It has been an interesting year so far in the property sphere! This is evident in the new e-conveyancing process and now, in proposed changes to legislation governing retail leases. On 1 March 2017, the Retail Leases Amendment (Review) Act 2017 (the Act) was approved by Parliament, having been earlier introduced as a Bill in November 2016.
What are the key amendments?
The Act gives effect to a statutory review of the Retail Leases Act 1994 which consisted of various recommendations which were informed by stakeholder consultation.
The Act makes the following changes which may have an impact on franchising. The Act:
- requires the landlord to provide full disclosure in the disclosure statement of any contribution which the tenant will need to make in outgoings;
- removes the five-year minimum term requirement for retail shop leases;
- grants the right to compensation for a tenant who terminates a lease in the first six months if they weren't provided a disclosure statement;
- the operation of the demolition provisions are clarified;
- the procedure for tenants to seek the landlord's approval for an assignment is clarified;
- the landlord is now permitted to include some management fees as part of the outgoings; and,
- online sales revenue are excluded from turnover rent calculations in most instances.
Why do these changes impact on the franchising process?
Franchising and leasing are intertwined – a suitable premises to operate from is a key feature of most franchised businesses and these suitable premises are usually leased. The amendments which the Act implements therefore have significant implications for both franchisors and franchisees.
Positive implications for franchisors and franchisees
The amendments have significant protections for tenants, which in most instances, will have positive implications for both the franchisor and the franchisee. This is due to the sub-lease or licence arrangement which the franchisee must obtain from the franchisor (who is the tenant in most instances) in order to operate in the premises. This means that any benefits that the franchisor obtains as a tenant will also benefit the franchisee.
A significant protection for franchisors is that they aren't required to pay any outgoings which aren't disclosed in the disclosure statement. This requirement, in addition to the requirement of disclosing estimations of outgoings in the disclosure statement means that there is greater transparency in relation to the franchisor's/tenant's requirement to pay outgoings.
The Act also introduces more liabilities for landlords. Landlords will now need to pay the franchisor/tenant compensation if the franchisor/tenant terminates the lease within the first six months, on the basis that the landlord didn't provide a disclosure statement or because the disclosure statement was incomplete, contained information that was materially false or misleading. This amendment means that tenants/franchisors are given extra protection and shouldn't forfeit funds on their investment if they choose to terminate the lease for that reason.
Another significant implication is that landlords can't require the tenant/franchisor to provide turnover information for online sales which weren't delivered from the leased premises. This may result in a smaller turnover rent which will need to be disclosed to the landlord, and in turn, increasing profits.
Possible negative implications for franchisors and franchisees
The repeal of the minimum five-year term of retail leases means that tenants/franchisors are no longer entitled to an automatic minimum five-year term upon entering a retail lease. One of the potential implications of this is that tenants/franchisors and franchisees may not have that security of tenure for their premises.
The Act also provides that outgoings can now include 'management, operation, maintenance or repair of the retail shop building or land'. This inclusion may significantly increase outgoings for tenants/franchisors. The franchisees will also need to bear these extra costs as per their sub-lease or licence agreement.
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.