Retail Leases Act and Quarries

ANDREW LUMB, Special Counsel for Nevett Ford Lawyers reports on the application of the Retail Leases Act to Quarries, in particular the impact with respect to Land Tax.

The Retail Leases Act applies to leased premises which under the terms of the lease are used wholly or predominantly for the sale or hire of goods by retail or the retail provision of services.

When the first retail leases legislation was introduced in 1986 it was directed to the bargaining imbalance between small tenants and large landlords. This was obviously primarily motivated by the well-known imbalance in the case of shopping centre leases.

However, court decisions over recent years have broadened the scope of what is retail sale of goods and provision of retail services under this legislation. The cases have decided that provision of services between business providers can be retail, one case involving a cold storage facility. There has been discussion in the decisions about the ultimate consumer test.

It would be fair to say that the Act has been applied in situations which are far removed from anything imagined by anyone when the legislation was originally introduced, and in fact beyond the understanding of most people today entering into commercial leases. How far the courts have taken this approach is illustrated by the comment of a judge in one of the cases that, in view of the judicial attention which “retail” has received, it is simplistic and unhelpful to attempt to have resort to dictionary definitions of the word.

A recent manifestation of this approach has been a decision of the Victorian Civil and Administrative Tribunal (VCAT) that the Retail Leases Act applied to a lease of rural land on which is situated a quarry. The basis of the Tribunal’s decision was that the extracted material sold by the tenant was mostly used by the tenant’s customers for their own purposes, i.e. they were end users, and that the leased area was predominantly used for the retail sale of goods or services, hence the lease was a retail lease subject to the Retail Leases Act.

This outcome has some awkward and inappropriate consequences, for instance consider the task of a lessor who has to complete and provide to the tenant the statutory disclosure statement, which is essentially designed to apply to a shop.

However, it is much more serious than this, as the application of the Act affects the commercial dealings between the parties. The most obvious and serious issue is that the Retail Leases Act makes void any provision in a retail lease which requires the tenant to pay land tax for which the landlord is liable. It is likely that most extractive leases of land place the obligation to pay land tax on the tenant extractive operator. This would be particularly so in rural areas, where in many cases the landlord’s property is otherwise used for primary production and is therefore exempt from land tax. The only reason land tax is payable is because of the tenant’s activity on the land.

The effect of the VCAT decision is that in all such cases, as between landlord and tenant, the obligation to pay land tax is reversed and the landlord will become liable for payment. Over a period of years land tax has become an increasingly significant impost.

Land tax calculation rates have remained unchanged since 2009 while the property values to which they are applied have increased significantly. The result is a bracket creep effect. According to State Revenue Office figures, land tax revenue collected in 2009 was $1.23 billion. According to the State Government Budget papers land tax revenue for 2019-20 is estimated at $3.659 billion, for 2021-22 $4.078 billion and $4.497 billion for 2022-23.

Michael Hocking (CJ Ham & Murray Pty Ltd) has previously drawn our attention to the centralising of all municipal valuations under the control of the Valuer-General while at the same time valuations have become annual, rather than two yearly.

The Valuer-General has also produced specialist valuation guidelines for quarries, the application of which has in some cases produced controversial results. Land tax is therefore an increasingly significant item for all extractive operators, whether or not on leased land.

However, because of all these factors the VCAT decision applying the Retail Leases Act to quarry leases is likely to cause a significant disruption of the landlord tenant relationship in the case of many quarries situated on leased land.

A liability for land tax has the potential to make a very big hole in the royalty income of the landlord. Most quarry leases are for extended periods and this means that there may be no opportunity to renegotiate the payment terms of the lease to allow for the changed circumstances.

There are other inappropriate consequences of the application of the Retail Leases Act to quarry leases, e.g. where an assignment of the lease is requested by the tenant, the position of the landlord is likely to be less favourable than under the commercial terms which would normally apply under a quarry lease, and in addition it may not be possible to preserve the ongoing liability of the tenant and any guarantors in the event that the assignee defaults.

The application of the Retail Leases Act to quarry leases seems entirely inappropriate and to have nothing to do with the issues at which the legislation was originally directed. As a matter of common sense this presents a situation where legislative intervention is required.

For further information contact;
Andrew Lumb on 03 9614 7111

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