Is your industrial tenant a retail tenant?

In what many might consider a surprising decision, the Victorian Supreme Court held that a lease of "industrial" premises was a retail premises lease, with the tenant entitled to the protections under the Retail Leases Act 2003 (Vic) (CB Cold Storage Pty Ltd v IMCC Group (Australia) Pty Ltd [2017] VSC 23).

The Act applies to "retail premises" which means "premises that … under the terms of the lease relating to the premises, are used, or are to be used, wholly or predominantly for … the sale or hire of goods by retail or the retail provision of services".

The issue for the court was whether the premises were "retail premises" such that the lease of the premises attracted the operation of the Act. The decision will have major implications for landlords and tenants in Victoria, and potentially other States if similar reasoning is followed there.

The facts

The tenant leased premises in North Laverton, in an area zoned for "Industrial 2 use".

The premises included two freezer warehouses (approximately 2,650 sq m in total area), a forklift charging area, ramps down to a loading dock area, an anteroom area, an office area (170 sq m), some car parking spots and a large area for semi-trailers to back into the loading bay ramp.

The tenant stores customers' products in the freezer warehouses for a fee, and also arranges transport services as a lesser part of its business. The permitted use of the premises under the lease was "Cold and cool storage warehouse and transport facility".

The office includes a sign saying "Laverton Cold Storage" but otherwise there is no point of sale advertising or invitation to the public to enter the premises.

Members of the public are able to, and do, walk into the office from the street and are commonly in the office.

The tenant's services are available to any individual or company wishing to use them and willing to pay the fee.

There was no sale or hire of goods from the premises, only services.

The decision

On appeal from VCAT, the Court found that the premises were retail premises subject to the Retail Leases Act.

At the premises, the purchaser of the cold storage services buys and uses them at the premises, and is not resupplying them (so they are the ultimate consumers of the services). This makes the premises "retail premises".

The consequences

There are a number of important consequences that flow from this decision, including:

•  the tenant cannot be required to pay land tax;
• a rent review clause cannot include a "ratchet";
• the landlord must satisfy disclosure requirements at the outset which, if not satisfied, create qualified termination rights for the tenant; and
• subject to prescribed qualifications, the term of the lease must be at least 5 years.

A tenant may be entitled to a refund of money previously paid. This may include land tax, or rent wrongly paid, if there has been reliance on a ratchet clause in a market rent review previously undertaken.

What landlords should do

First, landlords should review whether there are any reasons the Act does not apply not linked to the use of the premises. These may include the amount of the occupancy costs (as defined in the Act), or the tenant being a listed company, or subsidiary of a listed company, at the time the lease is or was entered.

Second, landlords should review whether the permitted use of the premises under the lease is qualified (or may be qualified) to prohibit any use which would result in the premises being retail premises under the Act.

In a proposed new lease, if it is not commercially possible to qualify the permitted use in this way and, based on the tenant's proposed use of the premises, the premises would be retail premises under the Act, the landlord will need to address the consequences of the Act applying, including disclosure requirements and consider amending the lease to compensate for the commercial consequences of the Act applying.

Particular circumstances

If you think the Act may apply, all may not be lost.

In both the VCAT and the Victorian Supreme Court decisions, both judgments referred to the importance of taking all relevant circumstances into account. This includes all terms of the lease, but also the nature of the premises and the nature of the occupancy and the business to be conducted from the premises (as assessed at the outset) and actually conducted from the premises.