Landlord is responsible for repair and maintenance of essential safety measures at their cost

Property Law: 18 March 2019

Small Business Commissioner: reference For Advisory Opinion (Building and Property) [2015] VCAT 478

What was the opinion about?

The question of who bears the responsibility and expense of repair and maintenance of leased premises is a question that Landlords and Tenants have difficulty with.  The answer to this question has been the subject of inconsistent views in legal journals and of legal commentary and debate in recent times [1].

The fact that there was no definitive answer to this question prompted the Small Business Commissioner ('SBC') to seek an advisory opinion from the Victorian Civil and Administrative Tribunal ('VCAT'). One of the reasons that the SBC applied to VCAT was that the answer to this question would benefit many commercial and retail tenants and commercial and retail landlords across Australia [2] . The advisory opinion was delivered by Justice Garde the President of VCAT ('President') on 1 May 2015 in the case of Small Business Commissioner: Reference for Advisory Opinion (Building And Property) [2015] VCAT 478 ('Opinion').

The SBC asked a number of questions of the President in relation to the operation and effect of sections in the Building Act 1993 ('Building Act'), the Building Regulations 2006 ('Regulations') and the Retail Leases Act2003 ('RLA').  The President considered whether certain sections were inconsistent, which section would prevail in the case of inconsistency and whether or not the various sections could operate harmoniously.

What was considered?

The main sections and regulations that were considered in the Opinion are:

Section 251 of the Building Act: Which in summary says that if the owner of a building is required to carry out any work or do any thing and fails to do so, the occupier or mortgagee of the building or the land can do that work or thing.

Costs and the Building Act: Pursuant to section 251 (2), if the occupier or mortgagee does the work or thing then it can recover from the Landlord the expenses incurred as a debt or set off the expenses against the rent. 

Essential Safety Measures ('ESM'): ESM's are listed in Schedule 9 of the Building Regulations 2006. ESM's include such things as fire alarms, sprinkler systems, fire doors and emergency lifts.[3]

Section 52 of the RLA: Which is applicable to retail premises only and imports an obligation into a retail lease that the Landlord is responsible for maintaining in a condition consistent with the condition of the premises when the lease was entered into the following items:

• The structure of, and fixtures in, the retail premises; and
• Plant and equipment at the retail premises; and
• The appliances, fittings and fixtures provided under the lease by the Landlord relating to the gas, electricity, water, drainage or other services.

There are two exceptions to the Landlord's obligation to maintain: (i) when the need for repair arises out of misuse by the Tenant; or (ii) the Tenant is entitled or required to remove the thing at the end of the lease.   The note to section 52 was also considered by the President, it says: 'Section 39 regulates the ability of the landlord to recover outgoings (including the cost of repairs). Section 41 provides that capital costs are not recoverable from a Tenant'.

The Explanatory Memorandum for the Retail (Leases) Amendment Act 2005[4] (which inserted the note to section 52) commented that the effect of the added note 'is to highlight other provisions of the Act which, together with the application of section 52 of the Act, clarify that while the landlord is responsible to arrange and carry out the repairs under sub-section (2), the cost of those repairs, other than capital costs and the cost of urgent repairs, may be passed on to the tenant if they have been specified in the lease as recoverable outgoings under the lease'.[5]

Outgoings and the RLA: A number of sections relating to outgoings were considered including, the definition of outgoings which includes expenses directly attributable to the maintenance and repair of a building that the retail premises are located in and section 39 which outlines what outgoings are recoverable from a Tenant (noting that there must be a specific provision in the lease that states a certain outgoing is recoverable).  

Costs and the RLA: Section 41 states that capital costs are not recoverable and section 51 that a Landlord cannot claim the Landlord's legal or other expenses in relation to the negotiation, preparation or execution of the lease, obtaining the consent of a mortgagee to the lease or the Landlord's compliance with the RLA.

The RLA prevails: Pursuant to section 94, a provision of a retail lease (or other agreement) is void if it is contrary to or inconsistent with anything in the RLA.

What questions did the small business commissioner ask?

In summary the questions asked by the SBC were:

• If a Landlord agrees with a Tenant in a lease that the Tenant has to maintain ESM's in leased premises, can the Landlord enforce this obligation?
• What effect does section 251 of the Building Act have on the contractual agreement between a Landlord and a Tenant to maintain ESM's including:
  • Can a Landlord recover from a Tenant the costs associated with maintaining ESM's?
  • Does section 251 of the Building Act require a Landlord to reimburse costs incurred by the Tenant in complying with a term in the lease that requires the Tenant to maintain the ESM's?
  • Does section 251 of the Building Act allow the Tenant to set off the costs it incurred in maintaining the ESM's against the rent?
• If the costs are non-capital costs [6] and there is a clause in the lease that says that the costs of maintaining ESM's is a recoverable outgoing [7] , does section 251 of the Building Act take precedence over section 39 of the RLA so that:
  • The Landlord cannot recover the ESM compliance costs as an outgoing;
    and/or
  • A Tenant, if it has paid ESM compliance costs as part of the outgoings for the premises, can recover those costs.
• Can a Tenant deduct or set off any ESM compliance costs against the rent payable for the premises; and
• What are the circumstances that a Landlord can recover costs of repair and maintenance from a Tenant?

What was Justice Garde's opinion?

