Recent changes to the Retail Leases Act and their impact on entering into lease of a retail shop

On 1 July 2017, amendments made to the Retail Leases Act 1994 (NSW) came into effect that will impact landlords and tenants of retail premises.

The leasing of retail premises is governed and affected by numerous legislative and regulatory requirements. The Retail Leases Act 1994 (NSW) (the Act) overrides any provision of a lease that is inconsistent with the Act. Accordingly, it will be in the interests of landlords and tenants alike to be aware of them. This is particularly so, when either:

  • negotiating and entering into a lease; or
  • renewing a lease on exercise of a lease option.

A summary of the changes to the Act that are of particular relevance when either entering or renewing a lease are set out below.

 

1. Five year minimum term no longer applies

A tenant’s statutory entitlement to a five year term is one of the most significant aspects of retail leases, intended to improve a tenant’s security of tenure allowing a tenant to realise its investment in its fitout costs. A tenant could waive it by providing a certificate under the Act.

As from 1 July 2017, the minimum five year term is now no longer required.

The reason for this change is to provide greater flexibility in lease negotiations where parties find that a shorter term is better suited to their business needs.

Quite often landlords and tenants will enter into a lease for a term of less than five years not being aware that the five year statutory entitlement was required to be waived. If not waived at the commencement of the lease, a tenant was later entitled to rely on the Act to extend its lease term to five years. As a result, situations have arisen whereby tenants have sought significant sums from landlords to surrender its lease.

Removing the five year term requirement is aimed at addressing these types of situations.

 

2. Some retail premises are now no longer covered by the Act

The Act now specifically excludes certain usages from being retail shop premises. These include ATMS, vending machines, internet booths, storage of goods for use or sale in a retail shop and in some instances, car parking.

 

3. Provision by landlord of its disclosure statement

Seven days before entering into a lease, a landlord is required to provide a disclosure statement to a tenant. The information contained in the disclosure statement includes important information for a tenant such as the rent, lease term, options, relevant dates, premises details, fit out requirements and estimates of outgoings.

If the landlord fails to do so, or the disclosure statement is materially false, misleading or incomplete, a tenant can terminate the lease within the first six months.

In addition to this right of termination, a tenant will also have a right to compensation. This right also extends to a tenant’s cost in connection with the fit out of the retail premises.

Landlords should be aware that the requirement to provide a lessor’s disclosure statement also extends to when an “agreement for lease” is entered into. An agreement for lease is an agreement to grant a lease in the future. This can occur in situations where the premises are not ready for occupation or have not been fully erected, or if the former tenant is still in occupation or when a lease is inteneded to commence at a future date and the parties do not want to execute a lease until then.

 

4. Disclosure of outgoings before entering into a lease

Many leases allow a landlord to recover outgoings from a tenant for various expenses it incurs in the operation, maintenance and repair of retail premises. A retail landlord is required to disclose details of the various outgoings and contributions a tenant is required to meet. This disclosure is intended to help tenants make informed decisions about the costs of a lease.

Noncompliance with this requirement will result in the tenant not being liable for anything not disclosed or accurately disclosed by the landlord.

This also extends to estimates of outgoings. If an estimate of a particular outgoing provided in the disclosure statement is less than the actual amount required to be paid, a tenant will only be required to pay the estimate, unless there was a reasonable basis for that estimate.

In addition, any term of a retail shop lease that requires the tenant to pay or contribute towards the cost of providing any finishes, fixtures, equipment or services will not be enforceable if not disclosed in lessor’s disclosure statement.

 

5. Leases with terms of three years are now required to be registered and a copy given to the tenant within three months

It is now a requirement that when a retail shop lease has a term of more than three years (including any option term), or the parties agree that the lease is to be registered on the title to the premises, the landlord must lodge the lease for registration and an executed copy provided to the tenant within three months of it being returned to the landlord.

However, this period can be extended when a landlord is required to seek the consent of its mortgagee in order for the title deed (CT) to the premises to be produced for registration to occur. Obtaining a mortgagee’s consent and production of a CT can take a few months.

This amendment will provide greater protection to tenants. There are several risks to a tenant in not having a lease registered. In the event a landlord’s mortgagee takes possession, the mortgagee is not required to recognise a lease that is not registered. A purchaser of the landlord’s building may also not recognise a lease if unaware of its terms.

 

6. Lease preparation expenses that a landlord can recover from a tenant

Under the Act, a landlord is prohibited from passing on lease preparation costs to a retail tenant. Lease preparation costs are the legal fees a landlord incurs in issuing a lease. Other costs a landlord incurs are registration fees and mortgagee consent fees. Consent of the mortgagee is required for a lease to be registered.

When the original provision in the Act was drafted, it was intended that a landlord could not pass on mortgagee consent fees. However, the intention not to pass on mortgagee consent fees was not made sufficiently clear in the Act. As it was not specifically prohibited, mortgagee consent expenses have been passed on.

Seeking to provide greater clarity to prevent disputes, the Act now specifically prohibits a landlord from passing this expense onto a tenant.

However, a landlord can still request a tenant to pay the fee to register the lease on the title to the premises.

 

7. Bank Guarantee

A tenant is usually required to provide some form of surety to a landlord so as to guarantee it can meet its obligations under the lease.

The most common forms of surety under retail leases are security bonds and bank guarantees.

The Act did not make provision for the handling and return of a bank guarantee. In order to encourage transparency and greater certainty in dealings between a landlord and a tenant, a landlord is now required to return a bank guarantee within two months after a tenant has completed performance of its obligations under the lease.

A landlord may be required to compensate a tenant for any loss or damage suffered by the tenant as a result of any failure by the landlord to return it, including any reasonable costs incurred by a tenant in cancelling a bank guarantee as a result of the landlord not returning the original bank guarantee.

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