Legal

Change – how will it affect you? Amendments to the Retail Leases Act 1994 (NSW)

Understanding the value of your lease is critical to rent negotiation

John Morrison is a practicing lawyer, dealing constantly with shopping centre leasing matters. He writes about the NSW Retail Leases Act, in particular the latest amendments coming into force on 1 July.

We are all familiar with the frustration often created by the application of retail lease legislation and the impact that it has upon the ability of the parties to a lease to negotiate a deal on their terms.

The Retail Leases Act 1994 (NSW) (Act) has a role to play in providing protection and comfort to tenants and, in particular, those tenants who operate a small business. But the regular criticism levelled at the Act is in many respects justified. The confusion caused by the lack of clarity in some of the drafting in the Act is unacceptable, and causes additional cost to business when dealing with a retail lease.

While most people object to the disruption caused by change, a review of legislation should be seen as an opportunity to keep the legislation relevant and remove ambiguity. The review of legislation presents an opportunity for stakeholders to complain, make observations and agitate for amendments to improve the operation and application of the legislation.

In 2013, we were presented with the opportunity to influence change when the NSW Government issued a discussion paper in relation to retail leasing in NSW. Submissions closed in February 2014 and, after several years of consultation with industry and other interested parties, the review has culminated in the Retail Leases Amendment (Review) Act 2017 (NSW) (Review Act) being assented to on 1 March 2017.

Key amendments to the Act include:

• removal of the requirement for a retail lease to have a minimum five-year term
• excluding leases of non-retail premises from the operation of the Act
• a requirement for greater detail of outgoings to be set out in the landlord’s disclosure statement
• the exclusion of certain online transactions from the calculation of turnover rent
• a requirement for the landlord to pay compensation to a tenant who terminates their lease due to the failure of the landlord to provide a disclosure statement, or where the landlord provides a disclosure statement that is incomplete or materially false or misleading
• clarification of the procedure for a tenant to obtain consent to an assignment of lease
• clarification of the provision of the Act dealing with demolition
• clarification that the Act does not apply to market stalls in a temporary marketplace
• the introduction of a time limitation on the return of a bank guarantee to a tenant
• imposing a prohibition on the recovery of mortgagee consent fees
• the increase of the monetary jurisdiction of the Civil and Administrative Tribunal from $400,000 to $750,000 in respect of claims made pursuant to the Act.

Minimum five-year term

The most significant change is the proposed removal of the requirement for a retail lease to have a minimum five-year term. This will result in a significant saving in time and money. The reality is that, in every day retail leasing, the five-year rule has provided a limited benefit to tenants with the added cost of a section 16(3) Certificate. Today, most retail leases are for a period of five years or more, the exception being where the tenant requests a shorter term or the centre is being considered for redevelopment.

Leases excluded from the operation of the Act

The Review Act excludes a number of categories of use from the operation of the Act. They may be described as usages that are ancillary to the operation of a retail shopping centre. They include ATMs, internet booths (but not an internet cafe), vending machines, public telephones, private post boxes, children’s rides, commercial advertising signage, digital display signs, renewable energy generation, communication towers and certain types of storage areas.

The Review Act also removes the provision of the Act that excludes premises in an office tower that is part of a retail shopping centre. This exception has always been superfluous. Generally, office accommodation was always separate to the retail component of a building or centre and if considered necessary was specifically excluded by the relevant lease.

To clarify any uncertainty resulting from the decision of the Court of Appeal in Sydney Markets Limited v Wilson [2011] NSWCA 201 the Review Act amends the Act to exclude market stalls in a temporary market and inserts a definition ‘permanent retail market’.

Benefit of landlord

The previous concern that the review of the Act may seek to exclude the recovery of management fees has been alleviated. The Review Act amends the definition of Outgoings under the Act to include ‘fees charged’ by a landlord and ‘expenses’ incurred by a landlord in connection with the ‘management, operation maintenance or repair of the retail shop building or land’.

The Review Act also provides for the Landlord’s Disclosure Statement to be corrected by way of amendment rather than having to reissue the Disclosure Statement which results in the seven-day rule prohibiting execution to be re-triggered and apply from the date of the replacement Disclosure Statement.

The Review Act will amend the Act so that the landlord will be required to provide the tenant with a copy of the signed lease within three months as opposed to the current one-month period.

