The Retail Shop Leases Amendment Act 2006 (the Amendment Act), which amends the Retail Shop Leases Act 1994 (the Act), was assented to on 22 February 2006. The amendments contained in the Amendment Act are due to commence on a date to be fixed by proclamation, which the Department of State Development expects to be on or about 4 April 2006. The date of proclamation is, however, yet to be confirmed. The new changes (except for some of the new dispute provisions) will only apply to leases entered into after the commencement of the Amendment Act.
This summary is not exhaustive and highlights the major changes for both lessors and lessees.
Meaning of ‘Retail Shopping Centre’
The definition of ‘Retail Shopping Centre’ has been amended so that it no longer distinguishes between floor levels within a retail shopping centre. A retail shopping centre is looked at as a whole and must now have all of the following attributes:
- Five or more shops used for retail businesses;
- All are owned by the one person or comprise lots within a community titles scheme;
- All are located in one or more buildings, only separated by common areas or a road; and
- The cluster of premises is promoted or generally regarded as a shopping centre.
The implication of this amendment is that a lessor will need to reconsider whether or not a lease is a retail shop lease requiring disclosure and otherwise complying with the Act. In some cases, leases that previously were not considered retail leases will now be subject to the various requirements under the Act. For example, office space contained on an upper level of a retail shopping centre which contains solely office space or other tenancies of a commercial nature will now likely fall under the Act provided the centre as a whole falls within the definition of ‘Retail Shopping Centre’. You will need to ask the question - is that upper level promoted as part of the shopping centre?
It may be arguable that if there is separate access between and to the retail and commercial areas, then those separate non-retail areas will not be governed by the legislation, however careful consideration of all the circumstances will be required.
Exclusions from the definition of ‘Retail Shop Lease’
A lease of premises that, if the premises were not leased, would be premises within a common area of a retail shopping centre and which are used for one or more of the following:-
- Information, entertainment, community or leisure facilities;
- Telecommunication equipment;
- Displaying advertisements;
- Storage; and
are no longer retail shop leases.
Disclosure - lessor’s obligations
A new concept of a ‘Defective Statement’ has been introduced. As is currently the law, the lessor must provide a draft lease together with a disclosure statement at least seven days before the lessee enters into the lease. If the lessor now does not provide a statement or provides a statement that is incomplete or contains information that is false or misleading in a material particular, then the lessor is deemed to have issued a defective statement, both which entitle the lessee to terminate the lease by written notice to the lessor within six months after the lessee enters into the lease (previously, it was two months). The lessor is also liable to pay reasonable compensation for any loss or damage suffered by the lessee because of such non-compliance or defective statement.
To protect lessors, if the lessor provides a defective statement but in doing so the lessor acts honestly and reasonably and the lessee is in substantially as good a position as the lessee would have been if the disclosure statement was not defective, then the lessee cannot terminate the lease.
There is a new definition of ‘Major Lessee’ which had not been previously included in the Act. It distinguishes a lessee with five or more retail shops in Australia from other less experienced lessees. This new classification is relevant for the new rent review provisions including the early determination of market rent on the exercise of options and is also relevant to the disclosure requirements.
A Major Lessee may opt out of receiving a disclosure statement at least seven days before entering into a lease by giving the lessor written notice stating that it has received financial and legal advice and that it waives the entitlement to the seven day disclosure period. This is not a complete waiver of the requirement for the lessor to provide a disclosure statement. It merely removes the requirement for the disclosure statement to be provided within the seven day disclosure period.
The Major Lessee exception will also apply with respect to the disclosure obligations between a lessor and an assignee who is a Major Lessee such that the disclosure statement need only be given to the assignee before the assignment date provided the assignee gives similar written notice to that provided by a Major Lessee entering into a lease.
Disclosure - lessee’s/assignee’s obligations
The requirement for a lessee to give a lessor a disclosure statement is now mandatory, although there is no reciprocal right of termination for a lessor should a lessee fail to provide one. It will, however, create a retail tenancy dispute at the lessor’s election.
Similarly, the requirement for an assignee to give a lessor a disclosure statement and for an assignee to give an assignor a disclosure statement is now mandatory.
Rent review changes
The Amendment Act provides a new basis for a rent review. If the rent is determined as a base rent plus percentage rent then a review may be conducted based on the average rental paid over the previous year of the lease or the stated number of previous years of the lease.
