Author: Leisha deAboitz

On 1 July 2017, the Government will lower the threshold established under the Building Energy Efficiency Disclosure Act 2010 (Cth) from 2,000 square metres to 1,000 square metres. Generally, this means that, on and from 1 July 2017, if you are:

• a building owner who is selling or leasing office space with a net lettable area of 1,000 square metres or more; or
• a tenant who is subleasing part of your tenancy with a net lettable area of 1,000 square metres or more,

you are now required to obtain a BEEC (Building Energy Efficiency Certificate) prior to the building being placed on the market for sale, lease or sublease.

A reminder of the obligations

You may recall that under the Building Energy Efficiency Disclosure Act 2010 (Cth):

• A BEEC must include:
  • the building’s NABERS (National Australian Built Environment Rating System) Energy for offices star rating; and
  • a Tenancy Lighting Assessment (TLA).
• The NABERS Energy star rating must be included in any advertising for the sale, lease or sublease of the building or office space.
  • Some buildings are currently exempt from the disclosure obligations, determined by:
  • Type of building, such as:
    • new buildings or buildings which have completed a major refurbishment (where a certificate of occupancy has not yet been issued or was issued for less than two years)
    • strata-titled buildings
    • some mixed-use buildings (with total office space being less than 75% of the net lettable area); and
  • Type of transaction, such as:
    • sales through transfer of share or units
    • sale of partial interests
    • leases and subleases of less than 12 months (including any option to extend).
• A current, valid BEEC must be provided to all potential buyers and tenants free of charge when requested and as early as possible in the transaction enquiry process.
• A CBD accredited assessor may require information or access to a disclosure-affected office. However, exemptions to this disclosure obligation are available where tenants:
  • are conducting sensitive police or security operations; or
  • cannot provide energy bills because they are new tenants and have yet received a bill.

Fines and other penalties apply for non-compliance.

For further information, please contact Jodie Masson or Kate Clissold.

Amendments to the Retail Leases Act 1994 (NSW) (RLA) will come into effect on 1 July 2017.

The changes are intended to increase transparency and certainty by increasing disclosure obligations, include provisions related to online retail sales and streamline access to justice and remedies.

Our interpretation of the changes is that they are generally positive because they provide clarity and remove some administrative burden. However, there are some traps to be aware of, and there is an additional risk (for landlords) of suffering a compensation claim from a tenant, where previously only a government monetary penalty (rarely enforced) applied.

Changes to disclosure statements

The amendment introduces new forms of lessor, lessee and assignor’s disclosure statements. Make sure that you are using the new formats on and from 1 July 2017!

The new legislation (sensibly) makes it clear that:

• a landlord is not required or permitted to provide a separate disclosure statement for a lease if one has already been provided with an agreement for lease
• disclosure statements may be amended by the agreement of the parties.

A tenant continues to be able to terminate the lease within 6 months after commencement if a lessor disclosure statement is not provided, is incomplete or is misleading. However, a tenant can now claim compensation from the landlord for reasonable costs (including fit-out) if the termination occurs due to the landlord not providing, or providing a misleading, disclosure statement.

Outgoings disclosure

A tenant is not required to pay any outgoings amount that was not disclosed by the landlord.

Further, if the lessor disclosure statement provides an estimate that the landlord arrived at with no reasonable basis and the actual amount of outgoings to be paid exceeds the estimate, then the tenant is only liable to pay the estimated amount and the tenant’s liability for future increase in outgoings is reduced by the same proportion.

For example, if tenant’s land tax contribution was estimated as $4,000pa, but actual cost is $8,000pa then the tenant will be liable for $4,000 in the first year and for only 50% of the actual land tax amount throughout the term.

Changes to excluded uses

A list of new excluded uses have been introduced in Schedule 1A, including ATMs, car parking, storage and vending machines.

No minimum term

The requirement for a compulsory minimum term of 5 years unless a section 16(3) certificate was provided has been removed. Accordingly, section 16(3) certificates are no longer required.

