Q St Kilda Tenancy Pty Ltd v Kane (Building and Property) [2023] VCAT 75

1. In answer to the preliminary question: Does clause 14.1.1 contravene section 35 of the Retail Leases Act 2003 (Vic) (RLA) by using more than one method or formula for determining the commencing rent on a lease renewal contrary to section 35(2) of the RLA and is therefore void?

Yes clause 14.1.1 contravenes s 35(2) of the RLA and is void under s 35(7) of the RLA. The rent review for the commencing rent upon lease renewal must be conducted in accordance with s 35(7) of the RLA.

1. In answer to the preliminary question: Is the rent for the year commencing on 1 July 2021 to be reviewed by an increase of 4% of:

(ii) the amount of rent paid in the previous year which has been reduced by the total amount of COVID-19 rent relief provided to the Tenant?

The rent for the year commencing on 1 July 2021 is the rent stated in the lease after the rent has been the subject of market review under s 35(7) of the RLA for the lease renewal commencing on 1 July 2019.

1. In answer to the preliminary question: Is the Tenant:

(i) entitled to a refund for outgoings the Tenant has paid because the Landlord has failed to comply with section 46 of the RLA; and > > (ii) liable for unpaid outgoings for which the landlord has failed to comply with section 46 of the RLA?

The tenant is not entitled to a refund of monies paid for outgoings and is not liable for unpaid outgoings for which the landlord has failed to comply with s 46 of the RLA.

1. This application forms part of the substantive proceedings brought by the applicant (tenant) against the respondent (landlord) concerning the lease of premises used for short term rentals by the applicant. The Tribunal is to answer 3 questions.
2. Those questions are:
   1. Does clause 14.1.1 contravene section 35 of the Retail Leases Act 2003 (Vic) (RLA) by using more than one method or formula for determining the commencing rent on a lease renewal contrary to section 35(2) of the RLA and is therefore void?
3. Is the rent for the year commencing on 1 July 2021 to be reviewed by an increase of 4% of:

(i) the rent stated in the Lease; or > > (ii) the amount of rent paid in the previous year which has been reduced by the total amount of COVID-19 rent relief provided to the Tenant?

(i) entitled to a refund for outgoings the Tenant has paid because the Landlord has failed to comply with section 46 of the RLA; and > > (ii) liable for unpaid outgoings for which the landlord has failed to comply with section 46 of the RLA?

1. The parties reached agreement regarding an Agreed Statement of Facts. The facts are not in dispute. The facts are, however, relevant to answering the Questions.
2. The landlord is the registered proprietor of Unit 21, 1A St Kilda Road, St Kilda (the premises).
3. By a lease dated 1 July 2009, the landlord leased the premises to the tenant. The term of the lease was for a term of five years commencing on 1 July 2009 and ending on 30 June 2014. The lease provided for three further terms each of 5 years (Lease).
4. By Deed of Renewal, the Lease was renewed for a further term of 5 years commencing on 1 July 2014 and ending on 30 June 2019.
5. On or about 28 March 2019, the tenant exercised its option to renew the lease for a further term commencing on 1 July 2019. There is no deed of renewal in respect of this term commencing on 1 July 2019 and ending on 30 June 2024.
6. On or about 17 June 2019, the tenant, requested that the rent for the commencement of the term on 1 July 2019 be set to market. The landlord contends that the rent is to be reviewed in accordance with the lease which provides for a CPI increase.
7. On or about 27 October 2020, the Tenant commenced this proceeding seeking determination of the issues raised by the Questions. Separately the tenant sought rent relief under the COVID-19 Omnibus (Emergency Measures) Act 2020 (Vic).
8. On 13 November 2020, terms of settlement were entered into between the parties providing rent relief to the tenant for the period 1 April 2020 to 31 December 2020 (First Terms of Settlement).
9. In about December 2020, terms of settlement were entered into between the parties providing rent relief to the tenant for the period 1 January 2021 to 31 March 2021 (Second Terms of Settlement).
10. The entry into these terms of settlement is relevant to the second question for determination - is the rent under the lease as at 1 July 2021 the reduced rent under the terms of settlement?

