Introduction
The following commentary is adapted from a paper titled “Retail Shops Act Mix Tape” presented by firm principal Shannon Davies on 7 August 2022.
Importance of lettable area
The definition of “lettable area” in the Commercial Tenancy (Retail Shops) Agreements Act 1985 (WA) (“Retail Shops Act”) is important for two reasons.
Firstly, at the beginning of the lease lifecycle, the definition may come into play on the question of whether the lease is a retail shop lease at all. That is because the definition of “retail shop lease” expressly excludes any retail shop that “has a lettable area that exceeds 1,000 square metres”.[1] The rights and obligations provided for by the Retail Shops Act mean that significant consequences can flow from any failure to correctly identify whether a retail shop falls in or out of this threshold. For example:
- a landlord may enter into a lease on the basis that the lettable area exceeds the 1,000m2 threshold and the Act does not apply. As a consequence, the landlord fails to provide a disclosure statement[2] or to include a tenant guide in the lease.[3] The lease also provides for annual rent reviews to the greater of CPI and 3%. It is subsequently determined that the lettable area of the retail shop is in fact less than the threshold. Among other risks, in those circumstances the landlord would be exposed to the possibility of the tenant terminating the lease or seeking compensation for any financial losses suffered as a result of the landlord’s failure to meet disclosure statement and tenant guide obligations,[4] or being unable to enforce any rent reviews;[5] or
- alternatively, a landlord may negotiate a lease on the basis that it will be a retail shop lease, on the incorrect assumption that the lettable area is equal to or less than the 1,000m2 threshold. By reason of that conclusion, the commercial terms of the lease are structured with the effect of the Act in mind, including the exclusion of any “ratchet provision” for market rent reviews,[6] and the exclusion of management fees from recoverable outgoings.[7] If the lettable area of the retail shop is later determined to be in excess of the threshold (so that the Act does not apply), the landlord will probably be bound by terms that are less favourable than what might otherwise have been agreed.
Secondly, during the term of the lease, the definition is a fundamental element of the “relevant proportion”,[8] which is generally the maximum proportion of outgoings that a landlord may recover from a retail shop lease tenant of a multi-tenanted property.[9] A failure to correctly calculate this proportion can also potentially lead to adverse consequences for a landlord. The landlord may find himself or herself in the position of facing a claim from the tenant for overpayment of outgoings over an extended period of time. Alternatively, the landlord may be put to the potential time and money cost of pursuing substantial shortfalls from an understandably unhappy tenant. Further, as the relevant proportion must be specified in the disclosure statement, there is also the possibility of the tenant seeking financial compensation for any financial losses suffered as a result of the false or misleading information, or (if the discrepancy materially impacts the tenant’s position)[10] terminating the lease.[11]
Accordingly, the lettable area of a retail shop should be accurately identified at the outset of a lease transaction to avoid consequences of the type outlined above materialising down the track.
Retail Shops Act definition
Section 3(1) of the Retail Shops Act defines lettable area as follows:
“lettable area, of a retail shop, means an area of the shop defined or calculated –
- in such manner as is prescribed by the regulations; and
- if the shop is part of a group of premises, in the same, or a substantially similar, manner as the area for each other retail shop in the group of premises is defined or calculated”
Regulation 3AA(1) of the Commercial Tenancy (Retail Shops) Agreements Regulations 1985 (WA) (“Retail Shops Regulations”) relevantly provides:
“The lettable area of a retail shop means so much of the surface floor area of the premises as are designed and available for use in carrying on the business that is, or will be carried on at the shop.”
The Retail Shops Regulations also provide that, “unless a particular tenant has a right to the exclusive use of the area“, lettable area does not include:
- areas covered by awnings or similar coverings, balconies, areas under planter boxes, terraces, verandahs, public spaces, thoroughfares or access ways for the use of service vehicles or the delivery of goods, and all other areas of a retail shop that are not reasonably capable of being used in carrying on the business that is, or will be, carried on at the shop;[12] and
- (to the extent provided as a common facility in the building where the shop is situated) access ways, cupboards, escalators, stairwells, landings, fire hose reel cupboards, lift shafts and lobbies, plant / motor rooms, recessed doorways, storage rooms, tea rooms and other service areas, telecommunications cupboards, toilets, car park spaces, and entrance halls.[13]
It follows that, where a tenant has an exclusive right to use any of the above areas, and those areas are designed and available for use in carrying on the tenant’s business, those areas can form part of the lettable area of a retail shop.
Particularly having regard to the expanded definition of “lease” in the Retail Shops Act,[14] an exclusive licence over such areas incorporated into a retail shop lease (for example, a storage area licence or car parking licence) arguably results in an expansion of the lettable area beyond the area of the shop itself.
