Proposed changes to retail leasing legislation – what you need to know

On 8 November 2016, the NSW government introduced the Retail Leases Amendment (Review) Bill 2016 (Bill), which seeks to amend the Retail Leases Act 1994 (Act).

The Bill provides further protection to a lessee consistent with the general legal environment of increased ‘consumer’ and small business protection.

This article examines some of the key changes the Bill proposes.

Lessor’s Disclosure Statement

The Act currently requires a lessor to provide a lessee with a lessor’s disclosure statement at least 7 days before the lease is entered into. If the lessor fails to comply with its obligation to provide the lessor’s disclosure statement or provides an incomplete or false or misleading disclosure statement, the lessee will be entitled to terminate the lease within the first 6 months.

The Bill includes a new section 11(2A) which provides that where a lessee terminates its lease in the above circumstances, it will be entitled to compensation for reasonable costs incurred in entering into the lease, including expenditure in connection with fit-out of the premises.

Disclosure of outgoings and expenses

Presently section 12 of the Act provides that a lessee is not required to pay or contribute towards the cost of any finishes, fixtures, fittings, equipment or services unless it was disclosed in the lessor’s disclosure statement. This means, for example, that if the lease requires the lessee to bear the lessor’s cost of maintaining, repairing and replacing the air conditioner in the premises but this expense is not disclosed in the lessor’s disclosure statement, then the lessor may not be entitled to recover that expense from the lessee.

The Bill seeks to create a new section 12A which provides that the lessee’s liability for outgoings (i.e. rates, levies, cleaning contribution, etc.) is limited to those outgoings disclosed in the lessor’s disclosure statement. If the estimated amount of the outgoing is provided without reasonable basis, the lessee’s liability for the outgoing will be limited to that estimated amount. In other words, the lessor will not be entitled to charge the full amount incurred in relation to that outgoing where it provides a misleadingly low estimate to induce the lesser into the lease. Further, any future increases in the outgoing will be relative to the estimated amount (as opposed to the actual amount incurred by the lessor).

Further, the definition of outgoings is amended so as to include fees for services charged by the lessor which would otherwise be considered outgoings under the existing definition if provided and charged to the lessor by a third party. The effect is to prevent lessors from avoiding the provisions under section 12A simply by providing their own services (i.e. cleaning and maintenance).

Meanwhile, advertising and promotional costs are excluded from the concept of outgoings so that the lessor is not constrained to the amounts set out in the lessor’s disclosure statement.

If the Bill comes into effect, lessors will need to be more careful than ever, when preparing their disclosure statements, to ensure that the costs and expenses for which the lessee is required to contribute are fully and accurately disclosed.

Mortgagee consent expenses

Presently, the lessee cannot be required to pay lease preparation expenses in connection with the granting, renewal or extension of a lease. The Bill proposes to extend the concept of lease preparation expenses to include the cost of obtaining the mortgagee’s consent.

Repeal of 5-year minimum term

Section 16 of the Act currently requires retail leases to have a minimum 5 year term (except where the requisite certificate is provided by the lessee’s lawyer or licensed conveyancer). The Bill proposes to repeal this provision so that no minimum term will apply.

The Bill’s replacement section 16 merely requires a retail lease to be registered under the Real Property Act 1900 where it has a term of more than 3 years or it is required by, the terms of the lease, to be registered.

Lease documentation

Presently, section 15 of the Act provides:

  1. if the lease is not to be registered, the lessor must provide the lessee with an executed copy of the lease within 1 month after the lease is returned to the lessor; or

  2. if the lease is to be registered, the lessor must lodge the lease for registration within 1 month after the lease is returned to the lessor.

Under the Bill:

  1. the lessor must provide the lessee with a signed copy of the lease within 3 months after the signed lease is returned to the lessor (except in circumstances where the lessor is delayed in obtaining head lessor consent or mortgagee consent); and

  2. a retail lease must be lodged for registration within 3 months after the executed lease is returned to the lessor (failure to register a lease in compliance with the requirement will be an offence with a maximum penalty of 50 penalty units).

Security bonds and bank guarantees

The Bill’s proposed section 16BA requires a lessor to return a bank guarantee to the lessee within 2 months after the lessee completes performance of the obligations under the lease that are secured by the bank guarantee (typically payment of rent and make good of the shop at the end of the term).

Assignment procedure

 The procedure for assigning a retail lease is clarified in the replacement section 41, although the requirements remain largely the same:

  1. the lessee must seek the lessor’s consent to the proposed assignment in writing and provide such information as may be sought by the lessor in relation to the assignee’s financial resources and retailing skills;

  2. the lessee must provide the proposed assignee with an updated lessor’s disclosure statement;

  3. the lessor must deal expeditiously with the request for consent, however, if the lessor has not made its decision within 28 days, then, provided the lessee has complied with the requirements under section 41, the lessor is taken to have consented to the proposed assignment.

Under the replacement section 41A, the lessee will be released following assignment if it has provided:

  1. the assignee with an updated lessor’s disclosure statement and an assignor’s disclosure statement; and

  2. the assignor with a copy of the assignor’s disclosure statement together with the disclosure confirmation signed by the assignor, at least 7 days before the assignment.

Demolition

The Bill seeks to amend section 35 of the Act so that any right of the lessor to terminate the lease due to a proposed demolition may only be exercised in circumstances where the proposed demolition cannot be carried out practicably without vacant possession of the retail shop the subject of the lease.

Online transactions

 The Bill seeks to amend section 20 to prevent revenue from online transactions from being included in turnover for the purposes of calculating turnover rent, except for transactions where goods or services are delivered or provided from or at the retail shop or retail shopping centre or where the transaction takes place while the customer is at the retail shop.

Under the Bill’s new section 47, the lessee is not required to provide the lessor with information about online transactions except for transactions where goods or services are delivered or provided from or at the retail shop or retail shopping centre or where the transaction takes place while the customer is at the retail shop.

Permanent retail markets

The Bill’s new section 6B seeks to exclude the application of the Act to any retail shop that is a stall in a market unless the market is a permanent retail market, as defined in the Bill.

The new section 6B also enables the regulations to:

  1. modify the operation of the Act in its application to a retail shop in a permanent retail market; and

  2. prescribe a mandatory code of conduct for lessors and lessees of shops in a permanent retail market.

Tribunal’s increased jurisdiction

The monetary limit of the Tribunal’s jurisdiction is increased from $400,000 to $750,000.

Retail Industry Code of Practice

The NSW government has also announced a collaboration between the Australian Retailers Association, the National Retail Association, the Pharmacy Guild of Australia, the Franchise Council and the Shopping Centre Council of Australia to create a voluntary Retail Industry Code of Practice – the Reporting of Sales and Occupancy Costs, being a code for the collection and sharing of industry information. The code is yet to be released.

Summary

Parties to retail leases may need to become accustomed to new timeframes and obligations if the Bill is passed by NSW parliament.

If you are a lessor or lessee of retail shop and would like further information, please contact Qin Bi on +61 2 9261 5900.