QUESTION 1 - IS CLAUSE 14.1.1 VOID PURSUANT TO SECTION 35(3) OF THE RETAIL LEASES ACT

1. Clause 14 of the lease reads as follows
   1. OPTION FOR RENEWAL FOR EACH OF THE FURTHER TERMS

14.1 Upon the written request of the Tenant at any time after the Commencement Date but not less than three (3) months prior to the expiration of the Term, the Landlord will grant and the Tenant will accept a new Lease on the same covenants terms and conditions as those set out in this Lease commencing on the day after the Term of this Lease ends for the Further Term PROVIDED THAT the Rental payable by the Tenant during the Further Term will be:

14.1.1 during the first year of the Further Term the Rental payable by the Tenant will be a Rental determined by rental calculated by increasing in accordance with Clause 14.2 the annual rental payable during the immediately preceding twelve (12) month period to such extent as may be necessary to allow for any increase in the cost of living between the date of commencement and the date of expiration of the immediately preceding twelve (12) month period. PROVIDED THAT the rental determined by the review shall not be GREATER than an amount equal to the rental payable for the preceding twelve (12) month period increased by four per centum (4%) PROVIDED THAT pending such determination of update Rental payable the Tenant will continue to pay an account of the Rental ultimately determined to be payable Rental at the rate current when the update ought to have come into force and the balance thereof immediately upon determination and any failure of the parties to determine the updated Rental payable when the update ought to have come into force will not be deemed a waiver by the Landlord or any of the Landlord's rights herein contained and such failure will in no way prejudice the Landlords rights in relation to the determination of any such updated Rental payable;

14.1.2 during each and every subsequent year of the Further Term a Rental calculated by increasing the Rental payable for the preceding twelve (12) month period by an amount equal to four per centum 4% thereof.

14.2 Where in this Lease it is provided that rental ("the revised amount") shall be an amount calculated by increasing the initial rental ("the base amount") to such extent as may be necessary to allow for any increase in the cost of living between the two dates the revised amount shall be determined by multiplying the base amount by a fraction whereof the denominator shall be the All Groups Consumer Price Index Melbourne published by the Australian Bureau of Statistics in respect of the latest concluded quarter immediately preceding the earlier date and the numerator shall be the same index in respect of the latest concluded quarter immediately preceding the later date PROVIDED THAT if the same index is not current on both dates or is calculated from different base years or if a substantial change takes place in the method or basis of calculating the same the fraction to be applied shall be a fraction representing the rise between the two dates in the weighted average for Australia of weekly wage rates to be determined by the Australian Bureau of Statistics and if the same Bureau is unwilling to make a determination to be determined by an Economist nominated by the President for the time being of the Law Institute of Victoria and the decision of such Economist shall be final and conclusive and its fees shall be paid by the Landlord and the Tenant in equal shares.

1. Section 35 of the Retail Leases Act 2003 (Vic) (RLA) states

(1) If a retail premises lease provides for a review of the rent payable under the lease or under a renewal of the lease, the lease must state-

(a) when the reviews are to take place; and

(b) the basis or formula on which the reviews are to be made.

(2) The basis or formula on which a rent review is to be made must be one of the following-

(a) a fixed percentage;

(b) an independently published index of prices or wages;

(c) a fixed annual amount;

(d) the current market rent of the retail premises;

(e) a basis or formula prescribed by the regulations.

(3) A provision in a retail premises lease is void to the extent that it purports to preclude, or prevents or enables a person to prevent, the reduction of the rent or to limit the extent to which the rent may be reduced.

(4) However, subsection (3) does not apply to a provision that uses-

(a) a basis or formula referred to in subsection (2)(a), (b) or (c); or

(b) a prescribed basis or formula referred to in subsection (2)(e) that is also prescribed as a basis or formula to which subsection (3) does not apply.

(5) A rent review is to be conducted as early as practicable within the time provided by the lease. If the landlord has not initiated the review within 90 days after the end of that time, the tenant may initiate the review.

(6) A rent review provision in a retail premises lease is void if the lease does not specify how the review is to be made.