Perhaps less clear is the situation where a tenant is granted a retail shop lease over a strata lot which enjoys the benefit of exclusive use by-laws over common property situated outside of the area of the shop,[15] although the Retail Shops Act’s somewhat loose definition of “retail shop”[16] invites argument in that scenario (as do Victorian authorities holding that the “floor area” of retail premises for the purposes of corresponding legislation may “be more or less” than the actual premises area).[17]
Also relevant to the issue of lettable area is regulation 6A of the Retail Shops Regulations, which facilitates the determination of the relevant proportion of outgoings in a mixed-use development. That regulation provides that:
“The lettable area of any premises that are not retail shops is to be defined and calculated for the purposes of paragraph (b) of the definition of total lettable area in section 12(3) of the Act in the same manner as is prescribed under regulation 3AA but for that purpose –
- a reference in regulation 3AA to ‘a retail shop’ or to ‘shop’ is to be read as a reference to ‘premises’; and
- a reference in regulation 3AA to ‘in carrying on the business that is, or will be, carried on at the shop’ is to be read as a reference to ‘by the tenant’.”
What is most interesting about the definition of lettable area in the Retail Shops Act is that many licensed surveyors simply ignore it.
Before the commencement of the Commercial Tenancy (Retail Shops) Agreements Amendment Act 2011 (WA) on 1 January 2013,[18] there was no concept of “lettable area” in the Retail Shops Act. Instead, the relevant definition for determining a tenant’s proportionate outgoings liability was “retail floor area”, which was simply “in relation to a retail shop … the floor area of the retail shop designed and available for use for the carrying on of business in the retail shop”.[19] There was speculation in the lead-up to the commencement of the amending Act that the prescribed method of determining “lettable area” would adopt the Property Council of Australia Method of Measurement for Lettable Area (“PCA Method of Measurement”),[20] which is a recognised industry standard for licensed surveyors to determine the areas of retail, office and industrial premises. It did not. Despite that fact, it is almost unheard-of to see a survey plan for a retail shop that refers to the Retail Shops Regulations. Invariably, a retail shop survey plan will refer only to the PCA Method of Measurement.
This raises the question of the extent to which a survey plan of a retail shop, prepared in accordance with the PCA Method of Measurement, can be relied upon for Retail Shops Act purposes. In other words, are there any material differences between lettable area as defined in the Retail Shops Act and lettable area as defined in the PCA Method of Measurement and, if so, what are they?
Case law
Prior to 1 January 2013, the definition of retail floor area applied in lieu of lettable area. The retail floor area definition itself only found its way into the Retail Shops Act via the Commercial Tenancy (Retail Shops) Agreements Amendment Act 1998 (WA), in order to give effect to the Supreme Court of Western Australia’s decisions in Monaco and Sharp v O’Driscoll.[21] Prior to that, the relevant definition was simply “floor area”, which the Act defined as “so much of the surface area of the demised premises designed and available for use in the carrying on of the tenant’s business in the retail shop the subject of the lease”.
In Monaco the Full Court of the Supreme Court of Western Australia was called upon to determine the floor area of what was then known as the Shafto Tavern in Shafto Lane, Perth. Ipp J (with whom Malcolm CJ and Kennedy J agreed) held:
“ … it is sufficient to state that in my view the phrase “floor area” in s 3(1) of the Western Australian Act means so much of the surface area of the demised premises designed and available for use in the carrying on of the lessee’s business in the retail shop the subject of the lease.” [22]
Ipp J also expressly recognised the tension between the Retail Shops Act definition and industry standards for the measurement of area:
“At the trial, both the appellants and the respondents submitted that the phrase ‘floor area’ was to be construed in accordance with a publication entitled ‘Method of Measurement of Buildings’, published by BOMA, effective as from 1 June 1989. Neither the appellants nor the respondents contended for a construction of ‘floor area’ based on the context of that phrase in the Act. BOMA is a private organisation and its ‘method of measurement’ has no statutory force whatsoever … the BOMA publication is entirely irrelevant to the meaning of ‘floor area’ in the definition of ‘retail shop lease’ in s 3(1) of the Act.”[23]
Sharp involved a dispute relating to the Colliefields Hotel in Collie, again before the Full Court of the Supreme Court. The tenant had contended that the floor area of the leased premises was 1,291m2, while the landlord had argued that it was only 737m2. The areas in question were a courtyard, car park, gravel driveway and various private areas used by the tenant for their own residential accommodation, which had all been excluded from the floor area by the trial judge. When the appeal came before the Full Court, the ground of appeal relating to floor area was abandoned by the landlord, who accepted that the trial judge’s determination was consistent with Monaco.[24]
The District Court of Western Australia applied Monaco and Sharp in deciding in Spooner v Ketch Nominees Pty Ltd[25] that the bitumen driveways and brick paved areas of a country roadhouse formed part of its retail floor area, taking the tenant’s lease of the roadhouse outside of the Retail Shops Act’s application.[26]
Because the current basic definition of lettable area in r. 3A(1) of the Retail Shops Regulations substantially reflects the previous definition of retail floor area, and the previous definition of retail floor area was introduced into the Retail Shops Act to reflect the decisions of Monaco and Sharp, those authorities arguably still hold and should be considered when approaching the question of lettable area.[27] This means that the lettable area of a retail shop for the purposes of the Act may be substantially less (or even more) than the overall area of the premises being leased.
