Retail Leases Changes: For better or worse?
The Retail Leases Amendment (Review) Bill 2016 ('Bill') passed without amendment through the Legislative Council. It is now awaiting Royal Assent and will come into force on proclamation. The Bill intends to give effect to recommendations of The Office of the Small Business Commissioner with a view to 'help level the playing field between tenants and landlords...' The significant changes to the Act brought about to try achieve this goal are summarised below.
A tenant's liability in relation to outgoings may be restricted to outgoings that are specified in the landlord's disclosure statement. In effect, this will ensure that disclosure statements must estimate outgoings on a reasonable basis otherwise the tenant's liability to pay more than the estimated amount is limited to the estimated amount. Clearly the amendment serves as an incentive for landlord to fully disclose outgoings (or at least conservatively estimate outgoings) and for tenants to have more certainty as to their costs before being bound by a lease. Additionally, the Bill clarifies that outgoings for the purpose of a tenant's liability does not extend to advertising, promotion costs, costs of fixtures, fittings, equipment or services and that outgoings such as taxes, rates or levies that are imposed by legislation after a disclosure statement is provided to the tenant will not be within the scope of this change.
Currently, a tenant may only terminate a retail lease in its first 6 months on the grounds of not receiving a disclosure statement or if the provided statement is false or misleading with no right for compensation. The amendments will introduce a right to compensation in addition to the right to early termination. Now, if a tenant exercises its right for early termination they may also be entitled to the costs 'reasonably incurred' from entering into the lease.
Mortgagee Consent Expenses
The scope of 'lease preparation expenses' under the Act will be widened to include costs incurred in obtaining the consent of a mortgagee of the retail shop premises. This effectively means a landlord will not be able to recover these costs from a tenant.
Repeal of 5-year minimum Term
The introduction of the new amendments will see an end to the 5-year minimum term for retail leases and the 'Section 16 Certificate'.
Lease Execution and Registration
In order to protect a tenant's interest in their retail business the Bill mandates that within three months after execution, a retail shop lease with a term longer than three years must be registered. Landlords will also be required to provide the tenant with an executed copy of the lease three months after the tenant provided a signed copy to the landlord.
Return of Bank Guarantees
Withholding a bank guarantee at the end of a lease period significantly limits a tenant's capacity to facilitate finance for new business ventures and hinders their ability to move to new premises. To respond to these issues faced by tenants, landlords will now be required to return a bank guarantee within two months after the tenant has performed all obligations under the lease that is secured by the bank guarantee.
The apparent injustice of demolition clauses – the ability to terminate a lease on the grounds of proposed demolition of the building – being used by some landlords have propelled a need to clarify the tenant protections related to demolition. The Bill extends tenant protections to proposed demolition of a building to the demolition of any part of the building and when demolition requires the vacant possession of the shop.
As the dynamic of retail shopping shifts to include more online transactions, accordingly so too must the legislation. For in-store retailers, this could be detrimental to their survival if revenue for the purposes of determining rent is gaged by including online revenue. For this reason turnover rent determinations will not include most online transactions and hence tenants will not be required to provide online transaction information to the landlord. As an exception, goods or services which are delivered or provided from or at the retail shop or shopping centre where the transaction takes place while the customer is at the retail shop are not excluded from the purposes of determining turnover rent.
Application and exclusions from the Act – Markets, ATMs, etc.
Significantly, the amendments will shed some light on the application of the Act in relation to markets and leases for non-retail uses. The Act will not apply to a stall in a market unless the stall is a "retail shop" under the Act and the market is a "permanent retail market". The Bill does not define a "stall" or a "market" but does define a "permanent retail market" as:
'an assemblage of stalls, styled or described as a market, that are predominantly used for retail businesses and that operate in a building or other permanent structure the sole or dominant use of which (or the part in which the market operates) is the operation of the market.'
While the Bill clarifies the current case law that retail shops in a market is not considered a "retail shopping centre" under the Act, a stall itself may still be considered a retail shop and the Act may still apply if the stall is in a "permanent retail market". The Bill has left it open for regulations to be formulated to modify the Act and to provide for the regulation of permanent retail markets including by requiring a code of conduct to be established.
Lastly, under the new schedule 1A, premises excluded from the operation of the Act are those used wholly for specific non-retail purposes. These include ATMs, vending machines, public telephones, children's rides, signage display, internet booths, private post boxes and certain storage uses.
For further information about this article, please contact Roger Mattar, Partner.
I would like to thank Kemp Strang Law Clerk, Adeline Technitis for her contribution to this update.