This, again, is a sensible change as it reduces a whole lot of administration and the risk of the parties being locked into a term that was not wanted.

Assignment

The new legislation clarifies that a proposed assignee’s financial resources and retailing skills are to be assessed against the tenant’s at the time the lease is assigned. This of course, could potentially detrimentally affect landlords and tenants where there has been a (upward or downward) change in the tenant’s financial position during the term. This changes only applies to leases entered into before 1 July 2017. In the case of a lease assignment, the landlord also needs to provide an updated landlord’s disclosure statement to the assignee in accordance with the new landlord disclosure requirements.

Registration and provision of executed lease

A lease under the RLA must be registered within 3 months after the execution copy being returned to the landlord if:

• the term is longer than 3 years; or
• the parties agree the lease is to be registered.

This change echoes the general requirement to register a lease for a term of more than 3 years, but now a penalty applies for failure to do so. There is now an implied contractual term that the landlord must give the tenant an executed copy of the lease within 3 months after it is returned to the landlord. These periods will be extended if delay is due to obtaining mortgagee consent, which we suspect will often occur in practice.

Bank guarantees

A landlord must return bank guarantees to a tenant within 2 months after the tenant ‘completes performance of the obligations under the lease for which the bank guarantees is provided as security’. The landlord will be liable for any loss caused by a failure to return the bank guarantee within this timeframe.

Online retail provisions

The changes envisage that an ‘online retail bond service’ may be established. This is a new online system for depositing and drawing down on security bonds. However it will be an offence for a landlord or landlord’s agent to require a tenant to use the online retail bond service.

The amendments also make it clear that turnover does not include revenue from online transactions for purposes of turnover rent calculation, unless goods or services are delivered from or at the shop, or the transaction occurs at the shop. A tenant cannot be required to provide the landlord with turnover information from online transactions.

Demolition

The new legislation also makes it clear that demolition provisions in the RLA apply even if only part of a building is being demolished, but also that the lease cannot be terminated for demolition unless the proposed demolition cannot be conducted without vacant possession of the shop. This amendment also applies retrospectively.

Disputes

The financial jurisdiction of NCAT is increased from $400,000 to $750,000. Interestingly, the RLA also now contemplates ‘penalty notices’ being issued for offences (however, the government would need to introduce regulations to cause this regime to apply, which it has not yet done).

Miscellaneous… but important!

The changes make it clear that landlords can’t on-charge mortgagee consent fees (some landlord had persisted in trying to do this even though even the old legislation arguably prevented recovery of mortgagee consent fees).

The new legislation also means that parties can now apply directly to Registrar for appointment of specialist retail valuer, instead of seeking orders from NCAT – arguably a much better system!

It’s that time of year when we all take a break from our stressful jobs, and travel to places more peaceful than our own. We start to reassess our priorities and think about spending more time with our families.

Maybe it’s time to buy a weekender? A place to get away from it all regularly. A home away from home.

But the problem with buying a weekender is that it’s a huge expense – not only the initial acquisition of that beachside property, but also the ongoing maintenance costs and rates (which are usually not tax deductable). In addition, the reality is that it’s unlikely, after the initial “honeymoon period”, that you will use it every weekend and every holiday.

The ongoing maintenance (eg cleaning and lawn mowing) can also be a drain on families who are already time poor – do you really want to be spending your week maintaining and cleaning one house and your weekends maintaining and cleaning a weekender?

It might be time to think about co-ownership.

Co-ownership is essentially owning a property with others. In the context of a weekender or holiday house, it’s a very useful structure as it allows people to pool their money to buy and manage an asset that they may not have otherwise been able to afford. It allows several families to share the burden of ongoing rates and charges, maintenance and cleaning. In most structures, it means that the weekender is used more regularly as people visit less often and tend to value their “allocated time”.

A co-ownership structure is analogous in many ways to a strata scheme (in the sense that it involves many owners working together to make decisions about a jointly owned property). However, whilst a strata scheme sits within a comprehensive legislative framework that governs the relationship between co-owners, a co-ownership structure does not. You need to specially contract to establish the “ground rules” as, unlike strata, there is no specific legislation to save you if things go wrong. It is very important to have a comprehensive co-ownership deed which sets out the legal contract between the various co-owners.

