Article by Jodie Masson and Adrianna Witkowski
The NSW Legislative Assembly, in its usual audit process, has once again reviewed the Retail Leases Act 1994 (Act). The Retail Leases Amendment Act 2005 (Amendment Act) giving effect to the changes required as a result of the review was assented to on 17 November 2005 and came into effect on 1 January 2006.
The Amendment Act introduces comprehensive changes to the Act; such changes placing additional obligations on landlords in various areas of retail leasing, including:
- Short term tenancies;
- Security bonds;
- Landlord consent to assignment of lease;
- Lessor disclosure statements;
- Outgoings statements;
- Relocation and disturbance; and
- Advertising retail premises.
Generally, the provisions of the Amendment Act apply to all leases entered into after 1 January 2006, with the exception of the requirements regarding amended disclosure statements and outgoings and estimates statements (for which a six month transitional period applies). The provisions relating to misleading and deceptive conduct extend to leases that were in place prior to 1 January 2006, but not to conduct prior to that date.
The following is a brief summary of the major changes to the Act.
- Landlords will be required to provide prospective tenants with a copy of a retail tenancy guide at the same time as the tenant is provided with the proposed lease (i.e at the commencement of negotiations).
- The retail tenancy guide may be obtained from the NSW Department of State and Regional Development and outlines the tenant’s rights and obligations in relation to leasing a retail shop.
- The pro-forma lessor disclosure statement has been amended in several areas including disclosures on:
3.1 Details of any current legal proceedings in relation to the lawful use of the retail premises or shopping centre; and
3.2 whether the landlord can assure the tenant that the tenancy mix will not be altered due to the introduction of a competitor or other tenant.
- The new prescribed form of the lessor disclosure statement must be used by landlords on and from 1 July 2006.
- The Act does not apply to leases which have a term of less than six months. However, the Act now applies to successive short term leases whose total terms exceed 12 months, or where the tenant has been in unbroken occupation for 12 months or more. The Act does not apply to tenants holding over under leases for less than six months where the holding over period is terminable at will by either party.
- The above amendment applies to leases entered into on or after 1 January 2006 and all post 1 January 2006 renewals of existing leases that, if renewed, will result in the total term exceeding 12 months.
- Section 16 of the Act has been amended so that the tenant may now provide the landlord with a Section 16(3) certificate (waiving the tenant’s right to a five year term) at any time within the first six months of the term of the lease. This amendment was introduced so the tenant has six months to avoid the term automatically being extended. Of course, a landlord should always obtain a section 16(3) certificate where necessary, before the lease is entered into.
- The rent payable from the commencement of the additional period is to be reviewed by the rent review method stipulated in the lease or by CPI if no review is stipulated.
- If a landlord requires a particular standard of fit-out for its retail premises in a retail shopping centre then the tenant must now be provided with a tenancy fit-out statement that contains the relevant information (e.g. particular standard of construction for fit-outs in that retail centre). The tenant is not responsible for carrying out any fit-out which is not covered by the statement.
- The cost of any fit-out works to be carried out by the landlord on the tenant's behalf will only be recoverable from the tenant to the maximum cost estimated by the landlord prior to entering into the lease.
- A new part 2A has been inserted into the Act, establishing a government scheme to regulate security bonds received by landlords for retail premises. The amendments to the Act in this respect do not affect bank guarantees.
- Landlords are now required to lodge with the Rental Bond Board (Board) any security bond received for new leases within 20 business days after receipt of the bond. For existing leases, security bonds (plus any interest earned) must be deposited with the Board by 31 March 2006.
- Previously, landlords could exercise some discretion in claiming on security bonds. However, the government regulation means that landlords and tenants must now make a claim with the Board if a security bond is required to be paid out. The Act only provides a 14 day period in which the other party may either dispute or accept the applicant’s request for payment. If the claim is disputed then it will be determined by the Administrative Decisions Tribunal (Tribunal).
- It is not clear at this stage whether these new requirements in the Amendment Act will create undue difficulties for parties in terms of claiming on security bonds. Landlords may prefer to obtain bank guarantees as security due to the certainty landlords have in terms of their administration and claiming for default under a lease. Tenants may prefer to offer security deposits given the protections now granted under the Act.
- The time in which a landlord must make a decision to consent to a proposed assignment has been shortened from 42 days to 28 days. If the landlord does not respond it will have been deemed to have consented to the assignment. However, the 28 days now runs from the date on which the tenant provides the landlord with a statement of key information regarding the assignee, including details of the assignee’s financial standing and business experience.
