News

Landlords must pay safety costs – not tenants

The Victorian Civil and Administrative Tribunal (VCAT) recently gave its first advisory opinion on what has been a contentious issue concerning the landlord tenant retail /commercial relationship namely, who bears the cost of complying with Essential Safety Measure (ESM) obligations under the Building Act 1993.

What is an ESM obligation?

ESM obligations are the building owner’s responsibilities for the upkeep, management and maintenance of important safety systems within the building – for example, emergency lighting and warning systems, fire prevention and fire warning mechanisms, sprinkler systems, heating ventilation and cooling systems and air handling systems used for smoke hazard management. The definition and full list of essential safety measures can be found in Part 12 and Schedule 9 of the Building Regulations 2006 (Vic).

How does the VCAT opinion affect me?

For tenants, this is likely to mean that your landlord may continue to recover the ESM costs from you if required under your lease but the VCAT advisory opinion, if followed by Courts and tribunals, may now allow you to seek reimbursement for such costs.

Landlords should ensure that all new leases are negotiated and prepared to factor in such ESM compliance costs, to avoid the potential ESM expense recovery uncertainty.

It is important to note, you may continue to recover the cost of maintenance and repairs to retail/commercial premises from tenants for works that do not relate to your ESM obligations and your obligations under Section 52 of the Retail Leases Act 2003 (Vic)¹ (Retail Act) and the cost is not a capital cost (under Section 41 of the Retail Act).

The key points to remember are:

  •  A landlord cannot recover the certain costs of complying with its ESM obligations from a tenant regardless of who undertakes the work
  • A landlords can require a tenant to undertake some, but not all, ESMs provided that the tenant’s costs are recoverable from the landlord
  • Outgoings provisions in leases that require the tenant to  reimburse the landlord for its ESM expenses or incur those costs may no longer be enforceable.

What is the legal basis for the decision?

VCAT’s opinion is merely advisory in nature and may be affected by a subsequent Court decision or a change in legislation.
The decision is not legally binding, but it may provide guidance and will likely be followed by Courts and Tribunals Although the opinion in not intended to be retrospective, landlords could now face potential claims from tenants relating to ESM compliance previously paid by the tenant.

We anticipate that the opinion will be influential at both VCAT and in the Victorian Courts in future matters. The complex legal issues of interpretation that arise may, however, mean that the opinion will be difficult to apply in some factual circumstances. Nevertheless, the decision could help prevent disputes relating to the the costs of ESM and certain repair and maintenance obligations in a retail/commercial leasing setting – particularly for new retail leases that adopt this opinion in lease negotiations.

We strongly recommend that you seek your own legal advice on the advisory opinion and the implications it has for your lease both as a tenant and as a landlord

 

¹Section 52 of the Retail Act provides that a landlord is responsible for maintaining in the condition when the lease was entered into, the structure of and fixtures in the premises, plant and equipment, and the appliances, fittings and fixtures relating to services provided by the landlord under the lease (unless the works arise from the tenant’s misuse or the maintenance relates to items which the tenant is entitled or required to remove at the end of the lease).