We have set up and worked with several co-ownership structures, both for enormous and complicated commercial properties and for smaller “weekender” style assets. Specialised skills are required to set up a functional and peaceful co-ownership scheme. It pays to get it right from the very beginning.

In the context of a weekender, the co-ownership arrangements that we have seen work well all cover the following key areas:

• Allocation of use of the property between the owners (usually by way of a yearly roster) ensuring that each “special” period (eg Christmas, Easter, long weekends) is rotated fairly
• Insurance, indemnities and risk
• Maintenance, repairs and cleaning (what will be outsourced and what will the owners will do themselves?)
• “House rules” that apply equally to owners and visitors (eg pets, storage of personal items)
• Furniture and other jointly owned house and pantry items
• How costs are shared (preferably by way of an administrative fund and sinking fund held in a separate bank account)
• Annual meetings and processes for decision making. Will one share equal one vote? Are some decisions so important that they should be unanimous?
• Who is responsible for key areas (eg administration (managing the roster and mail), paying rates and other bills, organising tradesman)?
• What happens when an owner wants to sell their share? Will owners have a right of first refusal to buy each other out? What happens if an owner dies or becomes insolvent? Can an owner mortgage their share?
• Is holiday letting permitted? How will it be managed? How will the income be distributed?
• Will a caveat be registered on title to notify purchasers of the existence of the co-ownership structure?
• And most importantly… dispute resolution! What happens if the owners can’t agree?

A co-ownership deed needs to be properly constructed to be enforceable by the original owners, and any subsequent co-owner. It needs to have “running covenant” clauses so that it will always apply to the property, even where one or more owners try to avoid its operation. It needs to be a document that an owner is able to rely on if they need to take legal action, in court if necessary, against a co-owner for a failure to comply with the co-ownership deed.

In a well-managed co-ownership scheme, serious disputes rarely happen as the co-ownership deed articulates the pre-arranged agreement between the owners. It operates in practice like a strata scheme – where meetings are held annually, owners follow the pre-agreed rules and the costs associated with owning and maintaining the property are properly budgeted for and properly shared.

Now…. maybe that weekender is not such a bad idea after all?

The new Strata Schemes Development Act 2015 (NSW) (SSD Act) and the Strata Schemes Management Act 2015 (NSW) (SSM Act) will come into effect on 30 November 2016.

One of the most significant (and long awaited) changes is the collective sale and renewal process in the SSD Act. The draft Regulations are expected to be finalised and released shortly.

1.     What is collective sale and renewal?

It is a new regime in Part 10 of the SSD Act which allows strata lot owners to decide (on a 75% majority basis) whether to end or wind up a strata scheme so that the site can be sold or renewed. It applies to all strata schemes (eg commercial, residential, industrial) except those which are subject to a development contract or the Retirement Villages Act 1999 (NSW).

2.     Why is this change significant?

Under the existing legislation, a scheme can only be terminated with unanimous lot owner consent or by way of a court order – this has given the minority significant power. Historically, a single lot owner could frustrate termination, sale or renewal, despite majority agreement. It is hoped that this change will be a boost to urban renewal and will present better commercial outcomes for many lot owners (eg where rising maintenance costs are no longer viable, or where the entire scheme can be collectively sold at above market value to a developer). By way of comparative example, the introduction of collective sales by majority consent to Singapore in 1999 led to an explosion of sales and windfall gains for owners.

3.     Will there be protections for the “vulnerable” or dissenting owners?

Yes. The new scheme involves a multi-stage (and rigorous) process requiring significant lot owner involvement, 75% majority approval, and final consideration and approval by the Land and Environment Court. There is also additional protection for dissenting owners to ensure that they”

·         are not required to fund the strata renewal process

·         will be assured “fair compensation”, and

·         will have access to free advice through a Strata Renewal Advice and Advocacy Program (run by Fair Trading).

