Retailers that pay rent based on their turnover may be required to submit to an annual audit at their landlord’s discretion, according to a recent judgement by the Supreme Court of WA
Retailers that pay rent based on their turnover may be required to submit to an annual audit at their landlord’s discretion, according to a recent judgement by the Supreme Court of WA.
The ruling was handed down after Claremont retailer Fresh Provisions disputed a move by its landlord to conduct an audit of the store in the Bayview Centre.
In its decision, the court found that Fresh Provisions was required to allow an accountant, appointed by its landlord, to audit the turnover of the business, under the Commercial Tenancy (Retail Shops) Agreement Act 1985 (WA).
While the act does not define the scope of an audit, where rental is based on turnover, the court said it could be deduced from the purpose of the legislation.
It argued that because a lessor may need to rely on an audit to verify turnover figures, it fell within the act.
The court said such audits could only be conducted annually and must be paid for by the lessor, provided the turnover figure is within five per cent of the figure reported by the tenant originally.
Fresh Provisions’ lease did not set out the terms of an audit.
The court also ruled that all cash register reports, tax returns and financial statements should be made available to an auditor.
Retail Traders Association of WA executive director Wayne Spencer told WA Business News he felt the decision was unfair.
“I really question the judgement in this particular situation, where the tenant is subject to turnover rental only, and the court has basically given the landlord the right to a complete audit of the business,” he said.
Mr Spencer said he believed Fresh Provisions fell outside the Commercial Tenancy Act, and fell instead within the scope of commercial leasing regulations due to the size of its tenancy.
“Commercial tenants are not as protected as normal retail tenants and it does cause some discrepancies,” he said.
“[Fresh Provisions] has been placed in an onerous position where they may have to subject to an audit year after year.”
Since its lease commenced in 1995, Fresh Provisions’ rent had remained relatively static, according to the court ruling, with the business paying a fixed rent rather than one based on percentage of turnover.
The company was permitted to pay a base rent because it had not exceeded the turnover threshold, outlined in its lease, where rent would be based on percentage.
However, the landlords questioned the gross turnover figure Fresh Provisions was reporting, given the buoyancy in food retailing in recent years.