Commercial v Retail Leases

Property Law: 14 June 2023

Author: Ralph Davies - Our People

The commercial leasing sphere is often a contentious legal area. Striking an equitable balance between the landlord and tenant’s interests is a difficult, if not impossible, exercise. One of the most contentious areas that is readily disputed is the classification of such commercial leases, specifically whether the lease can be classified as ‘retail’ or ‘commercial’.

The significance of such differing classifications is not insignificant to a tenant and landlord alike. If a lease is classified as ‘retail’, the Retail Leases Act 2003 (Vic) (“Act”) provides several protective provisions for tenants that are normally unavailable to commercial lease tenants.

These provisions, amongst other terms, include constraints on a tenant’s liability to pay outgoings that have not been previously disclosed by the landlord (ss 29 & 39), the inability for a landlord to recover land tax from a tenant as part if general outgoings (s50), the prevention of a landlord recovering legal costs and expenses incurred during lease negotiation and preparation (s 51), and a minimum lease term of 5 years (s 21(1)). The legislature established these protective provisions in an attempt to remedy the underlying assumption that a retail tenant has unequal bargaining power to its landlord.

Conversely, commercial leases are not governed by such provisions, rather standard commercial and contract law apply. Thus, the landlord has a considerably stronger bargaining position with such leases. Therefore, it is favourable for a tenant to claim a lease is ‘retail’, while for a landlord the inverse is true.

When contemplating a retail premises, one often perceives a store, selling conventional retail goods such as clothing or homeware, while commercial leases are frequently viewed as typical white-collar corporate offices. However in reality such cursory conclusions are insufficient and frequently require more critical legislative interpretation.

By virtue of section 4 of the Act, retail premises means premises that are used, wholly or predominantly, for the sale or hire of goods by retail, or the retail provisions of services, or any businesses classified as retail by the Minister. As the Act does not provide a more in-depth analysis of this test we turn to common law.

The Supreme Court of Victoria provided guidance for questions on the classification of leases in CB Cold Storage Pty Ltd v IMCC Group (Australia) Pty Ltd [2017] VSCA 178. This case involved the tenant’s customers (usually companies involved in the food industry) paying fees to store their dairy products, small goods, seafood and other expirable goods at the tenant’s premises. The tenant sought to use the Act to recover money that it had paid to the landlord. While VCAT ruled the lease was commercial, the Supreme Court did not.

The Supreme Court applied the ‘ultimate consumer test’, which considers whether the person acquiring the goods or services provided by the tenant is the ultimate consumer of such goods or services. VCAT used the concept of a mining company wishing to sell coal to a power station in India for their determination of the meaning of retail in the context of services – noting that if the coal company dispatched such shipment of coal by rail to a port, neither the rail operator nor the port would be considered as providing a service on a retail basis. However, the Supreme Court distinguished this analogy, stating that, as the service of cooling the food products was ‘consumed’ at the premises, and the recipients of the services could not resupply this cooling service, the recipients were considered the ‘ultimate consumer’.

This test is not a new revelation, as it has been applied previously (see Fitzroy Dental) however this case is a clear message the Supreme Court has no intention of narrowing the scope of retail leases anytime soon.