In brief - Lessors and lessees should consider impact of coming legislation
The Queensland parliament has recently passed the Retail Shop Leases Amendment Bill 2015. To prepare for these changes, lessors should review management processes and amend standard lease terms to comply with the new requirements, particularly with respect to disclosure, outgoings, costs and lessee refurbishment clauses. Lessees should consider the changes to their rights and new rules around disclosure on assignment and the ability to waive the prescribed periods.
Retail Shop Leases Amendment Bill passes with minor amendments
The Retail Shop Leases Amendment Bill 2015 was introduced to the Queensland Parliament on 13 October 2015 and passed with minor amendments on 10 May 2016. The Bill gives effect to the outcomes from the statutory review of the Retail Shop Leases Act 1994, the objectives of which were to:
- improve the efficiency of the Act
- reduce red tape
- continue to address imbalance in negotiating power between the lessor and the lessee
- where appropriate, align with equivalent legislation in other states
At this stage it is not known when the Bill will be assented to and become law. We recommend that lessors carefully review the Bill to ensure that they have appropriate systems ready to deal with the changes once they are in force.
We have outlined some of the key amendments below.
"Retail shop lease" definition specifies new exclusions
The definition of "retail shop lease" is important as it determines whether the Act will apply. The Bill has refined the definition by excluding some additional categories of leases.
In particular, the Act currently excludes retail shops with a floor area greater than 1,000 m2, but only in circumstances where the lessee is a listed corporation or a listed corporation's subsidiary from the definition of a retail shop lease. The Bill extends this exclusion to all retail shops with a floor area greater than 1,000 m2, regardless of the type of lessee.
The Bill also excludes from the definition:
- Premises used wholly or predominantly for the carrying on of a business by a lessee for a lessor as the lessor's employee or agent.
- Premises within a common area of a retail shopping centre which are used for automatic teller machines and vending machines.
- Premises located in a retail shopping centre where the premises are not used wholly or predominantly for carrying on a retail business; and at the time the lease is entered into, 25% or less of the total lettable area of the level (in a multi-level building), or 25% or less of the total lettable area of the building (in a single-level building) is used wholly or predominantly for carrying on retail businesses.
Timing of disclosure obligations determined by when a lease is entered into
The question of when a retail shop lease is "entered into" is relevant to determining the timing of the parties' disclosure obligations. The Bill seeks to achieve greater clarity by providing that a retail shop lease is entered into on the earliest of:
- the lease being signed by all parties
- the lessee entering into possession, and
- the lessee first paying rent under the lease, other than a deposit
At least seven days before a lessee enters into a retail shop lease (the prescribed disclosure date), the lessor must give the lessee a draft of the lease and a disclosure statement.
If a lessor does not comply or gives a defective statement, the lessee may terminate within six months of entering into the lease and the lessor is liable to pay the lessee compensation.
The Bill allows the lessee to give the lessor a waiver notice and (unless the lessee is a major lessee) a legal advice report, in which event the lessor may give the lessee the disclosure statement after the prescribed disclosure date but before the lessee enters into the lease.
It is hoped that this change will prevent the current practical difficulties where the tenant wants to gain access as soon as possible, but is prevented from doing so until the seven-day period has expired to allow the lease to be entered into.
Head lessor's and sub-lessor's disclosure obligations
Specific disclosure requirements have been introduced for head leases and franchise arrangements.
A head lessor must, within 28 days of receiving a prospective sub-lessor's request, give the prospective sub-lessor an updated disclosure statement. The prospective sub-lessor must pay the head lessor's reasonable expenses for the preparation of the updated disclosure statement.
At least seven days before the sub-lessee enters into the retail shop lease, a prospective sub-lessor must give the prospective sub-lessee a draft of the lease, an updated head lessor disclosure statement (being no more than two months old before being given to the prospective sublessee) and a written statement of any matters of which the prospective sub-lessor is aware, that affect the information in the head lessor disclosure statement.
A similar regime applies for a franchisor's disclosure.
