A recent decision of the Full Court of the South Australian Supreme Court has set out when a landlord of a retail shop lease can seek payment of land tax as an outgoing from a tenant.
The Retail and Commercial Leases Act 1995 ("Act") governs retail shop leases in South Australia. When the Act applies it exempts tenants from the payment of land tax. Until April 2011 the Act applied to retail shop leases where the annual rent did not exceed $250,000 per annum. From April 2011, the threshold under the Act increased to an annual rent of $400,000 per annum.
It was previously thought that if the Act applied at the commencement date of a lease it continued to apply for the term of that lease (including renewals and assignments) notwithstanding that subsequent rent may exceed the threshold as at the commencement date.
However, the Court decided that whether or not the Act applies depends on what the rent is during a lease year and the threshold applicable for the operation of the Act during that year. That is, whether or not the Act applies to a lease is a moving target during the term of the lease.
The most common issue arising from whether or not the Act applies to a lease is whether or not a landlord can demand payment of land tax for the leased premises from a tenant. If the Act applies, the landlord cannot demand the payment of land tax from a tenant. If the Act does not apply, a landlord can demand payment of land tax from a tenant if a lease so provides.
Illustrative Example of Operation of Law following Recent Decision
Tom leases retail property from Sam to run his restaurant business. Tom and Sam’s lease agreement provides that Tom is responsible for all rates and taxes (including land tax) for the leased premises, but that he is not required to pay land tax if the Act applies. The lease agreement also provides for a 3% increase in rental in the first two years and a market review in the third year.
At the commencement of the lease, the rental payable by Tom was $390,000 per annum, meaning that the Act applies for that year because the annual rental is below the current threshold of $400,000.00 per annum and Sam is liable for land tax. However, due to the 3% rental increase in each of the two following years, the rent will exceed $400,000 per annum meaning that the Act no longer applies for each of those years. Tom would therefore be liable for land tax in year two and three.
Suppose that a market review then took place and the annual rental was lowered to $385,000. The annual rental would once again fall below the $400,000 threshold and Sam would again become liable for land tax, not Tom.
The outcome of the decision may have particular significance for certain landlords and tenants of leased retail premises. Landlords and tenants alike in such circumstances should now closely monitor annual changes in their lease against the requirements of the Act from year to year to determine land tax liability.