In late August the Productivity Commission released its eagerly awaited report on the Australian retail tenancy market. The Commission's inquiry and subsequent report stemmed from concerns among small retail tenants about a perceived imbalance in bargaining power between them and landlords in negotiating retail leases. The inquiry was far reaching and for the statistically minded there were public hearings in each state and territory (with 800 pages of transcripts), numerous visits, informal discussions and over 160 written submissions. A summary of the Commission's report and an analysis on what it means for the industry follows.
How are retail tenancy leases currently regulated?
Retail leases are governed by State and Territory legislation (or in Tasmania by a code of practice).
The Trade Practices Act 1974 (Cth) (TPA) also contains provisions relevant to tenancy arrangements, such as unconscionable conduct, the establishment and enforcement of industry codes of conduct, collective bargaining and misleading and deceptive conduct.1
The Commission notes there are significant differences between jurisdictions, and the indications are that the divergence in policies and regulations across jurisdictions will continue and increase.
The Commission observed:
- While retail shops can be found in isolation, as well as shopping strips, shopping centres have been the main contributors to retail space growth over the last decade and currently contribute nearly 40% of total retail space.
- Supply and demand conditions in the market, together with retailers' individual assessment of their market prospects, determine the negotiating balance between landlords and tenants.
- The retail market operates within the confines of planning and zoning controls, the application of which can limit competition by restricting the number and use of sites.
- There is no evidence of an imbalance in bargaining power between tenants and landlords of similar size where there is competitive provision of retail space. However, the Commission observed imbalances may exist in large centres with many small specialty tenants competing for limited retail space. In these circumstances, large centre landlords are able to offer leases on a 'take it or leave it' basis to smaller tenants. The Commission also notes that market tensions may arise in the landlord/tenant relationship in shopping centre tenancies because of the control exercised by large landlords over centre operations, the attractiveness of centre locations to many retailers, and competition between retailers.
Effectivenes of legislative regulation to date
The Commission is not convinced that current legislation has helped redress negotiating imbalances between landlords and tenants. In addition, the report states that the current approach has widened the differences between States, and between retail and commercial leases, and as such has constrained commercial decision making.
On a positive note, the Commission identified a number of effective elements in the current system, including:
- Disclosure requirements on landlords.
- Registration of leases (in some jurisdictions).
- Affordable and accessible dispute resolution alternatives.
The Commission identified and commended the emergence of a leasing advisory service industry. However it expressed the view that the advisory service needs to evolve further because of substantial differences in the quality and usefulness of the advice being offered.
The Commission also states collective bargaining under the TPA is of limited use because strong common interests between tenants are rare given the competitive nature of retailing.
Is there need for change?
There is insufficient evidence to suggest that size differences in participants in the retail tenancy sector distort the efficient operation of the market. The Commission is of the view that the market is working reasonably well, and that:
- There is no convincing evidence (at least on a systemic basis) that imbalance of bargaining position exists outside of shopping centres.
- In large shopping centres there is competition among tenants for high quality retail space and competition among landlords for the best tenants.
- The more desirable tenants and shopping locations are able to negotiate more favourable lease terms and conditions.
- The incidence of business failure in the retail sector is not exceptional relative to other sectors.
- Formal disputes are relatively few and widely dispersed.
The Commission states market tensions are unlikely to be resolved or eliminated by government intervention. However, it acknowledges there is room to improve the regulatory framework by:
- Improving education and the information provided in relation to dispute resolution procedures.
- Moving towards self-regulation.
- Removing the more restrictive elements of retail tenancy legislation which impede commercial contracting between landlord and tenant.
The Commission states regulations should:
- Not unnecessarily extend or overlap with current laws governing commercial transactions.
- Not unduly restrict the provision or conditions of retail tenancy space.
- Ensure transparent lease conditions and clearly defined lease and property rights.
- Not restrict commercial decision making.
- Ensure the application of unconscionable conduct provisions without overly prescribing levels of 'unconscionable' behaviour.
- Not restrict the commercial provision of market information.
- Provide affordable and accessible dispute resolution.
The Commission concluded the case for greater prescription in tenancy legislation is weak. It states an alternative approach is warranted, to improve the efficient features of the current system, to progressively 'unwind' provisions which seek to prescribe lease terms and conditions (such as minimum lease terms), and to move towards national consistency.
The Commission recommends the shopping centre section of the leasing market should develop a voluntary national shopping centre code of conduct specifically in relation to leasing. The Commission suggests the introduction of this code of conduct should be synchronised with the removal of restrictive or overlapping elements of State and Territory retail tenancy legislation. (States and Territories should therefore not in the immediate future pursue measures which increase the prescriptiveness of retail tenancy legislation or which further widen the gap between the retail tenancy market and the broader market for commercial tenancies).
The Commission also calls for improved clarity and transparency in leasing transactions generally, through greater use of simple language and the provision of clear leasing information. It notes wider availability of key lease details would contribute information to the market, therefore key lease details should be made publicly available.
The Commission states change should be progressive. The focus should be on what can be achieved in the short term (up to two years), medium term (two to five years) and longer term (beyond five years).
Key recommendations outlined in the Commission's report include:
- State and Territory governments should take action to further improve transparency and accessibility in the retail tenancy market by:
- Encouraging the use of simple language in tenancy documentation.
- Providing clear contact points for information on lease negotiation, registration and dispute resolution.
- Encouraging the inclusion of a one page summary of all lease terms and conditions in retail lease documents.
- State and Territory governments should facilitate the lodgement of a standard one page lease summary at a publicly accessible site. In the short term, the method of lodgement should fit into the practices of the relevant individual jurisdiction, however in the longer term a national database may emerge.
