Tenants may request changes or “variations” to their existing Leases for various reasons.  A common reason is to extend their tenancy by increasing the duration of the term or inserting additional options for further terms.  If agreed to by a Landlord, the change is implemented by way of a document known as a “Deed of Variation of Lease”.

In the recent case of Richmond Football Club Limited v Verraty Pty Ltd (ACN 076 360 079) (Retail Tenancies) [2011] VCAT 2104 (3 November 2011), the Tribunal held that in certain circumstances, a Deed of Variation may constitute a surrender (or termination) of the original Lease and re-grant of a new Lease.

In this case, the Landlord was unaware of the ramifications of varying the original Lease and ultimately had to refund monies paid by the Tenant in relation to land tax.  The Tribunal’s decision may cause similar problems for other Landlords who agree or have agreed, after the introduction of the Retail Leases Act (“the Act”) in 2003, to vary Leases entered into prior to 2003.  Conversely, the decision may prove advantageous for Tenants who have paid land tax by mistake.

When does a Deed of Variation constitute a re-grant of a new Lease?

The Deed of Variation in this case made various changes to the Lease, including reducing the rent, amending the rent review and bank guarantee provisions, introducing an obligation to pay GST and most significantly, extending the term of the Lease by 10 years. 

The critical question considered by the Tribunal was whether the changes made to the original Lease were so significant such that the law recognises that a new Lease has come into effect.

The original Lease contained an option to renew, which if exercised, would have meant that a renewed Lease would have come into effect in 2008 and would therefore be subject to the Act.  The Tenant argued that to construe the Deed of Variation as a “mere variation” of the original Lease would mean that the operation of the Act is “circumvented” as a consequence of the renewal date being extended from 10 years to 20 years. 

The Tribunal considered this to be a significant factor as it would mean that the Deed of Variation, if merely a variation, would be contrary to section 94(2) of the Act which states that a provision of a retail premises lease or of any agreement is void to the extent that it purports to exclude the application of a provision of the Act.

The Tribunal held that the substantial changes made to the original Lease - by significantly extending the term of the lease, altering the rent payable, and imposing an obligation to pay GST - clearly operated at law to effect a surrender and re-grant on substantially the same terms as the original Lease as amended by the Deed of Variation.

How does this affect leases entered into prior to 2003?

In this case, after entering into the Deed of Variation, the tenant continued to pay land tax and outgoings under the terms of the original Lease.

However, the finding that a new Lease had been granted which was subject to the Act had significant ramifications.  In particular, under section 46 of the Act, a Tenant is not liable to contribute to any outgoings until it is given a statement of outgoings.  No such statement of outgoings had been provided to the Tenant.

Further, under section 50 the Act, any provision of retail premises lease is deemed void to the extent that it makes a tenant liable to pay an amount for land tax.

The Tenant therefore argued that:

1. land tax was not payable under section 50 of the Act; and
2. as the Landlord had not served an estimate of outgoings under section 46 of the Act, the Tenant was not liable for outgoings paid under the term of the re-granted Lease.

The Tribunal ultimately found that:

1. the Tenant's occupancy of the premises increased the outgoings payable and the Tenant had received a benefit from the outgoings that it has paid for, so the payment of outgoings is analogous to the payment of rent considered in The Dog Depot case.  Consequently, it would be unconscionable or unfair to allow the Tenant to be repaid moneys in respect of outgoings and the Tenant's claim for outgoings failed;  and
2. There is a disconnect between the benefit enjoyed by the Tenant and the imposition of land tax.  Land tax represents a cost connected to the Landlord's wealth and not the Tenant's use of the land.  Also, in The Dog Depot, there was an underlying contractual obligation to pay rent, but there was no similar contractual obligation to pay land tax as the covenant to pay land tax is excluded by the Act.  The Tenant’s claim for land tax was successful.

Conclusion

The Tribunal’s decision that, despite the absence of outgoings estimates for the Tenant, The Dog Depot case applies in respect of the payment of outgoings (as good consideration was received for the money paid in respect of outgoings) is significant in of itself and will be the subject of a further article.  

For the purposes of this article, Landlords should be wary of the risks associated with varying Leases entered into prior to commencement of the Act.  Further, Tenant’s should be aware that variations to their original Leases (entered into prior to 2003), if significant enough, may release them from previous obligations such as paying land tax and entitle them to recover land tax paid to the Landlord from the effective date of the Deed of Variation.