Australia: Valuer and Retail Leases Update – Premises deemed not to be retail premises

In brief

A recent decision in Bulk Powders Pty Ltd v Seicon Pty Ltd (Building and Property)[2018] VCAT 2000 determined that premises used primarily for production, packaging and storage of health supplements, were not retail premises for the purposes of the Retail Leases Act 2003 (Vic) merely because the tenant sold the products to customers online. VCAT correctly determined (in the writer’s view) resort must be had to the permitted use under the lease.

What you need to know

The recent decisions by VCAT, as to whether premises are retail for the purposes of the Act or not, makes it very difficult for a valuer or property manager to understand if premises are in fact governed by the Act. At a recent seminar, a manager told me that they assumed that all leases were governed by the Act to be safe. This would mean that any rent would need to take account of land tax and the managing agent would need to comply with the requirements of the Act, such as provision of a disclosure statement and notification to the tenant of the last day to exercise an option. This is probably safe practice and will not make the lease be a lease under the Act, merely because a disclosure statement is given. For valuers, the issue is more difficult and where the parties cannot agree on the application of the Act, an independent binding decision will need to be given by an expert.

Background

The facts of the case were not in dispute. The tenant used the premises (in an industrial area) to manufacture sports nutrition products to an end consumer, to which it sold online. Customers could attend the premises to collect goods, although this was not encouraged and only about 5% of sales were made face-to-face. The premises were not open to the public and there was no signage advertising the premises. Importantly, the lease did not provide for any retail sales and specifically stated that it could “produce package and store online health supplements (not retail)”. Also, in the tenant’s application to lease the premises, it specified that it was not conducting a retail business.

Conclusion

In the writer’s view, this was a sensible decision as the landlord had not contemplated this being a retail lease and explicitly specified in the lease that retail sales were not permitted. This emphasises the importance of specifying the permitted use correctly; however, even with that wording, VCAT did look at what sales were conducted by the tenant from the premises. If retail is to be avoided, it would also be worth specifying that external signage advertising the premises should not be erected and that customers are not to attend the premises. What was not decided is whether online sales will constitute “retail” purposes of the Act. Appropriate drafting to exclude such sales may also be required to avoid the Act. This is now a very difficult area and it is anyone’s guess whether a lease will be governed by the Act in certain circumstances. Expert advice in drafting a lease and in interpreting whether it is governed by the Act will be required.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances. Madgwicks is a member of Meritas, one of the world's largest law firm alliances.