- Landlords are now prohibited from issuing a written or broadcast advertisement advertising the availability of the retail premises during the term of an existing lease except in certain circumstances as follows:
16.1 If the tenant consents in writing; or
16.2 If the landlord has offered the tenant a renewal/extension of the lease, which the tenant has not accepted, and the landlord has advised that negotiations have concluded without a result; or
16.3 The landlord informs the tenant that it does not propose to offer the tenant a renewal or extension of the lease; or
16.4 The tenant informs the landlord it does not wish to enter into negotiations for the renewal or extension of the lease, or that it wishes to withdraw from the negotiations; or
16.5 The tenant has vacated, or agrees in writing to vacate, the shop.
- Outgoings estimates and statements must now be provided to the tenant at least one month before the commencement of each accounting period concerned.
- The written estimate of outgoings must:
18.1 Itemise the outgoings to which the tenant contributes under the lease, such itemisation to be in the same format used in the list of outgoings appearing in the lessor’s disclosure statement; and
18.2 Include a breakdown of management fees - breakdown to include the administration costs of running the retail centre and other fees payable to the management company, and cleaning costs (such costs to be broken down into the costs of consumables and other costs).
- Audited statements must also reflect the information in paragraph 18. An audited statement is not required if the outgoings do not relate to outgoings other than statutory charges, insurance and strata levies.
- The tenant now also has the following avenues in terms of withholding or disputing outgoings payments:
20.1 Tenants may query the accuracy of the landlord’s proposed outgoings statement and must be given reasonable opportunity to make a written submission to the auditor on the statement; and
20.2 A tenant may withhold payment of contributions for outgoings if the landlord has not provided the tenant the estimate or outgoings statement within ten business days after the request. However, once the estimate or statement is provided, the tenant’s contribution to outgoings must be paid within 28 days.
- Landlords must detail to the tenant every six months what the promotional/ advertising levy imposed on the tenant has been spent on.
- Tenants are entitled to withhold contribution payments in respect of advertising or promotion if a statement with the above details is not provided by the landlord.
- On relocation (should the lease provide a relocation right to the landlord) the tenant is entitled to be reimbursed for the reasonable:
23.1 Costs incurred by the tenant for dismantling fittings, equipment or services and in replacing, re-installing or modifying finishes, fittings, equipment or services; and
23.2 Legal costs.
- The new Section 34A(f) also states that, if the parties cannot agree on the relocation cost amount, that the dispute is to be resolved by a quantity surveyor as appointed by the parties or the President of the Australian Institute of Quantity Surveyors.
- A lease may now include a provision preventing or limiting a claim by the tenant for compensation in respect of a particular disturbance, provided that the landlord gave the tenant a written statement prior to the commencement of the lease specifically drawing the tenant’s attention to details of the anticipated disturbance. The statement should include the following:
25.1 A specific description of the nature of the disturbance;
25.2 A statement assessing the likelihood of the disturbance occurring, including an indication of the basis on which the assessment was reached; and
25.3 A statement of the timing, duration and effect of the disturbance, so far as can be predicted.
- Please note that the statement cannot be general (i.e. the landlord cannot merely state that disturbances may occur during the term of the lease to avoid any compensation claims by the tenant).
- The procedure for determining the market rent where the parties cannot agree has been substantially amended. Parties can no longer set out their own mechanism for appointing a valuer to determine the appropriate rent. Instead, the Tribunal will now determine the market rent where parties to the lease cannot agree by appointing a special retail valuer. If a landlord or tenant does not agree with the value reached by the specialist retail valuer appointed by the Tribunal, either party can apply again to the Tribunal to appoint a panel of a further two specialist retail valuers to jointly determine the value.
- The cost of the determination is to be borne equally by the parties, except where the current market value is determined on appeal from an original determination and such determination is the same as, or within 10% of, the amount in the original determination. In this latter circumstance, the party who applied for the review is to pay for all the costs of the review.
- A new Division 2 entitled "Misleading and Deceptive Conduct" has been inserted into the Act, and reflects the provisions contained in the Trade Practices Act 1974 (Cth) and the Fair Trading Act 1987 (NSW).
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.
Application of Amendment Act to short term leases
Section 16(3) certificates and leases with a minimum five year term
Operation of the lease
Outgoings estimates and statements
Advertising and promotion statements
New procedures - rent reviews to current market rent
Misleading and deceptive conduct