(7) If a provision in a retail premises lease that provides for a review of the rent payable under the lease does not comply with subsection (2) or is void under subsection (6), the rent is to be-

(a) as agreed between the landlord and tenant; or

(b) if there is no agreement within 30 days after the landlord gives the tenant, or the tenant gives the landlord, a written notice specifying an amount of rent for the purposes of the review, the amount determined by a specialist retail valuer appointed by the Small Business Commission as the current market rent of the retail premises.

1. The tenant argues that clause 14.1.1 of the lease is contrary to the provision of s 35(2) of the RLA because it is uses more than one method for calculating the commencing rent for the renewed lease. In such a case, the tenant argues that the consequences of the clause being contrary to the RLA is that the clause does not comply with s 35(2) thus s 35(7) applies and the commencing rent for the renewed lease must be determined as the current market rent.
2. The landlord argues that clause 14.1.1 does not use more than one method for calculating the commencing rent for the renewed lease. He argues that
   1. Clause 14.1.1 provides that rent for any further term is to be increased according to 'the cost of living' and clause 14.2 further provides that this is 'All Group Consumer Price Index Melbourne' (CPI). The method adopted by clauses 14.1.1 and 14.2 is permitted by s 35(2)(b) of the Retail Leases Act being 'an independently published index of prices or wages.'[1]
3. The key words relied on in clause 14.1.1 are (emphasis added)

calculated by increasing in accordance with Clause 14.2 the annual rental payable during the immediately preceding twelve (12) month period to such extent as may be necessary to allow for any increase in the cost of living between the date of commencement and the date of expiration of the immediately preceding twelve (12) month period. PROVIDED THAT the rental determined by the review shall not be GREATER than an amount equal to the rental payable for the preceding twelve (12) month period increased by four per centum (4%) PROVIDED THAT pending such determination of update Rental payable

1. Clause 14.1.1 has two limbs to the determination of the new commencing rent for the renewed lease. Firstly, the rent is to be increased by CPI (cost of living) and secondly, such an increase is capped at 4%.
2. The tenant argues that each limb is a basis or formula within the scope of s 35(2). The first limb falls within s 35(2)(b) and the second limb falls within s 35(2)(a). Section 35(2) requires that the manner in which the rent is to be determined "must be one of the following" and therefore as there is more than one basis or formula for determining the rent the clause is contrary to s 35(2).
3. The landlord argues that the second limb is a ceiling or cap on the amount the rent can be increased rather than a second formula for determining the rent. The rent is to be determined by reference to the CPI. He argues that this is a cap imposed for the benefit of the tenant which aligns with the underlying consumer protection nature of the RLA.
4. The landlord's submissions also rely on s 35(4)(a) of the RLA. It is argued that

Section 35(4)(a) of the Retail Leases Act expressly provides that s 35(3) does not apply to a provision that uses a basis or formula in subsections (2)(a), (b) or (c). Section 35(3) therefore does not apply to clause 14.1.1.[2]