In addition, when rent reviews are undertaken, the amount by which the rent can be increased may be capped to protect a lessee. For example, a review to the lower of 4% or CPI, is now a valid review under the Amendment Act. The introduction of the term ‘Major Lessee’ is also significant. A Major Lessee is not restricted to the rent review bases in the Act if the Major Lessee has provided written notice to the lessor stating that it has received appropriate financial and legal advice about the lease and the lease provides for the timing and basis for each review.
There is still likely to be some confusion because of Section 36 of the Act which renders provisions of a lease that apply one of two or more methods of rent review or whichever of two or more methods will result in the highest rent void. Accordingly, lessors may still be reluctant to agree to rent reviews outside the Act with Major Lessees until this position is clarified.
Where a retail shop lease provides for an option to renew or extend the lease at the current market rent of the leased shop, the lessee may request that the market rent determination be undertaken prior to the exercise of the option for the further term of the lease. The objective is to allow a lessee to make an informed decision and assessment prior to exercising the option. The concern for lessors will be that market conditions could change in six months disadvantaging the lessor. The early determination period will depend upon the length of the lease in question.
Where the lessee is a Major Lessee, the early determination clause will not apply if the Major Lessee, before the lease was entered into, provided the lessor with notice stating that it had received legal and financial advice and the lease provides for the timing and basis for each review.
The following provision is very important for lessors.
Despite any other provision in the Act or the lease to the contrary, the last day on which the option may be exercised by the lessee shall be the earlier of the following:
- 21 days after the lessee receives written notice of the current market rent; or
- the day that the lease ends.
Does this mean that regardless of the terms contained in a lease (e.g. the option is to be exercised no earlier than six months and no later than three months prior to expiry of the term) and regardless of whether or not the lessee has requested an early determination, the lessor must provide a determination to the lessee of the market rent, otherwise, the option may be exercised by the lessee up until the day the lease ends?
Lessors will need to consider whether it is therefore prudent to agree the current market rent with a tenant well in advance of the option exercise dates. If the parties cannot agree on the market rent and the determination is referred to a specialist retail valuer, then, there have been amendments to the Act addressing that process. In particular, both the lessor and lessee must share equal financial responsibility for the valuer’s fee for the determination of the current market rent. The new provisions also provide a requirement for each party making a submission to the valuer to give a copy of their submission to the other party within a reasonable time decided by the valuer (the submission period). This then gives each party an opportunity to respond to the other’s submissions by way of a written response to the valuer.
A valuer will now also be required to state detailed reasons for his determination. Some valuers are asking parties to sign disclaimers or releases for fear of their valuation being attacked because they are now required to detail reasons for their determination. The tribunal now has power to make a declaration order that a particular valuation was not prepared in accordance with the Act. It has the power to set aside the valuation and order a fresh determination.
The Amendment Act inserts a very significant provision for lessors by shifting the onus for notification of the due date for exercise of an option to the lessor. At least two months, but no more than six months, before the option date, the lessor must give the lessee written notice of the option date. It is not clear whether this is the first date by which the option may be exercised or the last date for the exercise of the option, however, we consider it prudent that the lessor notify the lessee no later than two months before the first date by which the lessee may exercise the option.
This is a particularly onerous provision from a lessor’s perspective as failure to comply may result in a maximum penalty of 40 penalty units (one penalty unit is currently valued at $75.00). Notably, however, the lessor’s failure to provide the requisite notice does not give rise to an automatic right of extension to the lease. From an administrative point of view it is important for lessors to ensure they have a suitable system in place to monitor future option exercise dates and the relevant notification date.
If a lease does not provide for an option to renew or extend the lease, or it is not the subject of an agreement for renewal or extension, a lessor will be required to give written notice to the lessee as to whether or not it intends offering a new lease. This notice period will vary depending upon the length of the lease term. In the case of a lease longer than one year it must be given at least six months, but no longer than one year, before the lease is due to end.
If the lessor does not comply with this provision then the term of the lease is extended until six months after the lessor gives such notice (the extended period). However, this provision will only apply provided the lessee provides written notice to the lessor requesting an extension prior to the expiration of the lease term. The lessee may terminate the lease before the end of the extended period by giving at least one month’s written notice of termination to the lessor. The inclusion of these new provisions means that a lessor must not only be forward thinking with respect to upcoming option exercise dates but also as to its intentions for premises following the expiration of the lease term. It means that a lessor must make up its mind in relation to a tenancy that has no option at least six months out.
