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Retail legislation – a sword for landlords

In another article in this issue, the SCCA calls for a review of lease legislation. Robert Speirs represents both retailers and landlords and is widely considered an expert on the retail lease in Australia. He calls for a review as well; seems it’s time something should be done.

As we all know, the retail legislation is peppered with IEDs. Unwary industry participants can easily stray off the path, and get their legs blown off. I have recently been involved in a number of transactions in which the legislation has caused the tenant grief.

Disclosure period

It is a feature of the retail legislation that the Disclosure Statement must be given to the lessee at least seven days before the lease is entered into. Indeed, South Australia is the only jurisdiction that has not succumbed to the seven-day stupidity.

I mean, has anyone ever stopped to wonder why we need seven days? Or, if we do need seven days, why it can’t be waived in certain circumstances?

But don’t get me diverted.

In the case I want to discuss, an up-and-coming national tenant received a Disclosure Statement, which was issued in the tenant’s corporate name. After receipt of the Disclosure Statement and draft lease, the tenant negotiated the lease, and then stopped talking to the landlord. Unbeknownst to the landlord, the tenant arranged its fit-out and contractors.

After two months of radio silence, the tenant announced to the landlord that it wanted to sign the lease in the name of a different company, and that it had to sign the lease tomorrow, in order to meet its fit-out and store-opening imperatives.

I am pretty robust about Disclosure Statements, but the change of tenant entity raised a real problem. The retail legislation says that “the lessee” must get the Disclosure Statement “at least seven days before the lease is entered into”.

Under the idiotic legislation, if “the lessee” does not get the Disclosure Statement at least seven days before the lease is entered into, the lessee can terminate the lease. In this case, because of the last-minute change to the lessee entity, the “lessee” had not received the Disclosure Statement – its related body corporate had.

The decision of the ADT in Jain Cao & Hui Yuan Gao v Leo Siam Pty Ltd [2013] NSWADT 58 (12 March 2013) is authority for the proposition that a lessor who relies on a Disclosure Statement, issued to the wrong entity within a corporate group, steps on that figurative IED.

So our client advised the lessee it would have to wait for a further week (while the name of the previous lessee was whited out and the new tenant name inserted) before it could commence its fit-out. The tenant was furious. It was in full command of the content of the Disclosure Statement. It had its contractors booked, and wanted to start trade ASAP.

There are ways to overcome the problem, which I do not intend to discuss here, but they require time, effort and money. The point is that these problems are a direct consequence of the legislation, they positively harm the tenant, and they are unnecessary red tape.

Victorian rent reviews

This was a matter on which I acted for the tenant. (Yes,  it is possible to bat for the other team.)
My client is a sophisticated international industry participant. It negotiated a rent in Victoria which was subject to annual CPI, capped at an agreed percentage.

During negotiation of the formal lease, the solicitors for the lessor said that the tenant was not entitled to the benefit of the cap on CPI, because this infringed section 35(2) of the RLA. This section says that the rent can only be reviewed by reference to specified criteria (including an index such as CPI, or a specified fixed percentage), but that only one method of review can be applied on each review date. This drafting was no doubt designed to overcome lessor-friendly provisions which had once permitted rent to be reviewed  by CPI or a specified percentage, whichever is the greater.

The solicitors for the lessor argued that the cap on the CPI was, in effect, a second basis for review, which is outlawed by the legislation. Therefore, the lessee could  not have the benefit of the cap. I do not think the lessor’s argument is correct, but there are plenty of lawyers in Victoria who disagree.

You know the trolley has run off the track when the legislation can be used as a sword by landlords,  rather than as a shield for tenants. It is possible to draft provisions to overcome the problem, and we came up with a pretty neat solution but, again, these wrinkles all cost the tenant time,  risk and money. In this case, the landlord was a listed institution, and the tenant was a sophisticated international retailer.  We had well-advised, robust industry participants.  Yet we had the retail legislation poisoning the well. Maybe we need another review of the legislation. SCN