RETAIL LEASING- REPAIR & MAINTENANCE OBLIGATIONS- PART 2

 

In part one of our article, we discussed the landlord’s obligations to repair and maintain the leased premises and their equipment.

We now look at obligations of the landlord for capital works, urgent repairs and outgoings that can and cannot be charged by a landlord to a retail tenant.

 

 

We also look at landlord’s obligations under the Building Act 1993 and essential safety measures.

Capital Works 

Section 41 of the RLA (Vic) provides a landlord cannot pass on the cost of capital works to a retail tenant however if agreed to by a landlord and tenant, a landlord can pass on the costs of:

  • capital works;
  • installation and carrying out repairs or maintenance work in relation to essential safety measures.

Urgent repairs

Section 52(4) of the RLA is often overlooked by tenants as it allows a tenant to do urgent repairs (for which the landlord is responsible) if:

  • the repairs are necessary as they have a substantial effect on the tenant’s business; and
  • the tenant is unable to get the landlord (or the agent) to carry out the repairs despite taking reasonable steps to allow the landlord to do so.

Section 52(5) of the RLA provides if the tenant carries out urgent repairs the tenant must give the landlord written notice of the repairs and the cost within 14 days after (note: NOT 14 days before!) the repairs are carried out and the landlord is liable to reimburse the tenant for the reasonable cost of the repairs. The Landlord cannot then recover that cost or any part of it as an outgoing from the tenant.

Tip 

We recommend that a tenant give their landlord or agent written notice (an email is okay) advising they intend to do urgent repairs and give the landlord and or agent the opportunity to do them.

This notice does not need to be 14 days before, it could be provided the night before the works need to be done if the works are required to be completed urgently to avoid disruption to your business.

Failing to give the 14 days’ notice under section 52(5) of the RLA puts the tenant at risk that the landlord will likely refuse to reimburse the tenant and the matter will then need to be fought out via the VSBC mediation process, and then VCAT, which may be uneconomic depending on the amount involved.

 

Maintenance of Landlord’s equipment 

Most retail tenants understand the landlord is liable for capital costs, and any structural work if the building leaks and tenants believe they are liable for maintenance of the landlord’s equipment but in fact that is not the case!

A retail tenant can refuse to carry out maintenance and repairs (even where it arises from their use of the equipment) as that obligation under section 52 is on the landlord. This was confirmed in the finding of Garde J in a VCAT determination in 2015.

To refuse to pay an invoice issued by the landlord or its agent for the cost of these maintenance works is not a breach of the lease.

The tenant can require (as the RLA provides) that the landlord undertake maintenance works on equipment supplied by the Landlord (for example, the air-conditioning system, the elevator and other equipment).

If the landlord insists the tenant do those works or issues an invoice to be reimbursed for those costs, the tenant can rightly say- No, I am not liable!

It is likely that many retail tenants have paid out huge sums of money to landlords or directly to contractors for repair, maintenance and service costs they were not liable for.

Section 39 sets out what outgoings can and cannot be charged to a tenant.

The following outgoings cannot be passed onto tenants:

  • land tax;
  • expenses that do not benefit the premises;
  • contributions to a sinking fund for capital works;
  • rent payable by the landlord in respect of any head lease;
  • management fees, unless the management fees relate to the management of the building or shopping centre in which the premises are located;
  • capital costs; and
  • interest on borrowings.

Landlords cannot pass on costs in relation to:

  • legal or other expenses relating 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 Act.

A landlord can still claim reasonable legal costs and expenses in relation to an assignment of the lease or a sub-lease, including investigating the proposed assignee or sub-tenant, or preparing a new disclosure statement for the proposed assignee at the tenant’s request.

The Lease must specify the outgoings the tenant is liable to pay and how they are recoverable and how they are determined and apportioned to the tenant.

So, what does this mean for Retail Tenants?

  • You are not liable for and should not be charged for certain repair or maintenance costs of equipment supplied by the Landlord (even if the lease allows the landlord to do so) if it is covered by the RLA.
  • If the air-conditioning breaks down or roller door motor stops working, you can call on the landlord to fix it at their cost and they cannot recover that from you as an outgoing.

Many Landlords of retail premises and their agents are operating on a misapprehension of the law relating to retail tenant’s obligations and still send invoices to the tenant for repairs and maintenance costs that the tenant is not liable for.

You should carefully check any invoice received and get advice as you may be paying an invoice you are not liable for.

