Victorian options

I have to apologise to my Victorian friends (if I have any left) because this article is going to yet again moan about the crazy town that is retail shop leasing in Victoria.

I also have to apologise to readers who like to use my articles like a dose of Valium: you may need to pay attention this time.

We are going to again delve into options to renew in Victoria, and you will need to have to trust me with some preliminary observations which will inform the discussion.

First, we know that jurisdictional limits apply to the RLA, so that if the tenant is a listed company (or its subsidiary), or the occupancy cost exceeds $1m, the RLA does not apply.

Second, we know from the decision of the Court of Appeal in Verraty Pty Ltd v Richmond Football Club Ltd [2020] VSCA 267, that applicability of the RLA is determined at the time the lease is entered into. If the RLA applies when the lease is entered into, it does not matter if the tenant subsequently lists, or if the occupancy cost subsequently exceeds $1m, the RLA will continue to apply.

Third, we know that the lease arising from the exercise of an option to renew is a “renewal” per s9 of the RLA. And s11 provides that the RLA applies to a retail premises lease that is entered into or renewed after the commencement of the Act.

Fourth, s50 of the RLA says that a provision of a retail premises lease is void to the extent that it makes the tenant liable to pay land tax.

Now, you need to hold all of those thoughts, a bit like an undercoat.

Next, we need to imagine the following facts:

1. A retail premises lease is entered into, to which the RLA applies: the occupancy cost at commencement is $980K. The lease is for a term of 5 years, with a 5 year option to renew.
2. The lease includes a standard provision that says “The tenant is liable to pay land tax”.
3. Section 50 of the RLA applies, making the provision about the payment of land tax void.
4. The option clause is in standard terms, and says that if the tenant exercises the option, it is entitled to a new lease for the further Term, on the same conditions as this lease, except that the rent and Term details will be updated in accordance with directions contained in the option clause.
5. The tenant validly exercises the option.
6. When the rent is determined for the further Term, the Y1 occupancy cost exceeds $1m, so the RLA will not apply to the lease for the further term.

Does the tenant have to pay land tax under the option lease?

My analysis says:

1. The RLA applied to the original lease, so the provision making land tax payable was made void.
2. However, as you will remember from the undercoat above, the applicability of the RLA is to be determined at the time the lease is entered into or renewed. In this case, since the occupancy cost under the renewal lease exceeds $1m, the RLA does not apply. Therefore, s50 does not apply, the obligation to pay land tax is not rendered void, and land tax is payable.

There has been no judicial decision bearing directly on this issue, but in Richmond Football Club Ltd v Verraty [2019] VSC 597 at first instance, Croft J made some obiter comments which make you stop and think.

His honour appears to say in that case that:

1. By the terms of the option clause, the tenant is entitled to a lease for the further term “in the same terms” as the original lease;
2. The obligation to pay land tax in the original lease was made void by operation of s50 of the RLA;
3. If the option lease is to be “on the same terms” then the obligation to pay land tax should continue to be made void; and
4. The parties should have contemplated that the RLA might not have applied to the option lease, and (had it been intended that land tax was to be payable) they should have drafted the option clause so as to make it clear that the obligation to pay land tax was to be revived.

With respect to Croft J, I think this line of reasoning attributes too much intellect to me and my colleagues in the trenches. We could be forgiven for thinking that an express provision making land tax payable was intended to take effect as drafted, but for the interference of the RLA: had the parties intended that land tax could never be payable, whether or not the RLA applied, they would have deleted the obligation in the original lease.

The reasoning of Croft J  flows from the proposition that the lease for the further term is to be “on the same terms as the original lease”, and since the obligation to pay land tax was rendered void in the original lease by operation of s50, then the obligation to pay land tax must be rendered void in the lease for the further term.

But it seems to me that if this reasoning is correct, it fails its own requirement that the option lease “must be on the same terms”.

We know that the original lease includes a provision that says “The Tenant must pay land tax”. And we also know that the RLA does not apply to the lease for the further term. In those circumstances, how do we make the obligation to pay land tax void? We cannot achieve that outcome by statutory implication because, unlike the original lease, the RLA does not apply. Therefore, the only way in which we can remove the obligation to pay land tax is by deleting the clause which says that land tax is payable. But if we delete that clause, the lease is not “on the same terms”.

The Croft J approach requires that the express terms of the lease are overridden by a term implied into the lease by an Act that does not apply to it. Sorry, but my head is exploding.

Whatever the merits of the arguments above, what we have is yet another example of the mess created by the Victorian RLA.

Section 1 of the RLA proclaims its main purpose is to “enhance the certainty and fairness of retail leasing arrangements”. Can we just pause for a moment while I read that again. And that sound you are hearing is me laughing out loud. If someone wanted to devise a legislative scheme to make retail shop leasing as complex and confusing as possible, they would use the RLA as the base plate, and they wouldn’t need to change much.

The hypothetical described above is yet another example of the epic failure of the RLA to achieve its stated objective.

Download PDF here – Victorian Options

Disclaimer: This article is a general summary with focus on issues of interest to the authors. It is not intended to be used as legal advice.

Speirs Ryan is a boutique property law firm based in Sydney, Melbourne and Newcastle with national coverage. The firm is uniquely placed with specialist teams in both property transactions, construction and strata law