New disclosure obligations for a renewal under an option will put pressure on lessors to ensure compliance
The Bill creates a new requirement for a lessor to give a current disclosure statement within seven days after the day on which the lessor receives notice from the lessee exercising the option to renew. If a lessor does not comply or gives a defective statement, the lessee may terminate within six months of entering into the renewal and the lessor is liable to pay the lessee compensation.
If the lessee gives a waiver notice at the time the renewal notice is given, the lessor is not required to give a current disclosure statement.
Within 14 days of receiving the current disclosure statement, the lessee may withdraw the renewal notice (whether or not the renewed period has commenced).
This represents a significant change and lessors will need to put in place a process to ensure compliance when a lessee renews under an option. The timeframe of seven days is relatively short, particularly given that a lessor will not necessarily have forewarning as to when the lessee will serve the notice during the option exercise period.
There will also be some challenges in the event a lessor takes the position that the lessee is not entitled to exercise or has not validly exercised an option. Care will need to be taken to ensure a lessor does not inadvertently waive its rights by issuing a disclosure statement to a lessee on a purported exercise of an option.
There may be some ability to contractually oblige the lessee to deliver a waiver notice as a pre-condition to exercising the option under the terms of the lease.
Seven-day disclosure obligations may lead to contract signing delays on assignment
The Bill requires a prospective lessee (other than a prospective franchisee) to give the lessor a disclosure statement at least seven days before the prospective lessee enters into a retail shop lease. Currently, a lessee is only required to provide the disclosure statement before entering into the lease.
The Bill requires an assignor to give a prospective assignee a disclosure statement and a copy of the current lease at least seven days before the earlier of the following (the prescribed disclosure date):
- if the assignment is related to an agreement for sale to the assignee of the assignor's business carried on in the leased shop - the day on which the assignee enters into the agreement, and
- the day the lessor is asked to consent to the assignment
The Act currently only requires the assignor to give the disclosure statement at least seven days before asking the lessor to consent to the assignment (which is often after a business sale agreement is signed). Whilst the new regime arguably improves consumer protection for the assignee, the requirement for the disclosure to be given at least seven days before a business sale contract is signed is fairly restrictive and may lead to timing difficulties and delays for contract signing.
There is some small relief in that the Bill provides it shall be sufficient if, after the prescribed disclosure date but before the assignee enters into the business sale agreement and the lessor is asked to consent to the assignment:
- the assignor gives the prospective assignee a disclosure statement and a copy of the current lease, and
- the prospective assignee gives the assignor a waiver notice and (unless the lessee is a major lessee) a legal advice report
The Bill also imposes a new requirement that the assignor provide the lessor with a copy of the assignor's disclosure statement to the assignee on the day the lessor is asked to consent to the assignment.
Assignee's disclosure obligations unchanged, new waiver process for lessor
The Bill does not change the assignee's obligation to give a disclosure statement to the assignor before the lessor is asked to consent to the assignment.
The Bill requires a lessor to provide an assignee a disclosure statement and a copy of the lease at least seven days before the assignment is entered into (prescribed disclosure date).
However, the Bill also now provides for a similar waiver process as for the assignor's disclosure referred to above, so that that the lessor may give the assignee the disclosure statement after the prescribed disclosure date but before the assignment is entered into.
Bill changes lessee's turnover rent obligation, simplifies rent review notice required for major lessees
The Bill removes the requirement for a lessee under a turnover rent lease to give the lessor monthly turnover certificates and an annual audited statement of turnover. The terms of the lease will now determine the lessee's obligation to provide evidence of turnover.
The Bill simplifies the notice required for a major lessee to opt out of the provisions relating to implied rent review provisions and the early determination of current market rent.
Outgoings payable by lessee only when specified in lease
The Bill clarifies that a lessee is not liable to pay an amount for outgoings unless the lease specifies the outgoings payable by the lessee, how the outgoings will be determined and apportioned to the lessee and how the outgoings may be recovered.
The payment of an excess in relation to a claim on the lessor's insurance policy for the centre or building is no longer recoverable as part of outgoings.
