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Purpose over prescription? The Supreme Court’s interpretation of the Rental Leases Act in Krajcar v Eastern Central Real Estate

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By Alicia Hill, Principal and Robert Kukuruzovic, Law Clerk

The Supreme Court recently allowed a method of rent review which assessed the total value of a subdivided property and then split that amount between the multiple lot owners. While this appeared to sit outside the bases for rent review allowed by legislation, the Court found that it was permissible.

This article reviews the case to explain how the clause was found not to be in breach of the Retail Leases Act 2003 (Vic).

Facts

This case was an appeal from VCAT by two Appellants, Bojan Krajcar and Krajcar Family Pty Ltd. They were the Landlords of two lots of a 23-lot subdivision, where each property has its own certificate of title and each was leased to the respondents (‘the Tenants’) who operated an aged care facility on the site.

Clause 22.7(v) of the lease stated that the rent owed to each landlord was to be determined by assessing the market rent of the 23 properties as if they were one property, and then divided between each owner based on their lot entitlement.

The leases were governed by the Retail Leases Act 2003 (Vic) (‘the Act’), section 35(2) of which sets out the bases on which a rent review can be made. These are:

  1. Fixed percentage;
  2. An independently published index of prices or wages;
  3. A fixed annual amount;
  4. The current market rent of the retail premises;
  5. A basis or formula prescribed by the regulations.

VCAT

At the first instance in VCAT, the Landlords argued that clause 22.7(v) was not a valid basis for determining the rent as it did not determine it for each retail premises, i.e. each individual lot. As such, they argued that it was not within the scope of s 35(2) of the Act.

They also argued that this approach ignored the potential differences between lots such as size, location and improvements made to one over another.

The Tribunal found in favour of the Tenants; that the rental determination used was a valid basis or rent review under the Act.

Issues

In the appeal, the Landlords argued that VCAT had erred on a question of law and submitted the arguments mentioned above.

In reply, the Tenants argued that the collective assessment and distribution of rent simply reflected the closely linked nature of the agreements between the landlords and the Tenants, in that it would be difficult and unusual for any of the leases to be put to market separately.

This was shown through the single use of all the properties as an aged care facility and through the position of the Managing Agent, who under the agreement collected the rent and could make major financial decisions regarding all the owners based on a simple majority of their votes.

Further to this, the Tenants submitted that overturning the Tribunal’s decision would require each lot owner to undertake their own market review, with the costs being split with the Tenants. They argued that this would undermine the agreed arrangements between the Tenants and owners that had been around since 2013, and would not be an ameliorating or remedial interpretation of the Act.

The main issues for the Court to determine therefore were:

  • whether this basis was in fact permissible under s 35 of the Act, and
  • whether the leases would be voided if not.

Consideration

The Court held that the fact that the Act is ameliorating or remedial legislation is “well established” and that a purposive approach to interpretation is required by s 35 of the Interpretation of Legislation Act 1984.

That is, the Act’s provisions must be interpreted in line with them being intended to be ameliorating or remedial.

The Court was also persuaded by the Tenants submissions that the “global” nature of the facility was relevant and that a market valuation of each lot individually would not reflect the reality of the arrangements.

With that in mind, his Honour acknowledged that while the Act does not allow for amalgamating the separate premises and treating them as a single collective premise, the remedial purpose of the Act and the nature of the property’s use did allow for clause 22.7(v) to operate as a current market rent review.

While noting that this purpose could not be used to place contractual or lease provisions above clear legislative provisions, his Honour felt that this was not being done in the present case.

Held

Croft J held that the Tribunal did not make an error of law in finding that clause 22.7(v) was permitted under Section 35(2).

His Honour also held that even if there was an error of law, it would not be a vitiating one, since only a term that prevents a reduction in rent can be voided, which clause 22.7(v) does not.

Key takeaways

One of the key takeaways from this case is the Court’s purposive approach to legislative interpretation.

Although the rent review basis was unusual and did not appear to be valid on the face of s 35(2), the fact that the Act was intended to enhance certainty and fairness between landlords and tenants meant that Croft J was able to find that clause 22.7(v) was in fact valid.

There are limits however to how far this interpretation can be pushed though, and a Court must still look to the written words of the Act and what is fairly open based on them.

Landlords and Tenants should try and ensure their lease provisions fall clearly within the Act to avoid the risk where a lease term does not line up exactly with what is written in the Act, and having to get a judge to rule on whether it is valid and enforceable.

The circumstances of the agreement and the nature of the property, including its use, will all be considerations in whether or not it is enforceable.