Advice for retail landlords and tenants

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!