In determining the apportionable outgoings for a premises in a retail shopping centre, it has now been clarified that:
- areas within a common area of the centre or building used for a prescribed purpose (e.g. information, entertainment, community or leisure facilities; telecommunication equipment; ATMs; vending machines; advertisement displays; seating, tables and other furniture; trade out areas; storage; and parking) are excluded from the total area of a shopping centre or leased building, and
- the total area taken into account is the total area of the shopping centre or leased building owned by the lessor.
The Bill also imposes new requirements for the lessor's outgoings estimate and audited annual statement to include a breakdown of the estimated and actual fees paid by the lessee towards the administration costs of running the centre and any other fees to be paid to a centre management entity.
Another change is that the lessee may withhold payments in relation to apportionable outgoings until the lessor gives the outgoings estimate or audited annual statement to the lessee.
Lessor faces new promotion and advertising obligations
The Bill imposes new obligations for the lessor to:
- make available a marketing plan to the lessee at least one month before the start of each accounting period detailing the proposed spending on promotion and advertising where the lessee is required to pay the lessor for such amounts
- provide an audited annual statement of the lessor's expenditure on promotion amounts to the lessee within three months after the end of the period to which it relates
- carry forward the unspent promotion amounts to the next period
Bill clarifies lessee's compensation rights and liabilities
In relation to the disturbance of the lessee's business, the Bill requires a lessee to give written notice to the lessor of the lessee's loss or damage as soon as is practicable after it is suffered. The lessee's failure to do so will not affect the lessee's right to compensation but must be considered when determining the amount of compensation payable.
A lessor is not liable to pay compensation for action taken as a reasonable response to an emergency or acting in compliance with a statutory duty.
The Bill prevents double dipping on compensation by specifying that if the lessor causes the lessee to vacate the leased shop before the end of the lease or renewal because of the extension, refurbishment or demolition of the retail shopping centre or building, the lessor will not be liable to pay compensation to the extent the lessee is otherwise entitled to payment of relocation costs under section 46G or reasonable compensation under section 46K.
The Bill also introduces an exception to the rule that an agreement about compensation payable is void to the extent it limits the amount of compensation. The Bill now provides that a lease may limit a claim for compensation for an anticipated disturbance in the first year from the date the lease is entered into, provided that the lessor gives the lessee written notice before the lease is entered into containing certain information about the nature of the anticipated disturbance. This will give greater certainty for lessors who have short-term refurbishment and expansion programs.
Changes to lessor's ability to recover costs associated with lease
Previously, lessors have been prevented from recovering legal and other expenses for the preparation, renewal or extension of the lease. The Bill now permits a limited ability for the lessor to recover its costs if legal costs are incurred for the preparation of a final lease in circumstances where the parties agree to the terms of a proposed retail shop lease, the prospective lessee gives written notice to prepare a final lease but, ultimately, it does not sign the final lease.
The Bill also removes the lessor's ability to recover costs relating to obtaining the mortgagee's consent from the lessee.
Release of the assignor and guarantor on assignment
The loophole which arose after the last substantial amendment to the Act has now been addressed, so that a guarantor (as well as an assignor) will be released from any liability under the lease resulting from a default by the assignee, provided the disclosure regime has been complied with on assignment.
Refurbishment and refitting by lessee
The Bill inserts a new provision that a clause which requires the lessee to refurbish or refit the premises will be void, unless the lease gives general details of the nature, extent and timing of the refurbishment or refitting required.
Lessors and lessees should consider new requirements, rules and changes to rights
Lessors should undertake a review of their documents to amend standard lease terms to comply with the new requirements, particularly with respect to clauses such as outgoings, costs and lessee refurbishment. A review of management processes will also be necessary (including the new disclosure on exercise of options).
Lessees also need to be mindful of the changes to their rights, as well as the new rules around disclosure on assignment and the ability to waive the prescribed periods.
Retail leasing is a highly regulated area of the law and, whilst the amendments do not represent a major overhaul of existing concepts, compliance with these legal technicalities can be critical to achieving desired outcomes for each of the parties to a retail shop lease.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.