In brief: A recent VCAT decision has raised the possibility that even if the Retail Leases Act 2003 (the Act) applies when the lease is entered into, as occupancy costs are under $1 million, should the occupancy costs exceed $1 million during the term of the lease, the Act may cease to apply.

What you need to know:

For most leases, occupancy costs are well under $1 million and so the issue will not arise. However, if the occupancy costs are close to or in excess of $1 million, it is necessary to determine if the occupancy costs were below $1 million when the lease was entered into (assuming it is a lease potentially under the Act). If so, assuming the other criteria are met, the Act may apply.

But if the occupancy costs now exceed $1 million, questions will arise as to whether the Act still applies. In the absence of an agreement between the parties, it will be necessary to obtain advice as to whether the Act may apply.

Background:

The decision in William Buck (Vic) Pty Ltd V Motta Holdings Pty Ltd [2018] VCAT 15 commented on this issue, although the member was not required to make any determination. Senior Member Riegler of VCAT correctly determined that the Act could not apply in circumstances where the $1 million occupancy costs had reduced over the term of the lease from above to below $1 million, as a result of section 11 (2) of the Act. This is correct based on the reading of the Act.

However, Senior Member Riegler states that the reverse does not apply. This means that if the occupancy costs increased to over $1 million during the term of the lease, then the premises will fall outside of the Act.

Conclusion:

Where the occupancy costs are close to the $1 million threshold, consideration will need to be given as to whether the Act applies, which could affect the valuation and any management responsibilities.