4.     How will the new regime work?

The regime is neither simple nor straightforward. This is due to the various checks and balances that have been introduced to protect the rights and interests of dissenting lot owners.  At a high level, it involves pre-approval of an initial concept by the owners’ corporation, establishment of a strata renewal committee, preparation of a strata renewal plan, 75% majority approval, and finally a court order to confirm that the statutory regime has been properly complied with.

A high level summary of the steps involved is set out in the table below.

5.     What kind of influence will individuals have over the outcome?

This will depend on the type of interest/s held in the scheme:

·         Tenants and utility lot owners do not have votes at any stage of the process.

·         If a lot is subject to joint ownership, all co-owners need to sign a support notice.

·         Owners of multiple lots in the scheme will be able to give more ‘support notices’.

·         Owners of individual lots with greater unit entitlement will have more influence over decisions requiring a special or ordinary resolution.

6.     What happens if owners cannot be contacted?

This could make the process more difficult.  If owners are overseas, impossible to reach or do not understand the information they are receiving about the process they might not be in a position to provide support notices. In addition, the failure of multiple owners to attend meetings or vote by proxy at pivotal stages of the process might cause the plan to lapse.

7.     How long will owners have to consider whether to support a collective sale or redevelopment plan?

Owners will have a maximum of three months to consider whether to provide a ‘support notice’ for a distributed plan before it lapses.  Once an owner has received a copy of the plan there is a mandatory ‘cooling off period’ of 60 days before a support notice can be provided.  This leaves a very short window for returning signed notices : between one month and 14 days.

8.     Can support notices be withdrawn?

Yes, but only until the required level of support has been obtained.  Owners also have the right to be advised how many support notices have been given during this time.

9.     Can the sale or redevelopment be approved without going to court?

No.  Only the Land and Environment Court has the power to hear applications for collective sale and redevelopment plans under Part 10.  However, the primary function of the Court is to ensure that all steps and notice requirements from the legislation have been complied with, the plan has been prepared in good faith and all owners are compensated fairly as per the SSD Act. Accordingly it is imperative that the renewal process is completed strictly as per the Act.

[1] Or a ‘qualified request’ is received – A request from one or more owners in a scheme with unit entitlement which total more than 25% of the aggregate unit entitlements for the scheme.

[2] And a ‘qualified request’ is not received – see footnote 1.

[3] In accordance with s55 of the Land Acquisition (Just Terms Compensation) Act 1991.

[4] Not more than 25% of the value of votes cast are against the resolution, having regard to the specific requirements in s5 of the SSM Act.

[5] By all registered owners, mortgagees and covenant chargees with respect to the lot.

[6] A recording will be made on the folio of the common property, and subsequent owners and mortgagees will be bound by a support notice.

Following a lengthy review of the current scheme, significant changes to the Retail Shop Leases Act 1994 (QLD) (RL Act) have been passed by the Queensland parliament and represent a significant departure from the status quo.  Some of the changes include:

• some businesses will no longer fall under the RL Act
• tenants will be able to retract their option exercise
• make good clauses could be void if too vague
• tenants can waive the 7 day disclosure statement waiting period
• ratchet clauses will be permitted, but only for ‘major tenants’

The table below shows how some of the ‘big ticket’ changes in Queensland stack up against the similar retail lease laws across Australia. For those with national portfolios, it is important to understand that there are still significant differences across the Australian jurisdictions.

Getting ready for the changes

Landlords and managing agents will need to ensure that their standard lease documents, heads of agreements and disclosure statements are updated so as to be compliant with the changes to the RL Act.  This should be done as soon as possible given the imminent commencement of the changes.  Failure to do so may void parts of the lease or have substantial consequences (eg tenant termination rights that would not have existed before).

Tenants should also take note of the new rights afforded to them under the RL Act, which on the whole seek to largely improve the transparency in the relationship between the parties.

For further information, please contact Jodie Masson or Ben Malone.

