The Issue:

Over the past few years, there have been conflicting views on whether a Landlord or a Tenant was responsible for the expense of essential safety measures ('ESM') in rented premises.

Landlords contended that the Tenant should reimburse or pay these costs as an outgoing like any other.

On the other hand, Tenants contended that the Building Regulations made it a Landlord's responsibility to ensure that premises were ESM compliant at the Landlord's expense.

What are Essential Safety Measures ('ESM')?

In basic terms, ESM are the fire safety and other similar safety equipment installed in buildings, such as exit signs, fire extinguishers, fire doors, smoke alarms, sprinklers, exit paths, etc. The related expense is commonly very significant.

Who pays according to VCAT?

The VCAT opinion states that:

• A Landlord must bear the expense of ESM compliance and cannot pass such expense on to a Tenant;
• The Landlord and Tenant can agree that the Tenant undertakes ESM works but at the Landlord's expense;
• With respect to Retail Tenants, a Landlord can only recover the cost of any maintenance and repairs where that cost is not covered by:
  — Section 52(2) of the Retail Leases Act, which states that the Landlord must maintain the premises and fixtures to their condition at the commencement of the Lease (subject to conditions);
  — Section 251 of the Building Act, which enables a Tenant to recover the expense for works and actions the obligation of an owner in compliance with in the Building Act and Regulations;
  — The expenses are not of a capital nature;
  — The expenses are otherwise claimable pursuant to the Retail Leases Act;

• Otherwise, ESM is solely a Landlord's responsibility and a Landlord's expense would apply to both retail and commercial leases.

Note that a VCAT opinion does not have the immediate force of law and VCAT's view may or may not be upheld by subsequent decisions of a Court and may be impacted by any change in legislation. In fact, the Real Estate Institute of Victoria and the Property Council are continuing to lobby the government to ensure that Landlords can recover ESM expenses as an outgoing.

However, in our opinion, without the government expressly legislating otherwise, any Court is likely to uphold VCAT's opinion given the detailed reasons for the opinion set out by Justice Garde and the fact that he is also a judge of the Supreme Court.

What does this mean for you?

• If you are a Tenant: You may have an ability to stop paying for ESM and perhaps claw back past expenses which you might have paid
• If you are a Landlord: You have a choice to either keep claiming ESM expenses with the risk that they may be challenged or clawed back in the future or you can look at ceasing to claim this expense and factoring it into the total amount of rent. depending on your circumstances

If you have any queries regarding your lease, please feel free to call Andre Ong on (03) 8561 3317.

The information contained in this article is intended to be of a general nature only and should not be relied upon as legal advice. Any legal matters should be discussed specifically with one of our lawyers.

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