Landlords cannot sue retail tenants for surprise outgoings...

There has been an interesting legal development affecting retail landlords and tenants.

As you may be aware, Section 46 of the Retail Leases Act prescribes:

(1) A retail premises lease is taken to provide as set out in this section.

(2) The landlord must give the tenant an estimate of the outgoings to which the tenant is liable to contribute under the lease that itemizes those outgoings.

(3) The tenant must be given the estimate of outgoings-

(a) before the lease is entered into; and

(b) in respect of each of the landlord’s accounting periods during the term of the lease, at least one month before the start of that period.

(4) The tenant is not liable to contribute to any outgoings of which an estimate is required to be given to the tenant as set out in this section until the tenant is given that estimate.

Despite the wording of Section 46, there had been a line of thinking in retail leasing circles that a landlord would not be prevented from enforcing payment of outgoings despite failure to provide these estimate, which appears to have stemmed from the case of Richmond Football Club Limited v Verraty Pty Ltd [2011] VCAT 2104. In Richmond Football Club, it was held that a tenant was unable to claim a refund of outgoings it had already paid despite no landlord estimate having been given, on the basis the tenant had received ‘good consideration’ from payment of those outgoings.

Additionally, there had long been an unanswered question about whether the landlord could ‘cure’ the failure to provide the estimate required by Section 46 by issuing a late estimate, which would then trigger the tenant’s liability for retrospective outgoings remaining unpaid.

Last month VCAT handed down a decision addressing both of these aspects, cited as Phillips v Abel [2019] VCAT 1031. In Phillips, it was held that a landlord could not retrospectively recover unpaid outgoings in respect of a period for which an estimate of outgoings was not given, and that the landlord was unable to ‘cure’ that failure by providing a late notice. Consequently, the landlord in Phillips could not recover unpaid outgoings charged before the estimate was given.

As a result of Phillips, it now appears that, whilst a tenant is unable to claim refund of outgoings already paid, a landlord will not be able to recover unpaid outgoings in respect of which no estimate has been given.

Our experience in the sphere of retail leasing in Victoria indicates to us that a large proportion of landlords and property managers have yet to incorporate provision of statements of estimated outgoings into their lease administration processes. These statements tend to be more commonplace in shopping centre and plaza-type tenancies subject to centralised management, and so some have taken the view that the requirement to provide them is limited to that context.

Following Phillips, however, we believe all landlords and property managers of retail leases should now review their administrative processes and incorporate these statements, to avoid landlords being disadvantaged and out of pocket in the event of dispute.

In respect of each retail tenancy, landlords and property managers should diarise dates to provide these statements, ensure they are provided to the tenant in accordance with the notice requirements of the lease, and confirm their actual receipt by the tenant.

Failure to do so may carry a range of consequences, including:

• a landlord being unable to enforce payment of those outgoings;

• a tenant leveraging that failure to refuse payment of outgoings, or obtain some other benefit or concession with respect to the tenancy;

• a default notice being invalid; and/or

• a lease termination being rendered unlawful, resulting in the landlord being liable for damages.

Statements of actual outgoings

Section 47 of the Act requires a statement of actual outgoings expenditure to be provided to the tenant:

• at least once during each of the landlord’s accounting periods, and within 3 months after the end of the landlord’s accounting period;

• prepared in accordance with applicable accounting standards;

• stating the landlord’s actual outgoings expenditure, and any amount by which the estimated outgoings exceeded the total outgoings.

The statement of actual outgoings must be prepared by a registered company auditor unless it relates only to certain outgoings listed in Section 47(6) (generally GST, water and council rates and charges, and insurance) and the statement is accompanied by copies of assessments, invoices, receipts or other proof of payment for the landlord’s expenditure included in the statement.

It remains to be seen whether failure to give a statement of actual outgoings may (in and of itself) act as a barrier to recovery of unpaid outgoings.

Concluding remarks

The evolving application of the Retail Leases Act continues to pose challenges for Victorian landlords, agents and legal practitioners alike, leading to confusion, uncertainty and increased potential for dispute. In light of this, the adoption of robust administrative processes such as we have suggested above should significantly improve landlords’ certainty of being able to enforce at least this aspect of the bargain struck.

If you would like advice or assistance in relation to how the above may affect a tenancy or tenancies you manage, please do not hesitate to contact us.

Yen Ong

Lawyer

Paul Nunan

Director