Disclaimer: This article is intended to provide commentary and general information.  It should not be relied upon as legal advice.  Formal legal advice should be sought having regard to any particular facts or circumstances.

The Property, Stock and Business Agents Amendment (Property Reports and Exemption) Regulation (NSW) 2016 came into effect on 15 August 2016. These new exemptions are likely to have both a positive and negative effect for both commercial real estate agents and substantial property owners.

In very broad summary (but the devil is in the detail! – see below), there is now a complete exemption from the requirements of the Property, Stock and Business Agents Act 2002 (NSW) (PSBA Act) for commercial agents either:

1. acting for a substantial property owner (ie owning property exceeding particular thresholds); or
2. engaged by an owner within its own corporate group (provided that the entities are linked in a particular way).

It’s important to be aware that the exemptions won’t apply to all commercial agency relationships.

The Good

The new exemptions are great news for large property owners who manage, lease and sell their own assets via a separate, but related, licensed entity (which usually charges a fee to the owner). It means that those internally controlled agency entities no longer have the administrative burden of maintaining a real estate agent’s licence (including paying fees, annual CPD, required signage etc), managing trust accounts and holding PI insurance. It’s easy to understand why certain large shopping centre owners have been pushing for this change for many years.

It’s also great news for large commercial real estate agencies who will no longer need to ensure that they strictly comply with NSW agency law, particularly in the area of having compliant agency agreements, for their large clients. The courts have been brutal with real estate agents who do not have strictly compliant agency agreements (ie signed at the right time, containing all of the prescribed terms in the right places, and signed and served properly). In a commercial property industry which is largely dependent on relationships, it makes sense to relax the strict requirements so that agents can collect the agreed commission without having to jump through hoops.

The Bad

The changes also lead to a negative result for commercial real estate agents. If large property owners can now easily internally manage their property management, leasing, acquisitions and disposals, there is now less disincentive to outsource this previously troublesome role to an external licensed real estate agent.

Our understanding is that the legislation was passed with little opposition from the real estate industry. Most large real estate agencies couldn’t oppose the changes without offending their most important clients!

However, as in any industry, there’s always a place for absolute experts. Ultimately, it’s likely that large property owners will always want to deal with the experts employed by large commercial real estate agencies, even if it is now easier to choose to do some of the work themselves.

Devil in the detail

The exemptions only apply to “commercial property agency work” – that is selling, purchasing, exchanging, leasing, managing or otherwise dealing with property that isn’t “residential property” or “rural land”. Both “residential property” and “rural land” have particular meanings in the PSBA Act and it is possible that a property you thought was exempted as commercial may well be captured by the strict definitions.

The new exemption for internally managed commercial agents only applies if the agent entity is an “affiliate” of a principal/owner. This can be any agent entity that is controlled by an owner entity (ie if it has the power to make decisions about its financial and operating decisions). For entities which are body corporates, subsidiaries and parent companies are also affiliates. Affiliates can be, but aren’t limited to, companies, trusts (including trustees), partnerships and individuals. This means that most corporate groups will be captured by the definition, but it’s worth being aware that particular shareholding, unit ownership and external custodian/trustee relationships for some fund managers, trusts and investment schemes may not strictly comply.

The new exemption for substantial owners only applies to real estate agents acting on behalf of a principal/owner who owns property worth at least $40 million (at market value) or with an aggregate gross floor area of at least 20,000 square metres. The value and floor space amounts will include property that is co-owned an affiliate, presumably only to the extent of the ownership, but this is not clear. However, it is important to note that property that is wholly owned by an affiliate and not by the principal/owner itself, is not counted within this threshold.

NSW vs national position

The amendments bring NSW agency law closer to its Queensland counterpart, with 2 important differences:

1. the Queensland thresholds are less ($10 million and 10,000 square metres); and
2. the NSW exemptions are based on the principal/owner, whereas in Queensland they are based on the property or the parties that for the relevant transaction/agency agreement.

It’s noteworthy that NSW originally followed the Queensland approach in an earlier version of the new regulation, but changed it to its current state after a period of public consultation.

