many is that this “ultimate consumer” can be another business. The paper highlights several real-world Victorian cases where leases for seemingly non-retail operations were brought under the Act:
- A logistics and warehousing business that stored goods for other companies.
- A patent attorney’s office providing services to solicitors’ clients.
- A quarry that sold sand directly to builders and the public.
- A manufacturer of custom gates who sold primarily to builders, not the landowners themselves.
In these instances, because the tenant’s customer was the final user of the product or service, the lease was classified as retail. This expansive definition means many properties that landlords would logically classify as “commercial” or even “industrial” are, in the eyes of the law, retail premises.
Why the Distinction Is Critical: The Financial Stakes for Landlords
When a lease is governed by the Retail Leases Act 2003, a host of obligations are imposed on the landlord that are absent from a typical commercial agreement. For Victorian landlords, the most significant financial impacts include:
- Land Tax: This is the big one. Under the Act, landlords cannot pass on land tax to the tenant. If a lease is reclassified, a landlord could be forced to reimburse the tenant for years of land tax payments and absorb this significant cost for the rest of the lease term.
- Repairs and Maintenance: The Act places the responsibility for maintaining the structure of, and fixtures in, the premises squarely on the landlord.
- Disclosure Obligations: Landlords are required to provide a detailed disclosure statement to a tenant at least 14 days before a new retail lease is entered into. Failing to do so, or providing an incomplete statement, can give the tenant the right to terminate the lease and can lead to financial penalties.
- Options to Renew: The 2020 amendments to the Act introduced new obligations for landlords when a tenant has an option to renew, including providing notice of the last date to exercise the option and details of the new rent. Tenants now also have a 14-day “cooling-off” period after exercising an option in certain circumstances.
Can You “Contract Out” of the Act?
A frequent question from landlords is whether they can simply add a clause to the lease stating that the Retail Leases Act 2003 does not apply. The answer is a firm no. The Act contains anti-avoidance provisions (Section 94) that prevent parties from simply agreeing to exclude its operation.
However, as the paper discusses, it is possible to carefully draft the “permitted use” clause to limit the type of activity that can occur on the premises. For instance, a lease for a warehouse could be drafted to state that any retail activity must be purely ancillary to the primary use of wholesale and storage. For such a clause to be effective, it must reflect the genuine agreement between the parties and the reality of how the tenant uses the premises. It cannot be merely a device to avoid the Act.
Key Takeaways for Victorian Landlords
The line between a commercial and a retail lease in Victoria is increasingly blurred. For landlords and property managers, what you don’t know can certainly hurt you. Mistakenly treating a retail lease as a commercial one can lead to significant and unbudgeted costs down the track.
Given the technical nature of the Retail Leases Act 2003 and its evolving interpretation by the courts, obtaining specialist legal advice from a firm experienced in Victorian property law is not just a recommendation—it is an essential step in protecting your investment. Feel free to contact us for an initial consultation
Disclaimer: This blog provides general information and should not be considered legal advice. You should consult a lawyer for advice on your specific circumstances.