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Client Update: Amendments to Retail Leases Act (NSW)

9 November 2016

In brief: New legislation has been introduced into the New South Wales Parliament that, if passed, will make significant amendments to a number of the provisions of the existing legislation governing retail shop leases in New South Wales. Partner John Beckinsale (view CV) and Special Counsel Christine Adamson (view CV) report on the major changes.

Background

We reported in December 2013 on the proposed New South Wales Government review of the Retail Leases Act 1994 (NSW) (RLA). Submissions for that review closed on 7 February 2014. The Retail Leases Amendment (Review) Bill 2016 was introduced on 8 November 2016, and is the result of considerable stakeholder consultation conducted as part of the review of the RLA.

The Bill includes a number of proposed amendments to the RLA, and this update only deals with the most significant proposed changes.

Key amendments

Overview

The Bill makes the following main changes:

  • removes the minimum five-year term requirement for retail shop leases;
  • excludes leases of premises used for certain non-retail purposes from the RLA;
  • confers a right to compensation on a tenant who terminates a retail shop lease during the first six months because they were not provided with an appropriate disclosure statement;
  • reinforces the need for a landlord to be accurate when disclosing and estimating outgoings in the disclosure statement;
  • provides a specific time frame for return of bank guarantees to tenants;
  • excludes online sales revenue from turnover rent calculations except in certain cases;
  • prevents landlords recovering mortgagee consent costs from tenants;
  • allows the landlord to include certain management fees charged by the landlord as part of the outgoings;
  • clarifies the procedure for tenants to seek landlord's consent to an assignment;
  • clarifies when the demolition provisions will operate; and
  • changes the timeframes for return of signed leases and lodgement for registration.

The Bill does not include a right of first or last refusal for a new lease at the end of the term or a rolling six months holdover, which were two of the considerations included as part of the initial review.

We discuss the main amendments below.

Minimum five-year term to be repealed

The Bill removes the existing provisions requiring a minimum five-year term for retail shop leases.

This is likely to be welcomed by landlords and tenants alike as it will save time and costs for both parties. In our experience, a minimum five-year term was not a benefit to tenants who had commercial imperatives for agreeing to shorter time frames. Tenants would often ultimately need to pay legal fees to obtain a s16(3) certificate from a lawyer to enter into a lease for less than five years. That will no longer be required.

Certain leases excluded from the RLA's operation

The Bill excludes leases of premises used only for any one or more of certain non-retail purposes from the operation of the RLA. The excluded purposes are set out in a new Schedule 1A, and they include the following purposes (among other things):

  • ATMs;
  • car parking (excluding car parking provided as part of the business of a car park);
  • children's ride machines;
  • communications towers;
  • display of signage, digital display screens;
  • internet booth (but not an internet café or similar use);
  • self-storage units, storage lockers; and
  • vending machines.

The Bill removes an existing provision which excludes premises in an office tower that forms part of a retail shopping centre from the RLA. The explanatory note to the Bill states that this removal is not because such office towers are now to be included, but because the exception was unnecessary in the first place as an office tower does not form part of a retail shopping centre merely because it is in the same building as, or above, the retail shopping centre.

The Bill provides that the RLA does not apply to certain stalls in a market unless it is a permanent retail market (as defined in the Bill).

Enhanced tenant protection

  • Landlords will be liable to pay compensation to tenants who terminate a lease in the first six months because they were not provided with a disclosure statement, or the disclosure statement was incomplete or false or misleading. The compensation payable is for the costs reasonably incurred by the tenant in entering into the lease, including expenditure in connection with the fit-out of the premises.
  • A tenant is not required to pay outgoings unless that liability was disclosed in the lessor's disclosure statement.
  • If the lessor's disclosure statement provides an estimate for an outgoing and the actual amount of the outgoing is more than the estimate, then if there was no reasonable basis for the estimate when the disclosure statement was provided, the tenant is only obliged to pay the lower estimated amount, and all subsequent obligations to pay increases in outgoings will also be reduced in the same proportion. This does not apply to outgoings in the nature of a tax or levy imposed by an Act after the disclosure is given. Landlords will need to be careful to keep appropriate records which assist to justify their outgoings estimates should they be challenged by tenants.
  • Bank guarantees are required to be returned to the tenant within two months after the tenant completes performance of its obligations under the lease that are secured by the bank guarantee. This seems to be a reasonable compromise between giving a tenant a clear timeframe for the return of the bank guarantee but ensuring a landlord has enough time to confirm compliance by a tenant with post-termination obligations.
  • Turnover rent must exclude online sales revenue, except where the goods are delivered from or at the premises (or the Centre) or where the transaction takes place while the customer is at the premises (whether or not the goods are delivered from or at the premises).
  • Tenants cannot be required to provide turnover information to landlords on online sales, other than online sales where goods are delivered from or at the premises (or the Centre) or where the transaction takes place while the customer is at the premises (whether or not the goods are delivered from or at the premises).
  • Lease preparation expenses recoverable by a landlord now exclude expenses incurred in obtaining mortgagee consent to a lease.
  • If a landlord wishes to require police or security checks and clearances for tenants' employees or contractors carrying out works in the premises, the lease must include such a provision, and the written approval of the Registrar of Retail Tenacy Disputes will need to be obtained.

Amendments benefitting landlords

  • Repeal of the minimum five-year term as indicated above.
  • The definition of Outgoings will be amended to include fees for services 'provided by the lessor in connection with the management, operation, maintenance or repair of the retail shop building or land'. This will be welcomed by landlords as there was some speculation that the Bill would follow the changes in WA to prohibit a landlord from recovering management fees.
  • A lessor's disclosure statement may be amended by agreement in writing by the parties (rather than having to reissue a disclosure which would then reset the time for giving the disclosure).

General amendments

  • The procedure for requesting landlord consent to an assignment has been clarified. However, the provision still includes a deemed consent by the landlord if the landlord has not responded within 28 days from the later of the date the request was made or the date the tenant complies with the requirements of the RLA.
  • A new provision now provides that where a retail shop lease has been awarded by public tender, the landlord can refuse consent to assignment of the lease if the proposed assignee fails to meet any criteria of the tender.
  • The demolition provisions have been amended to clarify that they will also apply where only part of the building of which the premises forms part will be demolished. The amendments also clarify that the lease cannot be terminated unless the demolition cannot be carried out without vacant possession of the premises. The definition of demolition has been amended to include repair, renovation and reconstruction and will no longer be qualified by such matters needing to be substantial.
  • The timeframe for the landlord providing a copy of the signed lease to the tenant has been amended from one month to three months.
  • Leases for terms of more than three years are required to be lodged for registration within three months after the lease is returned to the landlord. There is an exception for delays in obtaining head-landlord or mortgagee consent, or where there are requirements arising under the Real Property Act 1900 (NSW) that are beyond the landlord's control. For example, this should cover a development situation where commencement/expiry dates are not yet capable of calculation.
  • The RLA will be amended to make it clear that the RLA applies to agreements for lease as well as leases. The definition of retail shop lease is currently wide enough to include agreements for lease, however, this amendment will put it beyond doubt. Landlords will therefore need to continue to ensure that disclosure statements are given in the required timeframe before agreements for lease are entered into.
  • The Bill expands the jurisdiction of the Civil and Administrative Tribunal, including to increase the monetary limit for claims from $400,000 to $750,000.

Where to from here

At this stage it is not known when the Bill will become law, or if the Bill may be amended before being enacted. Landlords should keep up to date with the likely timing of enactment, and with any material changes to the Bill, so that they will be in a position to deal with the new requirements once the Bill commences.

For further information, please contact:

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