Australia: 2017 Retail leasing reforms – Benefits for lessors

Last Updated: 17 November 2018
Article by Ash Rihak

The Retail Leases Amendment (Review) Act 2017 No 2 (Amending Act) came into force on 1 July 2017 and made a number of important amendments to the Retail Leases Act 1994 (the Act).

These amendments will have a significant impact upon the rights and obligations of both retail lessors and retail lessees. This is the second of two articles that look at the benefits of the changes to the law for both retail lessees and retail lessors. The first article 'Creating a Balance' addressed updated rights for retail lessees. This article looks at the benefits for retail lessors. Although the Amending Act could, arguably, be said to have provided greater benefits and protections to retail lessees, there were some key developments in the Amending Act that favour retail lessors, and these are addressed below.

No Minimum Term – Section 16 of the Act

Prior to 1 July 2017, section 16 of the Act required that the term of a retail lease, including any option periods, must not be less than 5 years, unless a solicitor (not acting for the retail lessor) explained the effect of section 16 of the Act to the retail lessee, and signed a certificate (section 16 certificate) to the effect that the retail lessee understood the effect of section 16 and had agreed that the lease would be for a term of less than 5 years.

Pursuant to section 16(2) of the Act, the term of a retail lease was automatically extended to be 5 years if a section 16 certificate was not provided.

The old section 16 of the Act was repealed by the Amending Act, and replaced with the new section 16, which deals with the circumstances in which a retail lease must be registered.

The effect of this amendment is that retail leases are no longer required to have a minimum term. This provides greater certainty to retail lessors when entering into short-term retail leases, and reduces the administrative burden on retail lessors by removing the requirement that they procure a section 16 certificate.

Outgoings – Section 3A of the Act

The definition of the 'outgoings' that a retail lessor may charge to a retail lessee pursuant to a retail lease was previously included in section 3 of the Act.

Based on this definition, it was unclear whether a retail lessor could charge a retail lessee for the following costs as outgoings:

  1. fees charged by the lessor for providing services directly that, if the lessor had paid a third party to provide those services, would be treated as outgoings; and
  2. fees charged by the lessor for directly providing management services for the retail shop building or the land.

The Amending Act introduced section 3A into the Act, which includes an extended definition of the term 'outgoings'. Section 3A(c) makes it clear that the fees referred to above may be treated as outgoings and recovered by a retail lessor from a retail lessee.

Correction of Disclosure Statements – Section 11(6) of the Act

The Amending Act also introduced new sections 11(2A) and 12A into the Act, which placed a higher administrative burden on retail lessors in relation to the retail lessor's disclosure statement (DS) by:

  1. giving the lessee a right to recover compensation from the lessor where the lessee terminates a retail lease on the basis that a DS was not provided to the lessee or on the basis that the DS was incomplete or materially false or misleading (section 11(2A)); and
  2. providing that an estimate of outgoings given in a DS will be binding on a retail lessor, even if the actual amount of outgoings is higher than the estimate, if there was no reasonable basis for the estimate at the time that the estimate was made (section 12A).

The Amending Act ameliorates the effect of these provisions to an extent, however, by the introduction of section 11(6). Section 11(6) of the Act allows a DS to be amended by written agreement between the retail lessor and retail lessee before or after the lease is signed. The effective date of an amendment to the DS made pursuant to section 11(6) may, by agreement between the retail lessor and retail lessee, be prior to the date of the agreement.

New Ground to Withhold Consent to Assignment – Section 39(e) of the Act

Section 39(1) of the Act specifies the circumstances in which a retail lessor may refuse consent for a retail lessee to assign the lease. Prior to the Amending Act coming into force, these reasons included:

  1. that the proposed assignee intends to change the use of the premises;
  2. that the proposed assignee has financial resources or retailing skills inferior to the current retail lessee;
  3. that the retail lessee has not complied with the procedure for seeking consent to the assignment specified in section 41 of the Act; and
  4. if the premises are 'airside' premises, the proposed assignee has inferior skills compared to the current lessee with respect to competing in the international airport retail market.

The Amending Act introduced an additional ground for withholding consent in the new section 39(e). Pursuant to section 39(e), a retail lessor may withhold consent to an assignment where the lease was awarded by public tender, and the proposed assignee fails to meet 'any' of the criteria of the tender. The use of the word 'any' in this section is unclear, however, as it may mean either:

  1. that if even one criterion of the tender is not met by the proposed assignee, the retail lessor may refuse consent to the assignment; or
  2. that the retail lessor may only refuse consent if none of the criteria in the tender are met by the proposed assignee.

Section 39(e) is, potentially, a significant change in the law, as it may cause a larger number of retail leases to be offered by way of public tender. Section 39(e) effectively allows a lessor, through the criteria that it chooses to include in the tender, to create a wider range of circumstances in which the lessor may legally refuse consent to an assignment. The broader impact of this provision remains to be seen.

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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