Earlier this year, VCAT handed down its Advisory Opinion holding that commercial landlords must bear the costs of maintaining any Essential Safety Measures (“ESMs”) which are required at their premises – and that landlords cannot pass those costs on to their tenants.
What are ESMs?
The Building Regulations 2006 require the landlords of certain types of commercial premises – including hotels, motels, backpacker hostels, nightclubs and bars – to have various ESMs installed and maintained in their premises.
ESMs are items such as smoke detectors, sprinkler systems, fire extinguishers, fire exit signs, fire exit doors, and air-handling systems. Exactly which ESMs are required varies from premises to premises. For example: a backpackers hostel has to comply with more ESMs than a hotel without accommodation.
If a building was constructed or altered after 1 July 1994, then the occupancy permit should state what ESMs (if any) apply to the building.
If the building was constructed before 1 July 1994, then the landlord should engage a building consultant to advise exactly what ESMs (if any) apply to the building.
If any ESMs are required for a building, then the landlord must ensure that an annual ESM report is prepared for the building (at the landlord’s cost).
VCAT’s Advisory Opinion
VCAT’s Advisory Opinion is that:
- If the Building Regulations state that a landlord must do something, then the landlord must do that thing itself and cannot pass that obligation on to the tenant. For example: the landlord of a backpackers hostel must installing hard-wired smoke alarms or a smoke detection system – at its own cost.
- If the Regulations state that a landlord must ensure that something is done, then the landlord can pass that obligation on to its tenant (as long as the terms of the lease allow the landlord to do so). But, the tenant will be able to recover its costs of compliance from the landlord. For example: the landlord of a hotel must ensure that the portable fire extinguishers are properly maintained. The lease may allow the landlord to pass this obligation on to the tenant, but the tenant will be able to recover its compliance costs from the landlord (or to set those costs off against the rent).
The Advisory Opinion is not a binding precedent. However, it is highly persuasive and VCAT members are almost certain to follow its reasoning in any cases they hear.
Retail Leases Act
VCAT’s reasoning about the ESM requirements applies to both retail leases and non-retail leases. The landlord must bear the cost of complying with ESMs even if the Retail Leases Act 2003 does not apply to the lease.
What it Means for Landlords
If any ESMs are required for your building, then:
- You need to obtain an annual ESM report for the building.
- When setting the rent for the first year of a lease (or negotiating the rent on a market review) you need to factor in the cost of the ESMs you will have to bear over the term of the lease.
- Before consenting to your tenant building an extension or such like, you need to consider whether it will result in extra ESM compliance costs for the landlord.
What it Means for Tenants
- You are not liable for the costs of complying with an ESM.
- If your lease requires you to maintain an ESM, then you should be able to recover the compliance costs from the landlord (or set it off against the rent).
- If your landlord has previously required you to maintain or pay for an ESM, then you may be able to recover the compliance costs from the landlord (or set it off against the rent).
- However, you should never attempt to set off any amount against the rent without first obtaining legal advice confirming your position (because wrongfully refusing to pay part of your rent could lead to your landlord terminating your lease).
- If you voluntarily carry out an ESM it is highly unlikely that you will be entitled to recover the costs from your landlord.
List of ESMS
A useful list of the types of ESMs which may apply to a building was attached to VCAT’s Advisory Opinion. You can view that list in the link below.
Please note that this article is only a short summary of the position. You should not rely upon this article as providing legal advice.