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VCAT restricts landlords’ ability to recover costs from tenants

On 1 May 2015, VCAT’s President, Justice Greg Garde, issued an advisory opinion (Opinion) to the Small Business Commissioner of Victoria on the scope of s 251 of the Building Act 1993 (Vic) (Building Act), and a landlord’s ability to recover costs incurred in complying with its repair and maintenance obligations under the Retail Leases Act 2003 (Vic) (Retail Act).

In summary, the Opinion concludes that:

  • a landlord of commercial or retail premises can only require a tenant to undertake essential safety measures (ESM) obligations under the Building Act and Building Regulations 2006 (Vic) (Regulations) in very limited circumstances, and only at the landlord’s cost
  • a landlord of commercial or retail premises cannot pass onto a tenant the cost of works it is required to carry out to comply with its ESM obligations under the Building Act and Regulations
  • a landlord of retail premises cannot pass onto a tenant the cost of works it is required to carry out pursuant to s 52 of the Retail Act[1].

The Opinion addresses the following:

Which party must comply with ESM obligations?

If an obligation in the Regulations relating to an ESM states that the obligation must be complied with through the landlord’s actions, a clause in a lease requiring a tenant to satisfy this obligation is void. However, if the obligation in the Regulations relating to the ESM merely requires the landlord to ensure that a certain outcome is achieved or standard is met, a landlord may require the tenant to achieve that outcome or meet that standard through the lease, at the landlord’s expense.

Which party must pay the costs of complying with ESM obligations?

Section 251 of the Building Act prevents a landlord of commercial or retail lease from passing on its costs of complying with the Building Act to a tenant whether as outgoings or otherwise. Any costs incurred by a tenant in complying with a landlord’s ESM obligations may be recovered from the landlord or deducted from the rent due to the landlord.

In what circumstances can a landlord still recover from a tenant the costs of maintenance and repairs under a lease to which the Retail Act applies?

Landlords may continue to recover from tenants the cost of maintenance and repairs to retail premises where:

  • the works do not relate to a landlord’s ESM obligations
  • the works do not relate to a landlord’s obligations under s 52 of the Retail Act
  • the cost is not a capital cost (s 41 of the Retail Act)
  • the landlord complies with s 39 of the Retail Act and the Retail Leases Regulations 2013 (Vic).

The Opinion is not legally binding in the same way as a decision arising from a disputed case. However, it is likely to carry substantial weight in any court proceedings. Landlords should consider whether their existing leases seek to impose ESM compliance obligations on tenants, and whether such provisions are void, and should review the costs on-charged to tenants to ensure that they are recoverable. Tenants who have paid significant amounts to landlords for compliance with a landlord’s ESM obligations or Retail Act repair and maintenance obligations under an existing lease may consider taking action to recover these amounts from the landlord, or seek to offset them against future rental payments.

If you have any queries, or require more detailed advice on the implications of the Opinion, please contact a member of our Property team.

[1] Section 52 of the Retail Act provides that a landlord is responsible for maintaining in the condition when the lease was entered into, the structure of and fixtures in the premises, plant and equipment, and the appliances, fittings and fixtures relating to services provided by the landlord under the lease (unless the works arise from the tenant’s misuse or the maintenance relates to items which the tenant is entitled or required to remove at the end of the lease).

On 1 May 2015, VCAT’s President, Justice Greg Garde, issued an advisory opinion (Opinion) to the Small Business Commissioner of Victoria on the scope of s 251 of the Building Act 1993 (Vic) (Building Act), and a landlord’s ability to recover costs incurred in complying with its repair and maintenance obligations under the Retail Leases Act 2003 (Vic) (Retail Act).

In summary, the Opinion concludes that:

  • a landlord of commercial or retail premises can only require a tenant to undertake essential safety measures (ESM) obligations under the Building Act and Building Regulations 2006 (Vic) (Regulations) in very limited circumstances, and only at the landlord’s cost
  • a landlord of commercial or retail premises cannot pass onto a tenant the cost of works it is required to carry out to comply with its ESM obligations under the Building Act and Regulations
  • a landlord of retail premises cannot pass onto a tenant the cost of works it is required to carry out pursuant to s 52 of the Retail Act[1].

The Opinion addresses the following:

Which party must comply with ESM obligations?

If an obligation in the Regulations relating to an ESM states that the obligation must be complied with through the landlord’s actions, a clause in a lease requiring a tenant to satisfy this obligation is void. However, if the obligation in the Regulations relating to the ESM merely requires the landlord to ensure that a certain outcome is achieved or standard is met, a landlord may require the tenant to achieve that outcome or meet that standard through the lease, at the landlord’s expense.

Which party must pay the costs of complying with ESM obligations?

Section 251 of the Building Act prevents a landlord of commercial or retail lease from passing on its costs of complying with the Building Act to a tenant whether as outgoings or otherwise. Any costs incurred by a tenant in complying with a landlord’s ESM obligations may be recovered from the landlord or deducted from the rent due to the landlord.

In what circumstances can a landlord still recover from a tenant the costs of maintenance and repairs under a lease to which the Retail Act applies?

Landlords may continue to recover from tenants the cost of maintenance and repairs to retail premises where:

  • the works do not relate to a landlord’s ESM obligations
  • the works do not relate to a landlord’s obligations under s 52 of the Retail Act
  • the cost is not a capital cost (s 41 of the Retail Act)
  • the landlord complies with s 39 of the Retail Act and the Retail Leases Regulations 2013 (Vic).

The Opinion is not legally binding in the same way as a decision arising from a disputed case. However, it is likely to carry substantial weight in any court proceedings. Landlords should consider whether their existing leases seek to impose ESM compliance obligations on tenants, and whether such provisions are void, and should review the costs on-charged to tenants to ensure that they are recoverable. Tenants who have paid significant amounts to landlords for compliance with a landlord’s ESM obligations or Retail Act repair and maintenance obligations under an existing lease may consider taking action to recover these amounts from the landlord, or seek to offset them against future rental payments.

If you have any queries, or require more detailed advice on the implications of the Opinion, please contact a member of our Property team.

[1] Section 52 of the Retail Act provides that a landlord is responsible for maintaining in the condition when the lease was entered into, the structure of and fixtures in the premises, plant and equipment, and the appliances, fittings and fixtures relating to services provided by the landlord under the lease (unless the works arise from the tenant’s misuse or the maintenance relates to items which the tenant is entitled or required to remove at the end of the lease).