To summarise the President's Opinion:

Building Act and Regulations and ESM's

• The Parliamentary intention underpinning section 251 is to ensure that work required to be carried out or thing required to be done by the Building Act or the Regulations are completed by the owner and if the owner defaults, to authorise their completion by the occupier at the owner's expense [8] .
  
  A Landlord is the party that bears the costs of complying with ESM obligations pursuant to the Building Act and it cannot pass the costs of compliance onto the Tenant as a recoverable outgoing. If the Landlord does not do the work or thing then the Tenant can do it and recover the cost from the Landlord, including setting off the cost against rent. A clause in a lease that transfers the cost of ESM's onto the Tenant is void because it is inconsistent with the purpose of section 251 of the Building Act.
   
• There are some obligations where the Landlord can require the Tenant to do the work or thing but the Landlord bear's the cost.  Whether the obligation can be transferred to the Tenant depends on whether the Landlord must comply with the obligation (as a matter of statutory construction) or whether the Landlord has to ensure that a certain result is achieved or a standard is obtained. Examples of the difference between the two classes was given in the Opinion:
  
  An example of the first class of regulation, being that the Landlord has the obligation to do the work or thing, is regulation 709 which requires the installation of smoke alarms and smoke detection systems that comply with specified Australian Standards. An example of a case that discussed this regulation is Chen v Panmure Hotel Pty Ltd [9] .
  
  The second class, is where the Landlord 'must ensure' that a specific result is achieved or obtained in relation to the building or the land. An example of this type of regulation is regulation 1217 (a) which provides that the owner of a building or place of public entertainment 'must ensure that any essential safety measure required to be provided in relation to that building or place€¦' is 'maintained in a state which enables the essential safety measure to fulfil its purpose' [10] . An example of a case that discussed this regulation is McIntyre v Kucminska Holdings Pty Ltd [11] . 
   
• In relation to retail leases, the Landlord cannot pass on the costs of complying with section 52 of the RLA or costs associated with section 251 of the Building Act.  The President considered that section 52 places the responsibility for maintaining the items listed in that section on the Landlord and that it is clear that Parliament expects and requires the Landlord to meet this responsibility unless one of the exceptions in section 52 (3) applies [12] .
   
  Interestingly, the President's opinion was very strong in relation to the Explanatory Memorandum which caused a lot of confusion in relation to the interpretation of the footnote to section 52 of the RLA. His opinion is that the statements contained in the Explanatory Memorandum are misconceived and that it can't be otherwise that section 52 (2) of the RLA places on the Landlord the obligation to maintain certain items and section 52 (1) and 94 make this responsibility an inexcludable term of every retail premises lease in Victoria [13] .
   
  The President came to the same view when considering section 52 of the RLA as the view was expressed by Deputy President Macnamara (as he then was) back in the 2009 case of Café Dansk Pty Ltd v Shiel [14] . In this case when referring to the note that was added to section 52 of the RLA by the Retail Leases (Amendment) Act 2005 he said: 

It would, in my view, make a mockery of s 52 if Parliament having allocated the responsibility for certain repairs to the landlord, the landlord could then send the bill to the tenant for the cost of carrying out those repairs. To attempt to reach this unlikely result by reliance on the note at the end of the section is, to quote Lord Salmon, 'like trying to suspend a 3 tonne truck from a cobweb' (Broome v Cassell & Co [1971] 2 QB 354, 390).

What's interesting?

• Six bodies or firms of legal practitioners provided submission to VCAT for consideration and of these only the Shopping Centre Council (represented by Robert Hay, QC) and The Real Estate Institute of Victoria (represented by Sam Hopper of Counsel) appeared at VCAT, apart from the Applicant.  The submissions are only given a brief reference as part of the reasoning's and it is unclear how much weight was given to these submissions by the President in providing his Opinion.
• The President provides the key steps in the Opinion that need to be followed to resolve the issue of whether a Landlord can enforce a term of a lease requiring a Tenant to provide or maintain the leased property's ESM's.
• The test preferred by the President to determine whether a lease term was inconsistent with a statutory provision is the test in the High Court case of Caltex Oil (Aust) Pty Ltd v Best [15] . The President noted that the test was a three limbed test and that each limb should be considered when determining whether a contractual provision is inconsistent with statute [16] . The three elements are:
  • Inconsistency includes, but is not confined to literal conflicts or collisions between the contractual provisions and the statutory provisions;
  • Inconsistency also arises whenever there is a conflict between a contractual provision or the operation of such a provision and the purpose or policy of the statute; and
  • If the operation of a contractual provision defeats or circumvents the statutory purpose or policy, then the provision is inconsistent in the relevant sense and falls within the injunction against contracting out.

Who will this opinion effect?

This effect of the Opinion is far reaching. Although it is an Opinion of the President of VCAT it is likely to be persuasive not only in relation to retail leases but for Landlords and Tenants of commercial leases, as the Building Act (and its regulations) applies to the standard of all buildings. In practice, at Aitken Partners we have already seen and referred to the Opinion in both retail and commercial lease negotiations. Generally, the Opinion is considered as a good outcome for Tenants as costs incurred by the Landlord associated with compliance with the Building Act, Regulations and the RLA are not able to be on charged to the Tenant and may be recoverable if already paid.  Tenants should note that some costs are still recoverable (however limited) and should seek legal advice on how the Opinion will apply to their particular circumstances.

If you have a legal enquiry in relation to this Opinion and how it applies to you, please contact Sarah Ward of Aitken Partners. This post is not intended to cover all the issues that the Opinion raises or to constitute legal advice.