Australia: Protection for small business against unfair lease terms

Last Updated: 7 December 2016
Article by Rebecca Castley

In brief - Landlords and tenants should consider impact of new laws on retail and commercial leases

The Treasury Legislation Amendment (Small Business and Unfair Contract Terms) Act 2015 (Cth) (Act) will allow a court to determine that unfair terms within a standard form "small business contract" can be declared as unenforceable. The new laws will take effect from 12 November 2016 and extend to a wide range of contracts, including for the leasing of land.

These new laws give small businesses the same protections afforded to consumers under both the Australian Securities and Investment Commission Act 2001 (Cth) (ASIC Act) and the Competition and Consumer Act 2010, Australian Consumer Law (ACL).

Retail and commercial leases where party falls within small business threshold to be affected

Both retail and commercial leases may be affected by the Act, depending on whether one of the parties may be within the "small business" threshold. The new laws will apply where a contract is:

  • a "small business contract", being:
    • a contract for the supply of goods or services, or a sale or grant of an interest in land, and
    • at the time the contract is entered into, at least one party to the contract is a business that employs fewer than 20 persons, and
    • either the upfront price payable under the contract does not exceed $300,000 or the contract has a duration of more than 12 months and the upfront price payable under the contract does not exceed $1,000,000
  • in a standard form (essentially, where the terms and conditions of the contract are set by one of the parties and the other party has a limited ability to negotiate), and
  • is entered into, renewed or varied after the commencement of the Act (although in the case of a variation, the Act only applies to those parts of the contract which are varied)

There are some specific contracts which are excluded but these are not relevant in the context of leasing transactions.

The upfront price is money that is provided for the supply, sale or grant under the contract and is disclosed at or before the time the contract is entered into. This definition suggests that for the leasing context, it would only apply to premiums paid for the grant of a lease and would exclude rent. This means the Act would potentially apply to many leasing transactions. This has yet to be determined through case law.

Failure to provide opportunity to negotiate terms of the lease a factor in determining whether contract is a "standard form contract"

There is no definition of a standard form contract, however, the following factors must be considered in making a determination:

  • if one party has all or most of the bargaining power relating to the transaction
  • whether the contract was prepared by one party prior to any discussion relating to the contract between the parties
  • whether one party was required to either accept or reject the terms of the contract in the form presented
  • whether another party was given the opportunity to negotiate the terms of the contract
  • whether the terms of the contract consider the characteristics of another party or the transaction

If landlords fail to provide the prospective tenant with the opportunity to negotiate terms of the lease, the contract may be considered a standard form contract. It is therefore important that landlords document all communication and negotiation between parties during the leasing process.

Contract transparency important to consider, as well as examples of unfair terms under section 25 of the Australian Consumer Law

A term will be "unfair" if proven on the balance of probabilities:

  • it would cause a significant imbalance in the parties' rights and obligations arising under the contract
  • it is not reasonably necessary in order to protect the legitimate interests of the party who would be advantaged by the term
  • it would cause detriment (whether financial or otherwise) to a party if it were to be applied or relied on

The legislation also places a heavy emphasis on transparency within contracts. Terms that are not deemed to be "transparent" may be considered as unfair. A term must be expressed in plain language, legible, presented clearly and be readily available to any party affected by the term to fulfil this requirement.

Guidance as to what may be considered as unfair may also be found in section 25 of the ACL. Section 25 provides a list of 13 terms which may be considered as unfair.

Penalties may apply where party seeks to enforce a term declared unfair

An unfair term in a small business contract will be void. The contract itself will continue in force, if it can continue to operate without the term.

There is no penalty imposed against a party for including an unfair term, but various remedies apply where a party seeks to enforce a term that has been declared as unfair, including compensation.

Landlords and tenants should be aware of new laws on unfair terms in a small business contract

Landlords should consider taking the following action:

  • consider what protocols will be required to identify new leases that may be standard form small business contracts
  • be alert to the possibility that lease renewals or variations entered into from 12 November 2016 may be impacted by the new laws
  • identify terms within current standardised leasing documents that may be void and remove or amend them, or at the least, consider the risks if those terms were found to be void

For tenants entering into a lease, it would be advisable to:

  • determine whether the tenant may be a small business (i.e. less than 20 employees) and if so, whether the upfront price payable exceeds the relevant thresholds
  • if so, a further ground of objection to an onerous term may be to argue that the Act will apply on the basis it is unfair or, where a landlord is seeking to rely on an onerous term in a lease entered into or varied after 12 November 2016, consider whether appropriate action should be taken to seek a declaration that the term is void

Rebecca Castley
Leasing - commercial and retail
Colin Biggers & Paisley

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.

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