1. Further, the landlord relies on the statement of Deputy President Macnamara (as his Honour then was) in Barbcraft Pty Ltd v Geobel Pty Ltd & Anor,[3] at paragraph 36:
   1. I reject the contention that the provision for indexation of the rent is avoided in so far as it provides only for rental increases and no decreases. Section 10(1)(b)(ii) exempts indexation by reference to the Consumer Price Index and the general prohibition upon review techniques which do not provide for rental to decrease as well as increase. For the reasons already given I believe that this clause meets the requirements of the section. Section 12(3)(a) of the Retail Tenancies Reform Act 1998 to the extent that that statute is relevant is to the same effect.
2. However, it must be noted that this case involved a consideration of a rent review clause and its interpretation and applicability under s 10(2) of the Retail Tenancies Act 1986 (Vic) which did not exclude the use of a "mixed" rent review clause combining different methods of calculating rent. Rather, s 10(2) was directed to prohibiting a rent review being determined by reference to any index of prices, costs or wages. Therefore, this statement by DP Macnamara does not support the landlord's proposition.
3. Further, DP Macnamara stated in Fazzolari v Couchouron (Fazzolari)[4]
   1. With some hesitation I believe the approach adopted by Dr Croft is the preferable one. Neither version of Section 10(1) intended to invalidate a provision automatically escalating rent during the term of a lease. So much appears from the decision of the Full Court in Pasen's case and the express terms of the revised Section 10(1). Section 10(2) prohibited the indexation of retail premises lease rental by reference to indexes such as the Consumer Price Index. That prohibition was repealed in 1991 and it is clear that Parliament intended such a review procedure to be available to landlords and tenants for retail premises leases entered into after the commencement of the 1991 amendment. There is nothing in the Minister's Second Reading Speech which indicated that his Bill sought to prohibit "mixed" rental review clauses. To adapt the words of Beach J. in the Hume's case, the sub-section by the use of two paragraphs and two "ors" seeks to indicate the types of underpinning clauses which may legally be entered into not to prohibit their combination.
   2. Accordingly, I would reject the tenants' contentions as to the validity of Item 7 of the Schedule.
   3. I should add that my views on the proper construction of Section 10(1) of the 1986 Act are fortified by the absence from them of the phrase "one only" which appears in the corresponding sub-section of the 1998 Act, viz. Section 12(2).
   4. Needless to say I accept that Item 7 constitutes a "rent review" for the purposes of Section 10 of the 1986 Act. Moreover, the decision of the Full Court in Pasen is clearly distinguishable for the reasons which Mr Arthur gave in his supplementary submissions. The interstate statutes which Mr Arthur says clearly invalidate a rent review clause such as the present, merely indicates that those Parliaments, like the Victorian Parliament in enacting Section 12(2) of the Retail Tenancies Reform Act 1998 well know how to use clear words to prohibit a mixture of rent review techniques when that is their objective. No clear words to that effect could be found in Section 10(1) nor is there anything in the Minister's Second Reading Speech which would indicate that such a prohibition was in contemplation.
4. The above comments from Fazzolari indicate that DP Macnamara considered that s 12(2) of the Retail Tenancies Reform Act 1998 (Vic) by using the term "one only" when describing the alternative methods of rent review did seek to prohibit "mixed rent review clauses".
5. Similarly, the RLA while having changed the language from "one only" to "must be one of the following" has adopted the same requirement that the method of rent review must be one method only, not a mixture of rent review methods.
6. While the second limb does have the effect of being a cap on the amount the rent can increase, this is not the test. The "cap" or limitation is itself an alteration of the method to be used for calculating the rent or a mixture of rent review methods.
7. Section 35(2) requires the use of only one method for calculating the rent review. In this case, the use of "an independently published index of prices or wages". The imposition of a cap means that the method of calculating the rent review is outside the scope of this method. It is a mixed method of calculating the rent review as more than one method is required to be used which is outside the scope of s 35(2).
8. Section 35(3) renders void any rent review provision that seeks to prevent the reduction of rent or limit the reduction of rent. This does not apply to a provision that uses a basis of formula in s 35(2).
9. The landlord therefore argues that s 35(3) does not apply to clause 14.1.1. I agree. Section 35(3) does not apply to clause 14.1.1 as clause 14.1.1 does not seek to prevent a reduction of rent. It seeks to cap the increase in rent as a consequence of the application of the prescribed indexation. This is not the transgression this section is seeking to prevent. It is seeking to prevent a landlord from preventing a rent review which results in a reduction in rent from being prevented by the terms of the lease.
10. I consider that the wording of Clause 14.1.1 refers to more than one method or formula for calculating the rent as it requires an assessment of rent after the application of the CPI and then an assessment of that rent to ensure it is not greater than an increase of 4%, and if it is, it is then limited to a 4% increase, which is an alternative calculation; it is not the application of the CPI formula but the application of fixed percentage. Any rent review which involves having regard to more than one method of rent review calculation must fall foul of the terms of s 35(2).
11. I find that clause 14.1.1 seeks to utilise more than one method of rent review, that is a "mixed rent review" method which is contrary to s 35(2) of the RLA.
12. Accordingly, s 35(7) applies and the rent at the commencement of each renewed period must be reviewed as a market rent review.

QUESTION 2 - IS THE TENANT ENTITLED TO A 4% INCREASE ON COVID-19 REDUCED RENT?

