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Is your serviced apartment a retail lease?

Newsletter 18 March 2015

What is a serviced apartment?

The term ‘Serviced Apartment’ is loosely defined and there are potentially several different types.

You may own a single unit in an apartment complex, which you lease to a management company who runs a business of providing accommodation to tenants for short or long term stays, together with services such as linen and reception support to short and long term residents.  It may also offer other paid services such as meals, tutoring or arranged day trips.

Alternatively, you may own an apartment in a resort style complex that you use intermittently and contribute to the annual management fees of the complex.   The apartment may be made available to the manager to provide short term accommodation during periods when not being occupied by the owner.

The definition of long term residential apartment is clear as is the definition of a shop.  But an office can be deemed a retail or commercial premises and, in Victoria, a serviced apartment can be deemed residential, retail or commercial.

Why does it matter?

In all Australian jurisdictions, residential leases are regulated under state residential tenancy legislation as retail leases are regulated under state retail legislation.

The legislation may override provisions of your lease or management agreement, leading to unexpected or unwanted outcomes.

In Victoria, a retail premises lease is one where the tenants use of the premises is predominantly for the provision of services or sale of goods.

What are the consequences?

The recent decision in Wang v Orion Holdings Australia Pty Ltd (Building and Property) [2014] VCAT 812 found that a lease of a building containing many rooms to a business that provided student accommodation was a retail lease and bound by the Retail Leases Act 2003.

By being deemed a retail lease, the tenant successfully avoided paying the landlord 40% of the sale proceeds on her sale of the accommodation business.  Under retail tenancy legislation in every State such payments known as a premium or key money, are prohibited.

By contrast, the decision in Evans & Ors v Thurau Pty Ltd [2011] VCC 1354 (5 October 2011) found that under a lease of a site in an alpine resort which required all subtenants to make their apartments available for short term holiday rentals if they were not using the apartment themselves, the retail tenancy legislation did not apply.

That the sub-lease was not retail was important to the subtenant, who had brought an action in the County Court seeking relief against the Manager.  The Manager argued that the lease was “retail” and that the County Court had no rights to hear the case.   Depending on the jurisdiction, the ability to hear disputes is restricted to certain Courts and, for example, by Section 89 of the Retail Leases Act (VIC), the Victorian Civil and Administrative Tribunal (VCAT) has sole jurisdiction to hear retail tenancy disputes.  This can have cost implications, where unless the action is considered vexatious in a way that unnecessarily disadvantages a party, or a party refused to take part in mediation, then each party is responsible for their own costs, regardless of the outcome.

Whether retail legislation applies may also be significant to the owner/manager of the building, who, pursuant to retail legislation in Victoria, Queensland and South Australia, may not on-charge land tax if the leases were deemed retail premises.  Other implications may arise, such as the ability to pass on costs associated with building repairs and responsibility for carrying out building repairs.

By contrast again, the Victorian Supreme Court decision in Stringer and Ors v Gilandos Pty Ltd [2012] VSC 361 found that individual leases of (strata) apartments, from the owners of apartments to a resort manager, were retail leases.   In this case, the individual owners were not able to reserve the use of the apartments for themselves.  Rather, the manager was able to utilise all apartments for holiday rentals to the public.

Not all serviced apartment rentals are the same.

In Summary

As far as retail lease legislation applies in Victoria, if an apartment owner leases back to a management company, who provides short term accommodation to the public, this would likely be deemed a retail lease.

If a tenant holds a lease of a building and runs the business of providing short term student accommodation, this would also likely be a retail lease.

If an apartment owner is required under a sub-lease to allow the apartment to be let by a manager for short term accommodation during periods when the owners are not using it themselves (similar to the facts in Evans), this is unlikely to be deemed a retail lease.

Lessons Learned

Whether a lease is retail, residential or commercial will depend more on function than form.  The definition of serviced apartments is evolving and on-going.  Seek advice before you enter into a management agreement for a serviced apartment, either as a manager or unit owner.

Dan Flynn, Partner

Emma Einsiedel, Associate

Newsletter 18 March 2015
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