A common mistake made by landlords and tenants when renting business premises in Victoria is failing to correctly identify whether their agreement is a Commercial Lease or a Retail Lease. Understanding the distinction between a commercial and retail lease is essential.
If a lease is classified as a retail lease under the Retail Leases Act 2003 (Vic), a range of mandatory tenant protections automatically apply. Not getting the distinction right can have serious implications. Tenants risk losing out on important protections and may pay outgoings for which they are not responsible, and landlords can face potential refunds, unexpected lease extensions, and compliance issues.
Features of a Retail Lease
The Retail Leases Act 2003 (Vic) was introduced to help protect tenants who traditionally have less bargaining power than landlords. When the Act applies, the landlord must comply with mandatory disclosure requirements and is prohibited from passing on certain costs (such as land tax) to tenants. Conversely, in a standard commercial lease, the parties are generally bound by what they have agreed contractually.
While not exhaustive, the table below lists some of the key features of a retail leasing arrangement.
| Feature | Retail Lease (Protected) | Commercial Lease (Negotiable) |
| Land Tax | Landlord pays. It is unlawful to pass this onto the tenant (s 50). | Tenant may pay if the lease allows. |
| Lease Preparation Costs | Landlord pays. The tenant cannot be charged for preparing the lease. | Tenant commonly pays the landlord’s legal fees. |
| Disclosure | Mandatory Disclosure Statement and proposed lease must be provided at least 14 days before signing (s 17). | No prescribed disclosure requirement. |
| Minimum Term | Generally, a five‑year minimum including any option periods, unless a waiver certificate is issued by the Victorian Small Business Commission before the lease is signed (s 21). | No minimum term requirement. |
| Rent Reviews | No “ratchet” clauses permitted – rent cannot increase if market rent decreases. | “Ratchet” clauses are lawful and common. |
| Liability for Repairs | Landlord must maintain the premises, plant, and equipment in the condition they were in when the lease commenced, excluding damage caused by the tenant (s 52). | Repairs and maintenance governed by the lease terms. |
What are Retail Premises?
Section 4 of the Act defines a retail premises as one that includes premises used wholly or predominantly for “the sale or hire of goods by retail or the retail provision of services”. Certain premises used to carry on specific kinds of business may, by Ministerial determination, also be deemed retail and there are statutory exclusions. Landlords and tenants should obtain appropriate advice based on the premises, business circumstances and the relevant legislation and determinations at the time.
The Ultimate Consumer Test – Case Study
A lease is not “retail” simply because the premises is in a shopping strip or includes customer access. The courts apply the “ultimate consumer test” as illustrated in the Victorian Court of Appeal’s decision in IMCC Group (Australia) Pty Ltd v CB Cold Storage Pty Ltd [2017] VSCA 178.
IMCC Group (the landlord) leased premises to CB Cold Storage (the tenant). The tenant charged its customers fees to store cold goods and provided ancillary services, such as loading pallets and arranging transport. Customers ranged from primary producers to small family‑run businesses.
The tenant applied to VCAT to recover money paid (including land tax) to the landlord, arguing that the payments were prohibited under the Retail Leases Act. VCAT ruled against the tenant, determining the warehouse was not retail. The tenant appealed to the Supreme Court, which overturned the decision. The landlord then appealed to the Court of Appeal.
The case turned on whether the service provided – cold storage – was “retail”. Using the Ultimate Consumer Test, the court looked at two main factors:
- Who uses the service? If the person buying the service is the ultimate consumer (meaning they use it themselves and don’t resell it unaltered), it is retail.
- Who can access the service? If the service is generally available to anyone willing to pay the fee, it also points toward retail.
Decision
The Court of Appeal ruled in favour of the tenant, confirming the warehouse was a retail premises. Their reasoning included:
- Commercial users count: It doesn’t matter if the customers are businesses or individuals; a business can still be an “ultimate consumer”.
- No “resale” of storage: When the customer pays for cold storage, it uses that storage for its own business and does not “resell” it – it is the ultimate consumer of the cold storage services.
- Open to all: The service was available to any business or individual willing to pay.
The Landlord’s Risk: When “Commercial” Isn’t Safer
Many landlords prefer a “commercial” lease structure for flexibility and cost recovery. However, if a lease later turns out to be “retail”, the potential financial consequences can be substantial:
- Land tax refunds: Under section 50, landlords cannot recover land tax from retail tenants and may need to refund payments.
- Outgoings reimbursement: Retail landlords can only recover outgoings if a written estimate was provided before the lease commenced (s 46).
- Unexpected lease extensions: Retail leases have a five‑year minimum term (unless waived). A “commercial” lease drafted for two years may inadvertently bind a landlord longer, affecting redevelopment or sale plans.
- Other risks: Security deposit return timing (s 24) and notice requirements for renewal (s 64) can also apply automatically if the lease is retail.
Conclusion
Determining whether a lease is commercial or retail requires a careful review of the legislation, the tenant’s business activities and customer relationships, and the “permitted use” clause in the lease.
- The definition of “retail premises” can have broad application, and the true nature of the business use governs whether the lease is retail or commercial.
- Agreements that try to exclude the Act or the application of a provision in the Act are void (s 94).
- Proper classification from the beginning protects both sides. Getting it wrong can trigger costly disputes and compliance issues down the track.
Lease disputes can be costly and disruptive, so it is important to seek legal advice from an experienced lawyer before entering a lease agreement. We can help landlords and tenants by:
- Correctly classifying the nature of the premises to ensure disclosure obligations, if relevant, are met.
- Drafting and reviewing retail and commercial leases.
- Negotiating lease provisions.
- Lease assignments and transfers.
- Leasing disputes.
This article provides general information about retail and commercial leasing laws in Victoria. It is not legal advice and should not be relied upon as such. For guidance specific to your situation, please call 03 9670 7440 or email [email protected].