1. As a consequence of the COVID pandemic, the landlord and tenant entered into terms of settlement granting the tenant rent relief. Those terms were documented in the First Terms of Settlement and Second Terms of Settlement.
2. As a consequence of the terms of settlement, the tenant paid a reduced rent for those relevant periods[5] which was about 50% of the rent. The other 50% of the rent was waived by the landlord.
3. The tenant contends that the annual rent increase on 1 July 2021 ought to have been based on the reduced rent being paid by the tenant. That is that the rent ought to have been reviewed by taking the rent which had been reduced by the COVID-19 rent relief as the base rent and adding 4% to this figure (effectively reducing the annual rent for the remainder of the term).
4. The landlord unsurprisingly disagrees. The landlord argues that the relevant rent for the purpose of the annual rent review is the current rent under the terms of the lease, not the reduced rent.
5. Each of the terms of settlement record that 50% of the tenant's rent liability is being waived. There is no variation to the lease to record a new annual rent being the reduced rent.
6. Of relevance are clause 12 and clause 14 of the First Terms of Settlement which state:
   1. The Landlord and Tenant have agreed that the Tenant will be granted rent relief as follows:

1 April 2020 - 31 December 2020

(i) The Landlord agrees to the rent being reduced to an amount of 50% of the usual rent, that being an amount of $1,004.28 per month. The rent relief is in the form of a waiver with no obligation on the Tenant to re- pay any part of the amount waived.

[...]

1. The Landlord and Tenant agree that, insofar as any of the provisions of these Terms of Settlement are contrary to the Terms of the Lease, these Terms of Settlement shall take precedence and effect a variation of the Lease to the extent necessary to give effect to these Terms of Settlement. All other covenants, terms and conditions of the Lease are not impacted by these Terms of Settlement and remain in force.
2. The first paragraph of the Second Terms of Settlement also has provisions substantially similar to those in the First Terms of Settlement:

The Landlord and Tenant have agreed that the Tenant will be granted rent relief as follows:

1 Jan 2021 to 31 March 2021

(i) The Landlord agrees to the rent being reduced to an amount of 50% of the usual rent, that being an amount of $1,004.28 per month. The rent relief is in the form of a waiver with no obligation on the Tenant to re-pay any part of the amount waived.

[...]

The Landlord and Tenant agree that, insofar as any of the provisions of the Terms of Settlement are contrary to the Terms of the Lease, these Terms of Settlement shall take precedence and effect a variation of the Lease to the extent necessary to give effect to these Terms of Settlement. All other covenants, terms and conditions in the Lease are not impacted by these Terms of Settlement and remain in force.

1. After 31 March 2021, the tenant did not pay rent and that failure is the subject of further terms of settlement dated 31 August 2021. Those terms of settlement resolve the issues between the tenant and the landlord and other landlords in the same building but do not record any further rent relief being granted.
2. The landlord argues that the effect of each of the terms of settlement and the granting of rent relief was to waive the landlord's claim to 50% of the rent. It did not remove the tenant's obligation to pay the total rent.
3. I agree with the landlord. The rent relief granted was to require the tenant to pay the full rent but the landlord then waived the right to claim from the tenant 50% of that rent. The waiver meant that the landlord could not seek damages for that amount nor could the lease be forfeited based on the failure of the tenant to pay that 50% of the rent. It did not reduce the rent payable under the lease.

QUESTION 3 - ARE THE OUTGOINGS THE TENANT HAS PAID RECOVERABLE FOR THE LANDLORD'S FAILURE TO COMPLY WITH SECTION 46 OF THE RETAIL LEASES ACT?

1. The tenant has paid outgoings to the landlord which it claims were not the subject of disclosure in accordance with s 46 of the RLA and therefore the tenant claims it is entitled to be reimbursed for those outgoings.
2. The landlord argues that because the tenant has already made these payments it is not entitled to reimbursement. The landlord argues that the effect of s 46 is that the landlord cannot rely on a failure to pay by the tenant as being a breach of the lease rather than the section entitling the tenant reimbursement of monies for outgoings which it has already paid.
3. Section 46 of the RLA states

(1) A retail premises lease is taken to provide as set out in this section.