None of the other states/territories in Australia currently offer complete exemptions from the relevant agency legislation for commercial agency work.

Lease negotiations can often be lengthy and take place over a number of weeks and months. It’s not unusual for there to be an abundance of emails back and forth, telecons, face to face meetings between the parties (and their representatives) from the early initial commercial discussions to the time that the lease is signed up.

A recent High Court case (Crown Melbourne Limited v Cosmopolitan Hotel (VIC) Pty Ltd & Anor [2016] HCA 26) has considered whether an informal verbal assurance from the landlord to an arguably anxious tenant during negotiations was sufficient to bind the landlord to grant a further 5 year lease once the initial term had expired.

The facts

• In early 2005, the tenant (Cosmopolitan) and the landlord (Crown) entered into negotiations for new leases of 2 restaurant spaces in the Crown Casino complex.
• The new leases offered by Crown were limited to a term of 5 years only and did not contain any option for renewal. They also required Cosmopolitan to undertake major refurbishment works at commencement.
• During lease negotiations, Cosmopolitan requested a longer lease term having regard to the substantial cost of the refurbishment works Crown required it to carry out. Crown refused, but evidence indicates they assured Cosmopolitan that they would nevertheless be “looked after at renewal time”.
• Under clause 2.3 of the leases, Crown was required to give at least 6 months’ notice before expiry stating whether:

“(a) the Landlord will renew this Lease, and on what terms (this may include a requirement to refurbish the Premises or to move to different premises…);
(b) the Landlord will allow the Tenant to occupy the Premises on a monthly tenancy after the Expiry Date; or
(c) the Landlord will require the Tenant to vacate the Premises by the Expiry Date.” 

• In December 2009, Crown gave notice pursuant to clause 2.3(c) that it would not be renewing the leases and required Cosmopolitan to vacate in August 2010.
• In July 2010, Cosmopolitan brought proceedings alleging that Crown, by the representations made by its representatives during lease negotiations, was bound to grant a further 5 year lease. The case was heard by VCAT in the first instance which determined there was both a collateral contract and an estoppel argument in favour of Cosmopolitan, and then subsequently appealed to the Supreme Court of Victoria, Court of Appeal and then ultimately the High Court.

High Court’s decision

There were 2 main issues that the High Court had to consider, namely:

1.  whether there was a collateral contract created by Crown’s representations under which Crown was obliged to offer Cosmopolitan a further 5 year lease; or

2.  alternatively, whether Crown was estopped from denying an obligation to grant a further 5 year lease.

Having regard to the assessments carried out by the lower Courts, a majority of the High Court determined that:

• there was no collateral contract as, in the circumstances, Crown’s statement that Cosmopolitan would be “looked after at renewal time” could not have objectively been understood to amount to a binding contractual promise. In short, this statement was no more than “vaguely encouraging”
• the estoppel claim could not succeed as the Court found that Crown’s statement was not capable of conveying (to a reasonable person) an expectation that a further lease would without doubt be granted (on the same or substantially similar terms).  In any event, the Court was unable to satisfy itself on the evidence available that Cosmopolitan had relied and acted upon such an expectation.

Implications for Landlords and Tenants

Although in this case the landlord’s statement was not of sufficient quality to amount to a contractual promise, this case is a good reminder for landlords (and leasing agents) to be careful about the statements or assurances made to tenants during lease negotiations.  An “entire agreement” clause in the HOA or the lease itself is not “bulletproof”, and a Court will look beyond this to consider objectively (not subjectively) whether a party intended for its separate promise or assurance to be contractually binding.

Likewise, it is important for tenants to ensure that any assurance given by the landlord is adequately reflected in the lease documentation.  Failure to do so may have significant financial consequences – in this regard, we note that Cosmopolitan entered into external administration shortly after the leases ended in 2010.

For further information, please contact Leisha De Aboitiz or Ben Malone.

Disclaimer: This article is intended to provide commentary and general information.  It should not be relied upon as legal advice.  Formal legal advice should be sought having regard to any particular facts or circumstances.