Could your warehouse lease now be a retail lease?

GUEST OBSERVER

Owners or tenants of Victorian warehouse space should review their lease details after a recent decision by the Supreme Court of Victoria was subsequently upheld by the Court of Appeal.

If a tenant supplies goods or services which are then used in something else that is sold to the public, the lease may be governed by the Retail Leases Act 2003.

A recent case saw a warehouse tenant that provided cold storage and logistics services to other businesses in a dispute with the landlord over the nature of the lease and whether it was classed as ‘retail’.

In this case, CB Cold Storage Pty Ltd v IMCC Group Pty Ltd, a warehouse tenant provided cold storage and logistics services to other businesses from the leased premises. 

The permitted use of the premises under the lease was ‘Cold and cool storage warehouse and transport facility’.  

The Victorian Civil and Administrative Tribunal held that the lease was not retail as the tenant’s business did not provide goods or services to the ‘ultimate consumer,’ a person who uses goods or services to satisfy personal needs.

The tenant disagreed with this interpretation and appealed to the Supreme Court of Victoria.

The court found, on 7 February 2017, that the ‘ultimate consumer’ test was valid, but the ultimate consumer could be a person or company that uses those goods or services to produce something else for a business purpose.

For example, if a warehouse is used to supply car parts for an automobile manufacturer, then that warehouse tenant is supplying something to be used in the production of a car, and therefore the lease likely to be covered by the Retail Leases Act.

However, the tenancy would not be covered by the Act if the warehouse was used to supply car parts to a shop who then on sold them to the public, as the shop they were supplying was not using them, merely reselling.

There are some exceptions to this, such as if a tenant is a listed company or its subsidiary. 

If the lease does not permit the use of the premises for retail purposes, a breach of lease may be present, but that does not affect the retail nature of the lease.

The landlord appealed the February decision to the Court of Appeal, which dismissed it on 5 July 2017, noting the following features combined led to the finding that the ultimate consumer test had been satisfied and that the lease was a retail lease:

• Services were used by the Tenant's customers who paid a fee
• Any person could purchase the services if the fee was paid
• The Tenant's business was open during normal business hours
• The Tenant's customers did not pass on the services to anyone else

What does this mean?

• Tenants may not be charged land tax. They may also be able to recover tax from the landlord retrospectively.
• Generally, the term of the lease must be for at least five years.
• A rent review clause may not include a “ratchet” which stops the rent falling due to market conditions. Any extra rent paid due to a ratchet clause may be recoverable from the landlord.
• The landlord is obligated to provide a detailed “Disclosure Statement” to the tenant. Non-provision or inaccurate information may result in the tenant having the right to withhold rent or to terminate the lease. 

Tim Kelly is a partner at Rigby Cooke Lawyers and has more than 35 years of legal experience. He can be contacted here.