PCA Method of Measurement
The PCA Method of Measurement provides measurement guidelines known as:
- “Gross Lettable Area – Retail” (“GLAR”), for use with shopping centres, commercial buildings, and strip shops, free-standing shops, semi-detached or terrace-type shops in suburban streets; and
- “Gross Lettable Area” (“GLA”), for use with free-standing supermarkets and showrooms.
Relevantly, all of the different classes of premises described above are capable of being retail shops for the purposes of the Retail Shops Act, depending on the nature of the tenant, the business being conducted from them, and (most importantly for present purposes) the lettable area of the premises as defined in the Act.
The GLAR guidelines expressly provide that “in some states or territories, lease legislation might contain provisions that over-ride the Property Council’s preferred approach to measurement”. However, this note is absent from the GLA guidelines.
PCA Method of Measurement definitions vs the Retail Shops Act
On review of the GLAR and GLA guidelines, a number of potential discrepancies with the Retail Shops Act definition stand out. The most obvious of these is the following provision, which appears in both sets of guidelines:
“Balconies, terraces, planter boxes, verandahs, awnings and covered areas should be excluded from tenancy area calculations, but may be measured and separately identified for the purpose of negotiating rentals.”[28]
This is clearly potentially at odds with the provision for the inclusion of such areas in the Retail Shops Regulations referred to in paragraph 13 above. Under the GLAR and GLA guidelines, such areas are never included in lettable area, while clearly for Retail Shops Act purposes they can be (if the tenant has exclusive use rights, and the areas fall within the basic requirement that they be designed and available for use in the carrying on of the tenant’s business at the retail shop). The inclusion or exclusion of such areas could be critical in determining the Act’s application, and may also have a material effect on the calculation of a tenant’s outgoings liability.
Both the GLAR and GLA guidelines also provide that the following areas are excluded from the lettable area of a tenancy, where all are provided as standard facilities[29] in the building: stairs, accessways, fire stairs, toilets, recessed doorways, cupboards, telecommunications cupboards, fire hose reel cupboards, lift shafts, escalators, smoke lobbies, plant / motor rooms, and tea rooms and other service areas.[30] Again, as these provisions do not have any concept of exclusivity, the areas to which they refer may potentially be included in Retail Shops Act lettable area, but never in lettable area for PCA Method of Measurement purposes.
The GLAR guidelines exclude areas where there is less than 1.5 metres in height clearance above floor level.[31] No such exclusion applies under the Retail Shops Act.
Finally, there is the question of whether the method for determining “floor space” under the GLAR and GLA guidelines is consistent with the concept of “the surface floor area of the premises” in the Retail Shops Act definition of lettable area. For example, both the GLAR and GLA guidelines contemplate that floor space is to be measured to the centre line of inter-tenancy walls.[32] The GLAR guidelines also provide for measurement to the mall line where a shop front is situated inside that line.[33] In the case of GLA, floor space is taken to the external building walls.[34] Whether any of these approaches align with the Act is an open question.
Conclusion
The parties to a retail shop lease should approach the issue of lettable area with caution, particularly in circumstances where the area of the retail shop is close to the 1,000m2 threshold.
Disclaimer
This post has been prepared as a general summary only. It is not, and is not intended to be, legal advice with respect to any particular matter. This post should not be relied on with respect to any particular matter without taking legal advice. Stork Davies Legal Advisors disclaims liability to any person who relies on this post without taking legal advice from the firm.
[1] See the definition of “retail shop lease” in s. 3(1) of the Retail Shops Act.
[2] In accordance with s. 6 of the Retail Shops Act.
[3] In accordance with s. 6A of the Retail Shops Act.
[4] Pursuant to ss. 6(1) and 6A(1) of the Retail Shops Act.