- To lower compliance and administration costs, State, Territory and Commonwealth governments should improve the consistency and administration of lease information across jurisdictions by:
- Encouraging the development of a national reference lease and/or disclosure statement to provide guidelines for all retail tenants, setting out what retailers, landlords and governments consider 'best practice'. The idea is to improve transparency and to provide an opportunity for tenants to gain an improved understanding of the requirements of and probable inclusions in a lease before entering into negotiations with landlords.
The Commission suggests that the reference documents could attach annexures on requirements particular to shopping centres, and should include information on:
- Areas which are or might prove contentious.
- Conditions regarding lease renewal and end of lease.
- Lease terms.
- Information disclosure.
Reference leases and disclosure statements would be voluntary, allowing landlords and tenants the flexibility to retain, delete or add clauses.
- Instituting nationally consistent reporting on the incidence of tenancy enquiries, complaints and dispute resolution.
- Jurisdictional differences in the application of unconscionable conduct provisions to retail tenancies should be identified and, where practicable, aligned.
- State, Territory and Commonwealth governments should facilitate the introduction of a voluntary national code of conduct for shopping centre leases, enforceable by the Australian Competition and Consumer Commission. The code should:
- Include provisions for standards of fair trading, transparency, lodgement of leases, information provision and dispute resolution.
- Avoid intrusions on commercial decision making via minimum lease terms, rent levels, rights of renewal, etc.
- State and Territory governments should remove provisions in retail tenancy legislation which restrict commercial decision making, such as minimum lease terms, rights of renewal, lease assignment and outgoings.
- Over the medium term, State and Territory governments should work towards establishing nationally consistent model legislation for retail tenancies.
- State and Territory governments should examine the potential to relax planning and zoning controls which limit competition and/or restrict retail space and/or its use.
Longer term options
The Commission's report concludes that a nationally consistent framework regulating retail tenancies should be adopted. The most appropriate approach is for jurisdictions to adopt the provisions of agreed nationally consistent legislation for retail tenancies.
Responses to the Report
The Commonwealth Government's response to the Report2 generally supports the Commission's findings, however comments that:
- A distinction between retail and commercial leases is necessary, particularly given the importance of location to retailers, and therefore it does not support the removal of restrictions on retail leases purely on the basis that they are not contained within the broader commercial lease market.
- In principle, it supports the introduction of a one page summary of key lease terms. However, it is concerned that tenants may place undue reliance on this summary and not fully understand the contractual obligations which arise under the lease itself.
- The introduction of a voluntary national code of conduct for shopping centre leases should be treated with caution, to be pursued only if appropriate reforms are made to current legislative arrangements so as not to add an 'additional layer' of regulation.
An overview of responses from retail tenants and retail associations appears to indicate support for some of the recommendations contained in the Report, but reveals:
- Rejection of the Commission's finding that the current market for retail tenancy leases is working well and that size differences in participants in the market does not distort its overall efficiency.
- Rejection of the Commission's finding that retail tenant complaints result from a failure by retailers to understand what they are 'getting themselves into' rather than from lack of protection or an imbalance of negotiating power.
- Rejection of the Commission's view that there is no entrenched inequality in bargaining power between shopping centre owners and tenants.
- Concern that the Commission's recommendations fail to adequately address areas of tension between shopping centre landlords and tenants. In particular some see the requirement for shopping centre tenants to disclose turnover details to landlords as an unnecessary and overly prescriptive obligation, particularly because it is a condition to obtaining a shopping centre lease but not any other commercial lease.
- Concern that the Commission's recommendations fail to adequately address bargaining inequalities between landlords and tenants and would, if implemented, result in less rather than more protections for retail tenants.
- The view that the Commission, in finding that the case for greater prescriptiveness in retail tenancy legislation is weak, rejected submissions by small business lobby groups to tighten the current legislative regime, thereby entrenching the excessive bargaining power of landlords over small businesses, which distorts the market in favour of landlords.
Landlords appear to be generally more supportive of the Commission's findings, however they have expressed their own concerns, including:
- The recommendations in relation to transparency, in particular the introduction of compulsory one page lease summaries, may lead to the public disclosure of commercially confidential information, for example, an incentive such as a fit-out contribution.
- The introduction of a voluntary code of conduct is likely to impose additional compliance costs on landlords.
As set out above, the Report was released following an Inquiry involving public consultations and written submissions. It is now in its final form and there is no further consultative process involved.
General support is evidenced for a number of the Commission's recommendations that aim for greater transparency in the retail leases market. This includes the Commission's call for the development of a national reference lease or similar reference document, the introduction of a national code of conduct for shopping centre leases, and finally the recommendation that the establishment of nationally consistent model legislation for retail tenancies should be encouraged.
The major concerns of retailers appear to centre around what they see as the Commission's rejection of reforms aimed at giving retailers more bargaining powers with shopping centre owners. While the Commission's finding that 'more desirable' tenants are able to negotiate more favourable terms and conditions with shopping centre landlords is supported by day-to-day retail leasing practice, it is equally true that landlords of 'more desirable' shopping centres have the upper hand in negotiations with all tenants wanting space within them. This proposition is supported by reference to the use by most major shopping centre landlords of 'standard' leases which are often offered to prospective tenants on a 'take it or leave it' basis.
Retailers have disputed the Commission's finding that a leasing advisory service industry has emerged in response to the need of retail tenants for access to clear information regarding leases and lease provisions. It is recognised, however, that tenants who use the services of legal advisors in entering into and negotiating leases are better informed in relation to lease provisions generally, and are able to negotiate more effectively.
- Part IVA (section 51AC), Part IVB, Subdivision B and Part V.
- Commonwealth Government Response to the Productivity Commission Inquiry: The Market for Retail Tenancy Leases in Australia, August 2008.
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