Many retail leases contain clauses which say that the tenant must “comply with all laws relating to the premises” or with the requirements of “Acts, rules, by-laws and regulations and notices affecting or relating to the premises” or with the directions of “statutory authorities”.
These clauses can become relevant when a Council building surveyor issues a notice under the Building Act if it considers that a building has become unsafe or is not up to Code. This often happens with fire safety matters like the exit signs, fire ramps, fire curtains, detectors, alarm sensors, fire doors, extinguishers, hose reels, hydrant systems and sprinkler systems.
Also, under the Building Regulations a building owner is responsible for maintaining the building’s “essential safety measures” (which includes things like lifts, air-conditioning, balustrades and fire safety items) and for preparing an annual essential safety measures report, all of which involves some cost.
Until recently, the common view was that these clauses were effective and a Landlord could use them to force the tenant to either carry out these works/reports or to meet their cost.
However, a VCAT case of Chen v Panmure threw doubt on this. In that case a Council building surveyor ordered the landlord to install hard wired smoke detectors in the leased premises. The landlord went to VCAT seeking orders forcing the tenant to carry out the works. The landlord relied on a clause that required the tenant to comply with notices and requirements of statutory authorities which were not structural in nature. VCAT found that fitting the hard wired detectors was not structural and that therefore, contractually speaking under the terms of the lease, the tenant was obliged to carry out those works. However, VCAT then held that the tenant was not obliged to carry out the works because of section 251 of the Building Act.
Section 251 states:
1. “If the owner of a building or land is required under this Act or the regulations to carry out any work or do anything and the owner does not carry out the work or do that thing, the occupier of that building or land or any registered mortgagee of the land or the land on which the building is situated may carry out the work or do the thing.
2. An occupier may:
- recover any expenses necessarily incurred under sub-section 1 form the owner as a debt due to the occupier; or
- deduct those expense from or set them off against any rent due or to become due to the owner.
3. This section applies despite any covenant or agreement to the contrary.”
VCAT held that this section ‘overruled’” the clause in the lease. To order that the tenant carry out the works would only result in the tenant then becoming entitled to deduct the cost of doing so from the rent. That was ‘circuitous’ in VCAT’s opinion. So it determined that no order should be made against the tenant and that the landlord should simply carry out the works itself. In VCAT’s opinion the Building Act evinced a policy that regulatory compliance work should be carried out by owners of buildings, not occupiers, and that policy should not be defeated by the lease clauses.
Chen’s case led to the belief that tenants may not have to reimburse their landlords for annual essential safety measures reports under the Building Act or costs relating to inspection and service of fire extinguishers in the building and various other building compliance costs.
However, a different member of VCAT in a later case has expressed the view that these type of contractual obligations and section 251 can sit side by side, and are not necessarily contradictory.
Because of these conflicting decisions, the Small Business Commissioner has now applied to VCAT for a special advisory ruling to answer various questions.
One question is whether a landlord may enforce against a tenant a contractual obligation stipulating that the tenant is obliged to provide or maintain the leased property’s essential safety measures, in satisfaction of the landlord’s obligations under the Building Act. Another is whether if the landlord incurs the cost itself, it can recover the cost as an outgoing from the tenant.
The SBC’s application was filed on 15 May 2014.
Submissions from interested parties are due to be filed with VCAT by 1 October and a hearing date is likely to be set sometime after that.
Any retail or other tenants affected by these matters would be well advised to seek legal advice and attempt to defer payment until after VCAT delivers its ruling.
Note: This update is a guide only and is not intended to constitute legal advice.