[5] Because “multiple basis” reviews are void pursuant to s. 11(1) of the Retail Shops Act.
[6] Such a provision is prohibited by s. 11(2)(c) of the Retail Shops Act.
[7] Section 12(1f) of the Retail Shops Act prohibits the recovery of management fees.
[8] The “relevant proportion” is defined in s. 12(3) of the Retail Shops Act to mean “in relation to a retail shop that is part of a group of premises … the proportion that the lettable area of the retail shop bears to the total lettable area of the group of premises at the commencement of the accounting year”.
[9] Section 12(1)(b) of the Retail Shops Act. The relevant proportion may be greater with the approval of the State Administrative Tribunal (“Tribunal”), and is also subject to modification pursuant to s. 12(1e) of the Act in circumstances where any particular outgoings are not referable to the tenant’s premises.
[10] This would likely turn on whether “the tenant is in substantially as good as a position as the tenant would have been if the statement … had not contained the false or misleading information” for the purposes of s. 6(3)(b) of the Retail Shops Act.
[11] Pursuant to ss. 6(1) and 6A(1) of the Retail Shops Act.
[12] Retail Shops Regulations r. 3AA(2).
[13] Retail Shops Regulations r. 3AA(3).
[14] Section 3(1) of the Retail Shops Act defines “lease” to mean “any lease, licence, or agreement, whether in writing or not, that provides for the occupation of premises”.
[15] Pursuant to s. 43 of the Strata Titles Act 1985 (WA), a scheme by-law may be made that confers “exclusive use and enjoyment of, or special privileges over, the common property in the strata titles scheme or specified common property in the strata titles scheme … on the occupiers, for the time being, of a specified lot or lots in the strata titles scheme”.
[16] “Retail shop” is defined by s. 3(1) of the Retail Shops Act to mean “any premises situated in a retail shopping centre that are used wholly or predominantly for the carrying on of a business … or … any premises not situated in a retail shopping centre that are used wholly or predominantly for the carrying on of a retail business”. The State Administrative Tribunal has held that “premises” in the context of the “management fees” definition in s. 3(1) of the Act means premises in the broad sense: Reds (WA) Pty Ltd and Edwards & Ors [2012] WASAT 85 at [37]-[45].
[17] See Hall v Joyworth Pty Ltd [1993] V Conv R 54-461 at 65,405-6; F P Shine (Vic) Pty Ltd v Gothic Lodge Pty Ltd [1993] V Conv R 54-472 at 65,533. The Full Court of the Supreme Court of Western Australia held in Monaco v Arnedo Pty Ltd [1994] WASC 487 (“Monaco”) at 9 that both Victorian decisions were applicable to the definition of floor area in the Retail Shops Act.
[18] This amending Act effected the most recent substantial amendments to the Retail Shops Act.
[19] This is essentially reflective of the wording in r. 3AA(1) of the Retail Shops Regulations.
[20] Property Council of Australia Limited, Method of Measurement of Lettable Area (first published 1997, 2008 ed).
[21] Sharp v O’Driscoll Unreported FCt SCT of WA 970111 [1997].
[22] Monaco at 9-10 per Ipp J. At 19 Ipp J goes on to say that consistent with this construction “void areas, such as, for example, stairwell areas and areas adjacent to mezzanine floors, could not be part of the floor area as those areas would not be ‘used to provide the retail services for which the premises are dedicated’. Under the GLA and GLAR methods of measurement, however, void areas of that kind would form part of the ‘floor area’”.
[23] Monaco at 10 per Ipp J. The BOMA Method for the Measurement of Buildings referred to by Ipp J was an industry standard that preceded the PCA Method of Measurement.
[24] Sharp at 6 per Malcolm CJ.
[25] Spooner v Ketch Nominees Pty Ltd (2001) 26 SR (WA) 90.
[26] Spooner at 99.
[27] Subject to the provisions in rs. 3AA(2) and (3) and 6A of the Retail Shops Regulations.
[28] PCA Method of Measurement sections 1.4 and 2.4.
[29] “Standard Facilities” are defined by the PCA Method of Measurement to “include stairs, toilets, cleaners’ cupboards, lifts, lift shafts and motor rooms, escalators, smoke lobbies, tea rooms and other service areas that can be used by the occupier / tenant of the floor or building and that are not purpose built”.
[30] PCA Method of Measurement sections 1.3.1 and 2.3.1.
[31] PCA Method of Measurement section 1.3.3.
[32] PCA Method of Measurement sections 1.1.2 and 2.1.2.
[33] PCA Method of Measurement section 1.1.3.
[34] PCA Method of Measurement section 2.1.1.