Benefit of tenant

It will come as no surprise that the Review Act contains a considerable number of benefits for the tenant.
If the tenant terminates the lease in the first six months of the term due to the failure of the landlord to provide a Landlord’s Disclosure Statement, or providing an incomplete or false and misleading Disclosure Statement, the tenant may claim compensation from the landlord. The tenant may seek to recover the costs reasonably incurred by the tenant in entering into the lease which includes the cost of fitting out.

The Review Act provides that, where the landlord fails to disclose a particular outgoing in the Landlord’s Disclosure Statement, the tenant is not liable to pay the amount of the undisclosed outgoing.

The Review Act will amend the Act so that, if the actual amount of an outgoing exceeds the estimate of that outgoing (taxes and statutory levies excluded) as set out in the Landlord’s Disclosure Statement (with no reasonable basis), then the tenant pays the estimated amount. This is likely to create a real problem for the inexperienced or disorganised landlord. A landlord will need to maintain accounting records which demonstrate the landlord’s estimate of outgoings was reasonable on the basis of the actual outgoings paid in the previous year with a reasonable allowance for any increase in the outgoing.

The Review Act requires the landlord to return a bank guarantee within two months after the tenant completes the performance of the tenant’s obligations under the lease. The landlord will need to carefully manage the make good process at the end of the lease. The landlord will also need to manage any claim the landlord may have under lease requiring the bank guarantee to be called upon.

On the topic of turnover rent, the Review Act excludes online sales revenue of the tenant except where the goods are delivered from or at the brick-and-mortar store or the transaction takes place while the customer is in the actual store. With most customers carrying a smartphone, the latter may prove to be irrelevant. A similar regime applies to the reporting of online sales that are made or delivered from the store.

The Review Act clarifies that the cost of obtaining mortgagees consent cannot be recovered from the tenant.

Other amendments

In the case of demolition, the Review Act removes any doubt that the demolition provisions of the Act apply where only part of the building of which the premises forms part is demolished. The definition of ‘demolition’ is amended by deleting the word ‘substantial’ and to include repair, renovation and reconstruction within the meaning of demolition.

While the present definition of ‘retail shop lease’ is sufficient to deem an agreement for lease to be a retail shop lease, the application of the Act to an AFL will be specifically mentioned.

In the context of a market review, the Review Act provides that a ‘specialist retail valuer’ be appointed by the Registrar as opposed to the current requirement for appointment by the Tribunal. The Review Act also provides that the experience and qualification of the ‘specialist retail valuer’ can be prescribed by the regulations to the Act.

The increase in the monetary limit of the jurisdiction of the Civil and Administrative Tribunal in respect of retail lease disputes from $400,000 to $750,000 is more relevant to the present time. The Review Act also expands the grounds upon which the Tribunal can order rectification of a retail shop lease. The Tribunal will have the power to correct a mistake, give effect to the intention of the parties or to reflect the Disclosure Statement.

The Review Act provides that certain amendments will operate retrospectively and apply to a lease entered into, and a Disclosure Statement given, before the commencement of the Review Act.

Conclusion

The article deals with the key amendments and by no means provides an exhaustive list. The amendments set out in the Review Act will be incorporated into the Act and commence operation on 1 July 2017.

It is in the interest of all persons involved in retail leasing in NSW to take the time to understand the changes being introduced by the Review Act, as many of these changes will impact on the day-to-day management of leasing transactions and shopping centres.

Whether the Act will keep pace with the evolution of the retail environment and address the issues arising out of change remains to be seen. What is certain is that the need to reconsider and amend the legislation will always be work in progress.

Disclaimer: This article is not intended to be a substitute for obtaining legal or other expert advice and no responsibility is accepted for any action taken as a result of any material in this article. Information and advice relating to your specific commercial dealings can be obtained by contacting HWL Ebsworth Lawyers.

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About the author

John Morrison

John Morrison is a Special Counsel in the NSW office of the national HWL Ebsworth Real Estate and Projects Group. John has extensive experience in the area of shopping centre retail leasing throughout Australia and New Zealand. He has advised a number of well known national landlords and tenants. John has acted for REITs in high volume retail leasing and the disposal and acquisition of shopping centres.

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