Release of Assignor from ongoing liabilities
A retail lessee is now released from ongoing liability after an assignment if each of the lessor, lessee and assignee has complied with their disclosure obligations. This changes the common law and will mean that a lessor will need to scrutinise very carefully and rigidly the financials of an incoming tenant. The concern for lessees is that the new provision does not extend to the release of guarantors who will remain liable unless released by the lessor. This may have the effect of retail lessees choosing a non-company structure to give themselves the benefit of this release provision.
Relocating lessee’s business
A new relocation provision has been introduced. If a retail shop lease states that the lessor proposes refurbishing the building in which the leased shop is situated during the term of the lease and those works cannot be carried out practicably without vacant possession of the leased shop, then the lessor may take action requiring the lessee to relocate the lessee’s business (relocation action). The lessor must provide at least three months’ written notice of the details of the redevelopment to indicate a genuine proposal that the works will be carried out after relocation of the lessee’s business, information about the alternative premises and the day by which the shop must be vacated.
It is arguable, given the wording of this new provision, that unless the lease contains clauses mirroring the exact wording of the Amendment Act, then the lessor may not be able to invoke the relocation provision contained in the lease.
If, however, the new provision is contained in the lease and the lessor does issue a relocation notice, then the lessee must provide a termination notice within one month, failing which it is deemed to have accepted the lessor’s offer of a lease of alternative premises.
If the lessee gives a notice to terminate, then the termination will be effective on the date that is agreed between the parties or if there is no agreement, the date that is three months after the relocation notice was issued by the lessor.
Unless the parties agree otherwise, any new lease must be on the same terms and conditions as the existing lease with the rent adjusted to take into account the difference in commercial values of the two premises once the lessee is up and trading in the new premises.
The relocation requirements do not apply to short term leases being tenancies of not more than six months (which includes any period for which the lessee has a right to extend). Nor do they extend to lessees holding over under leases that have since expired provided the holdover provisions are at the lessor’s discretion. Lessors contemplating redevelopment should consider the time left to run under a lease before issuing a relocation notice as a lessor will not be caught by the relocation provisions while a lessee is holding over.
The lessee is entitled to payment by the lessor of the lessee’s reasonable costs of relocation including but not limited to, the cost of:
- dismantling and reinstalling any fixtures and fittings;
- modifying or replacing any fixtures and fittings to the standard existing immediately before the relocation; and
- legal costs.
If the parties cannot agree upon the amount of compensation the amount will be decided under the dispute process in the Act.
The Amendment Act has not cleared up the possibility that a lessor could still be liable for compensation under Section 43(1) of the Act because the lessor causes disruption to the lessee’s business in the shop.
The new demolition provisions apply if the lease provides for termination by the lessor, if the building in which the leased shop is situated is to be demolished, requiring vacant possession of the leased shop. The lessor is required to follow certain steps in order to terminate the lease. The lessor must provide at least six months’ written notice giving details of the proposed demolition to indicate a genuine proposal to demolish the building within a reasonably practicable time after the lease is terminated and the date that the lease ends. A lessee may terminate the lease earlier than the proposed termination date by giving at least seven days’ written notice of the earlier termination date.
The lessor is liable to pay to the lessee reasonable compensation for the loss or damage suffered by the lessee:
- because of the early termination of the lease if the demolition is not carried out or is not carried out within a reasonably practicable time after the termination date; and
- for the fitout of the retail shop to the extent the fitout was not provided by the lessor, whether or not the demolition is carried out.
Agreement as to compensation
The new relocation and demolition provisions do not appear to prohibit the parties agreeing upfront upon the amount of compensation payable in the case of a relocation or demolition under the new provisions of the Amendment Act. This is different to the compensation provisions under Section 43 of the Act which voids any agreement that seeks to limit the amount of compensation payable.
Certain expenses incurred by the lessor that relate to actions performed by the lessor at the request of the lessee are now recoverable by the lessor. These costs include legal costs associated with the preparation of a variation to the lease and consent to a sublease or a licence.
Short term leases
A new exception has been inserted exempting short term leases from most of the provisions of the Act. A short term lease is a lease of not more than six months (which includes any period for which the lessee has a right to extend).
This publication is intended as a first point of reference and should not be relied on as a substitute for professional advice. Specialist legal advice should always be sought in relation to any particular circumstances and no liability will be accepted for any losses incurred by those relying solely on this publication.