On 1 May 2015 an Advisory Opinion was handed down by Justice Garde, the President of VCAT, in response to an application by the Small Business Commissioner (SBC). The application was made by the SBC with respect to the ability of landlords to recover from tenants the compliance costs associated with section 251 of the Building Act 1993 and regulations (Building Act) and section 52 of the Retail Leases Act 2003 (Retail Leases Act).
In summary the Advisory Opinion concluded that:
- A landlord must bear the cost of compliance and cannot pass on the cost to the tenant as an outgoing in the following circumstances:
- Where the owner of land is obliged under the Building Act or regulations to do anything, such as undertake works or comply with essential safety measures (ESMs); and
- Where the cost relates to a landlord’s obligations under s 52 of the Retail Leases Act, and
2. Whether a tenant can be obliged to undertake some ESM compliance works (such as an ESM report) will depend on the terms of the lease and the relevant Act, but in any event the cost may then passed on to the landlord to pay or reimburse or be offset against rent payments.
Whilst the Opinion is not binding and was not determined as a result of a dispute and thus without a particular set of facts in mind, it will have considerable influence on VCAT decisions and will also carry some weight with other Courts. It is also likely to have (and in my experience already has had) an effect on commercial negotiations and will affect negotiations in mediations.
Whilst the Opinion purports to relate only to retail leases subject to the Retail Leases Act, it is arguable that it will also apply to and be persuasive in other commercial lease disputes.
Section 52 of the Retail Leases Act provides:
- A landlord must keep the premises, landlord’s installations and services in a condition consistent with the state of the premises, installations or services at the start of the lease term (this includes responsibility for fair wear and tear); and
- But not where the work is required due to the tenant’s misuse or if the tenant is entitled to take the thing which needs maintenance at the end of the lease.
Steps to be taken
Landlords should take the Opinion into account when negotiating the terms of a lease. Some may wish to consider gross rents. It is expected that there will be some pressure on government to amend the legislation to remove the uncertainty as a result of the Opinion. Therefore in my view leases should still include these costs as an outgoing, but that in the meantime landlord’s should consider not passing those costs on to a tenant for payment as the obligation may not be enforceable.
Tenants should evaluate the costs paid to date with respect to ESMs, compliance with the Building Act, and any costs paid to the landlord for maintenance of premises, landlord’s installations and services, and seek advice if they wish to recover them. This should be done sooner rather than later, in order to take advantage of the current Opinion and/or uncertainty, and in case the legislation is subsequently amended to entitle a landlord to pass on those costs.
Agents will need to adopt a policy for dealing with these issues and, where that differs to their landlord client’s instructions, they may need to recommend that the landlord seeks legal advice and arrange for their lawyer to write to the agent confirming those instructions.