Landlords, where it is a retail premises, carry considerably greater maintenance costs and obligations and cannot pass them onto the tenant or require their tenant to do those works.

From recent decisions in VCAT the Tribunal may, in some circumstances, require a Landlord to replace or even upgrade equipment if that is the only way section 52 of the RLA can be sensibly complied with. So, it is landlord beware!

Essential Safety Measures (ESM)

The position up to 22 September 2020 was that a landlord could not pass on the cost of maintaining the ESM which include things such as exit lights, smoke detectors, sprinkler systems, fire extinguishers and annual safety inspection

The RLA was amended from 23 September 2020 by section 52(6) to provide that a tenant may agree with the landlord to carry out repairs or maintenance work for an ESM on behalf of the landlord.

Section 52(7) of the RLA states if the tenant carries out any work in respect of an ESM on behalf of the landlord, that work does not affect any obligation of the landlord as owner of the building to comply with any requirements under the Building Act 1993 or building regulations.

The Building Act 1993

Landlords’ obligations are further complicated by section 251 of the Building Act which is often overlooked by tenants and their lawyers.

It is a powerful weapon for a tenant as it provides that if the owner of a building or land is required under this Act or regulations to carry out any work and the owner fails to carry out the work or do the things required, the occupier of that building (Tenant) or registered mortgagee (Bank) can carry out the work and then recover those costs from the owner as a debt due to the occupier(Tenant), or deduct those costs against any rent due to the owner.

This applies despite any agreement to the contrary, so if the owner is required by the Act or regulations to keep the premises in a specific state:

  • the owner cannot contract out of those obligations by, for example, including provisions in a lease that make the tenant liable to repair those particular items (Chen v Panmure Hotel Pty Ltd [2007] VCAT 2463);
  • the tenant can do the work the landlord was obliged to do and recover the costs from the landlord/ owner; and
  • the tenant can set-off the costs of doing the work the landlord owner was obliged to do against the rent.

The usual rent covenant that rent must be paid “without deduction” will not help the landlord if it fails to comply with s.251 where the tenant does the work the landlord was obliged to do.

Section 251 therefore imposes greater obligations on a landlord than those implied into leases by s.52 of the Retail Leases Act 2003.

Occupational Health and Safety Act

Under the OH&S Legislation a commercial property leased or rented to a business is regarded as a workplace under Victoria’s health and safety laws imposing obligations on Landlords (to the extent of a landlord’s management or control).

The Act requires a person who manages or controls a workplace to (so far as is reasonably practicable) eliminate the exposure of persons at the workplace to airborne asbestos fibres. If it is not reasonably practicable to eliminate that exposure, they must reduce that exposure so far as is reasonably practicable.

Summary

Our experience in acting for landlords and tenants (both retail and general commercial premises) is that most of these issues get resolved by sensible direct communication.

Often a landlord will recognise they have to spend money on their building and equipment to support their tenant recognising that this will maintain the capital value of their freehold if they want to sell the property in the future.

Some landlords will fight tooth and nail not to spend a cent on their building and try to shift any cost (even those they should be paying) to their tenant.

Tenants need to take practical steps by ensuring they have a condition report at the start of the lease and seek advice if they think they are being charged for repair or maintenance the landlord should be paying.

Seeking specialist advice may well save a tenant a considerable amount of money and also prevent a landlord from being made liable for a breach of the retail tenancy laws.

 

 

Sanicki Lawyers – Property and Leasing Group

Robert Toth | Special Counsel | Accredited Commercial Law and Franchise Specialist 

  robert@sanickilawyers.com.au  mobile 0412 67 37 57

Robert Toth is a Partner of Sanicki Lawyers, with over 35 years’ experience in Franchise, Licensing and Distribution law acting for both local and International franchisors, franchisees and master franchisees and with expertise in dispute resolution. Robert is an Accredited Commercial Law and Franchise Specialist, a member of the Franchise Council of Australia (FCA) and the International Franchise Lawyers Association (IFLA) and regularly writes for franchise and corporate journals online. Contact Robert@sanickilawyers.com.au or even call him on mobile 0412 67 37 57

 

Kristen Attard | Senior Associate | kristen@sanickilawyers.com.au 03 9510 9888

Kristen Attard is a senior associate with expertise in franchising, leasing and sale of business. kristen@sanickilawyers.com.au; https://sanickilawyers.com.au/