(2) The landlord must give the tenant a written estimate of the outgoings to which the tenant is liable to contribute under the lease that itemises those outgoings.

(3) The tenant must be given the estimate of outgoings-

(a) before the lease is entered into; and

(b) in respect of each of the landlord's accounting periods during the term of the lease, at least one month before the start of that period.

(4) The tenant is not liable to contribute to any outgoings of which an estimate is required to be given to the tenant as set out in this section until the tenant is given that estimate.

(a) the landlord has not provided the required disclosure of the outgoings for the relevant period for payments made between 31 January 2019 to 31 May 2021 under s 46; and

(b) the tenant has paid to the Landlord the outgoings pleaded at paragraph 3 of the tenant's points of claim.

48 The tenant relies on the decision of DP Riegler in Phillips v Abel[6] in support of its position. The landlord relies on the decision of SM Riegler (as he then was) in Richmond Football Club v Verraty Pty Ltd[7] (Richmond Football Club).

1. In Richmond Football Club it was held that the outgoings already paid by the tenant are not recoverable by the tenant because the tenant had received good consideration for the payment of the outgoings as it had had the benefit of the use and occupation of the premises during that period. In Richmond Football Club SM Riegler stated[8]
   1. Here the payment of outgoings is part of the consideration paid by RFC. Its use of the Premises has no doubt contributed to the gross amount of those outgoings, at least in relation to the payment of rates connected with the use of utilities. It has received a benefit in exchange for the payment of outgoings. For example, the services provided by the municipal authority or the providers of utilities. It has received a benefit in exchange for the payment of outgoings. For example, the services provided by the municipal authority or the provider of utilities, such as water and sewerage. That is a different situation to what occurred in David Securities and in Roxborough. In David Securities, the borrower got nothing in return for the payment of the grossing-up amount. In Roxborough, the retailer received nothing in return for payment for payment of the tobacco licence fees.
   2. In my opinion, the payment of outgoings is analogous to the payment of rent, in that it has a direct connection with the use and occupation of the Premises. In my view, The Dog Depot applies in respect of the payment of outgoings. Good consideration was received for the money paid in respect of outgoings. That being the case, it would be unconscionable or unfair to allow RFC to be repaid moneys in respect of outgoings.
   3. Therefore, and having regard to the authorities cited above, the claim for money had and received, in so far as it relates to outgoings, must fail.
2. In Phillips v Abel, DP Riegler distinguishes that case from Richmond Football Club. At paragraphs 62 and 63 DP Riegler states
   1. Both Richmond Football Club and Australian Asset Consulting deal with a different factual matrix. In both those cases, the tenant was seeking reimbursement of outgoings already paid. Although not specifically argued in Australian Asset Consulting, the basis for refusing the claim in Richmond Football Club was that the landlord's counter-restitutionary claim prevailed. In other words, it was held that the tenant had received good consideration for the payment of outgoings and on that basis, equity would not come to the tenant's aid to recover monies had and received.
   2. The present case is different. Here, outgoings were not paid during the period that the Landlord had failed to comply with his obligations under s 46 of the RLA. Here, it is the landlord that seeks to recover those outgoings, rather than resisting a claim by a tenant for reimbursement of outgoings already paid.
3. I agree with the principles set out in the Richmond Football Club decision and Phillips v Abel.
4. I find that the tenant has had continued occupation of the premises throughout the relevant period and has been able to utilise the premises to generate income where possible. In those circumstances, the tenant like the tenant in Richmond Football Club has received good consideration for the monies paid for the outgoings. It would be unconscionable or unfair to allow the tenant reimbursement for monies paid. I find that the tenant is not entitled to reimbursement of the monies paid for outgoings.
5. I will make orders reflecting the above findings.

[1] Respondent's submissions dated 8 April 2022 at [14].

[2] Landlord's submissions dated 8 April 2022.

[3] [2003] VCAT 1700.

[4] [2003] VCAT 503.

[5] 1 April 2020 to 31 December 2020, 1 January 2021 to 31 March 2021.

[6] [2019] VCAT 1031.

[7] [2011] VCAT 2104.