Recent amendments to the Retail Leases Act 1994 (NSW) (RL Act) will affect both landlords and tenants of retail premises.
Under the Retail Leases Amendment (Review) Act 2017 (NSW) (Amending Act) various changes will apply to retail shop leases, the rights and obligations of retail landlords and tenants, leasing processes and dispute resolution procedure.
Generally speaking, the amendments, which came into effect from 1 July 2017, seek to ensure that the protections provided by the RL Act to tenants are more aligned with the protection of consumer and small businesses. The amendments extend certain protections to tenants.
Some of the key changes are:
1. Proposed retail leases
Agreements to lease are now captured by the RL Act including proposed tenants and landlords (section 3B Application of Act to agreements to lease) and the RL Act applies to agreements to lease in the same way that it applies to a lease.
2. Minimum term
The previous legislative requirement that a retail lease must be for a minimum term of 5 years has been removed and there is no longer a minimum term. Therefore, more flexible terms can be negotiated. However, if the term of a lease is 3 years or longer, then the lease must be registered.
3. Disclosure of outgoings
Under section 12A if a landlord’s disclosure statement given to a tenant fails to properly disclose outgoings it may result in the retail tenant not being liable to the extent of the non-disclosure (section 12A Lessee not required to pay undisclosed outgoings; note: this does not apply to a lease entered into before the commencement of that section). The definition of ‘outgoings’ has been extended to include fees charged by a landlord for services that the landlord provides in connection with the management, operation, maintenance or repair of the retail shop building or land (section 3A(1)(c) (addition)).
The effect of including these fees in outgoings is to protect tenants by preventing landlords from avoiding the provisions under section 12A by providing their own services, such as repairs, cleaning or maintenance. Landlords will need to be diligent in preparing their outgoings calculation and include these fees accurately.
4. Documents to be given to the tenant
A retail tenant must be provided with a copy of the executed lease within 3 months of its execution and an executed Bank Guarantee within 2 months of its execution.
5. Assignment of lease
The process by which a retail tenant obtains the consent to assignment of the lease from the landlord has been streamlined.
The RL Act now separates and clarifies the steps involved for a current tenant to:
- obtain the consent of the landlord to an assignment of a retail shop lease; and
- to be released from liability to the landlord after assignment.
This includes a new requirement for giving the proposed assignee disclosure statements when requesting consent to assign the lease. Where previously the tenant was entitled to ask the landlord for a copy of the lessor’s disclosure statement to pass on to the proposed assignee, the requirement of the tenant to provide it no longer applied if the landlord was unable or unwilling to comply with the request within 14 days. Now, the landlord is required to provide the tenant with the ‘updated lessor’s disclosure statement’ within 14 days of the request, and the tenant is required to give the updated lessor’s disclosure statement to the proposed assignee.
This will allow proposed assignees to be properly informed in a timely manner as if they were entering a lease from the beginning.
The process also requires the tenant to provide the landlord with such information as the landlord may reasonably require to satisfy themselves, specifically, that the ‘financial resources and retailing skills of the proposed assignee are not inferior to those of the tenant’, whereas previously the tenant was required only to provide information to the landlord ‘concerning the financial standing and business experience of the proposed assignee’.
6. Compensation on termination for non-compliant lessor’s disclosure statements
The RL Act requires a landlord to provide a tenant with a lessor’s disclosure statement at least 7 days before the lease is entered into by the tenant. If the landlord either fails to comply with its obligation to provide the tenant with a lessor’s disclosure statement, or provides an incomplete, false, or misleading lessor’s disclosure statement, the tenant will be entitled to terminate the lease within the first 6 months.
The Amending Act includes a new provision that where a tenant terminates its lease in either of these circumstances, it will be entitled to compensation (section 11(2A) Compensation for Lessees) from the landlord for reasonable costs incurred in entering into the lease, including expenditure in connection with fit-out of the premises. Importantly, this right will apply to leases entered before 1 July 2017 and which are terminated after 1 July 2017 (per Schedule 3, Paragraph 39).
7. Recovery of expenses by landlord
A tenant cannot be required to pay lease preparation expenses. A landlord will not be entitled to recover any expenses from a tenant involved in obtaining the consent of the mortgagee of the leased retail premises, as these costs are now included in the definition of ‘lease preparation expenses’.
Where a retail lease includes a provision for termination by the landlord of the lease on the grounds of proposed demolition of the building, the RL Act imposes specific requirements to be met before the termination on these grounds is permissible, including that the proposed demolition cannot be carried out practicably without vacant possession of the premises.
The Amending Act protects tenants when the landlord proposes to terminate the lease due to demolition of ‘any part of the building’, where the term demolition includes ‘repair, renovation and reconstruction’.
9. Online sales
The definition of turnover no longer includes online transactions where goods or services are not delivered or provided from the retail premises. This amendment will benefit tenants who conduct segments of their business online.
As a result, tenants cannot be required to provide the landlord with information regarding these online transactions for the purposes of assessing turnover (section 47).
What to do next?
The RL Act amendments will affect both landlords and tenants of retail premises in New South Wales.
Should you require advice about how the reforms may impact you or your business, or on preparing or amending a retail lease, please contact our Commercial and Corporate Advisory Principal Michael Bracken or Special Counsel Georgina Odell.