It is imperative to negotiate retail leases with the right to renew for a further term. Otherwise retail tenants leave themselves wide open for unjustified rent increases if they wish to stay for a further term.
If there is no option to renew in a lease, the landlord has no legal obligation to give the retail tenant a further term, this is despite if the retail tenant has built up a lot of goodwill in the retail premises.
Reality Of Shopping Centre Leases
Unfortunately, shopping centre landlords rarely signoff on a lease with a right of renewal. Why would they when there is so much to gain when a lease ends. Landlords can increase the rent without making it reflective of market and demand the retailer pay substantial capital on refurbishing their tenancy for the next term.
This is the reality for many retailers. There is a growing dominance of shopping centres in Australia’s retail market as CBD shopping centres are expanding and regional shopping centres are popping up everywhere. Since 1998/99 retail sales at shopping centres has grown $33.4billion, or 52 per cent of the total retail sales growth in Australia1.
In many cases, landlords of major shopping centres have enjoyed a steady increase in profit from increased rental incomes and it could be fairly argued that these increases are higher than any increase in retail turnover.
Bargaining Strength Of Landlords
Shopping centre landlords clearly have significant bargaining power in lease negotiations. Retail tenants belonging to a strong franchise system tend to be better placed in lease negotiations but only marginally because at the end of the day, the landlord knows they want the site.
The Trade Practices Act 1974 (Cth) (the ‘Act’) offers retail tenants some legal protection. Of particular interest is section 51AC, the prohibition of unconscionable conduct in small business transactions. It sets out specific factors the courts may consider. These relate to both bargaining strength and a sample list of circumstances where the smaller party was required to submit to unreasonable conditions.
In the last 5 years the ACCC recorded approximately 1,119 complaints and inquiries relating to retail tenancy, 127 of these complaints involved allegations of unconscionable conduct.2
Excessive rent increases and refusal to renew leases are popular grounds relied on by small businesses when making these allegations. However, these facts alone will not successfully amount to a breach of section 51AC of the Act. There must be something more such as undue influence or unfair tactics.
The ACCC however is very selective in the matters it chooses to litigate and so regularly refer complaints to the relevant State or Territory Small Business Commissioner Offices. Since 1998 fifteen unconscionable conduct cases were litigated and approximately 26% of these cases focused on allegations of unconscionable conduct in the retail tenancy sector.3
There is a clear message from the ACCC that litigation is not the only answer and mediation via the Office of the Small Business Commissioner may be just as if not more effective.
To avoid ‘the next step’ put yourself in the best position possible when your lease is up.
The landlord does have an obligation to notify the retail tenant of its intentions prior to a lease ending. I can only suggest that this lead time is used for retail tenants to:
research the market generally
research current rents paid by comparable tenants in the Centre
crunch the numbers- what’s the new occupancy cost? how will this affect your gross margin?
file note your great behaviour as a tenant
find an alternative site, your plan B
You will increase your bargaining power by arming yourself with this type of knowledge and beginning the negotiation process early.
1 1 FCA Submission to the PC Inquiry into the Market for Retail Tenancy Leases, FCA, August 2007, p.9
2 ACCC Submission to the Productivity Commission Inquiry into the Retail Lease Market in Australia, ACCC, 3 September 2007, p.22
3 ACCC Submission to the Productivity Commission Inquiry into the Retail Lease Market in Australia, ACCC, 3 September 2007, p.33
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