Exclusions from the retail shop lease definition
The definition of a retail shop lease will specifically exclude leases/licences for:
- premises with an area greater than 1,000 square metres;
- premises carrying on a business by a lessee for a lessor as the employee or agent of the lessor;
- vending machines; and
- premises used for a non-retail business located in part of a retail shopping centre where the proportion by area of retail businesses is 25% or less.
A new definition of ‘government lease’ is introduced, which refers to leases where the lessee is a local, state or the federal government. For those leases, there is no obligation on the lessee to give the lessor a lessee disclosure statement, legal or financial advice report or for the lessor to give the lessee a notice under section 46 about when the lessee’s option window closes.
Entry into the lease and obligations of the parties for disclosure
A lease will be regarded as having been entered into on the earliest of the date that the lease is signed by all parties, or the lessee takes possession of the shop under the lease, or when the lessee first pays rent under the lease.
Prohibitions for contracting out of the Act are extended to cover other agreements entered into for a retail shop lease, for example, side agreements about lease incentives.
A lessor is taken to have complied with the seven day disclosure period if, before the lessee enters into the lease, the lessor gives the lessee a disclosure statement and the lessee gives the lessor a waiver notice. If the lessee is not a major lessee, the lessee must also provide a legal advice report specifically stating that advice was given to the lessee about the meaning and effect of the waiver.
If a lessee intends to grant a sublease or franchise licence, the lessee may ask the lessor for an updated disclosure statement and the lessor must respond within 28 days. The lessee must pay the lessor’s reasonable costs to prepare the updated disclosure statement.
A lessor must give a lessee an updated disclosure statement within seven days of the lessor receiving notice of the lessee’s exercise of an option. This obligation may be waived by the lessee when it exercises the option. A lessee now has the right, within 14 days after receiving an updated disclosure statement from a lessor, to withdraw its notice exercising its option.
Where the lessor fails to provide the disclosure statement on time or if it is defective, the lessee may terminate the lease within six months and claim compensation. This also applies where the lessee exercises an option to renew. A defective statement is a statement which is incomplete in a material particular or contains information that is false or misleading in a material particular.
Assignment of the lease
For assignments of the lease, the assignor must give the assignee a disclosure statement and a copy of the lease at least seven days before the earlier of the assignee entering into the sale contract for the business or when the lessor is asked to consent to the assignment. The assignee may give a waiver notice reducing the seven day disclosure period. The assignee must give a disclosure statement to the lessor at least 7 days before consent to the assignment is sought. The assignor must give a copy of its disclosure statement to the lessor on the day that the lessor is asked to consent to the assignment.
After assignment, both a lessee and its guarantors are released from any liability under the lease for a default by the assignee if the lessee complied with its disclosure obligations and the disclosure statement given was not a defective statement.
When the lessee triggers an early market rent review before exercising its option to renew, the window for the lessee to exercise its option closes 21 days after the market rent is agreed or determined. An appointed specialist retail valuer must nominate timeframes (not less than a minimum of 14 days) for the lessor and the lessee to make submissions and respond to each other’s submissions. If the lessor or the lessee fail to make a submission or do not respond on time, they are regarded as not having made a submission or a response.
Changes to outgoings and promotions fund provisions
The definition of outgoings now specifically excludes any insurance excess paid by a lessor on an insurance claim.
For retail shopping centres, outgoings estimates and audited statements must detail total management fees as administration costs to run the centre or other fees paid to the centre management. If a lessor fails to give an outgoings estimate or audited statement, the lessee may withhold payment of outgoings until the estimate or audited statement is given.
In apportioning outgoings over the area of the shopping centre, there is an exclusion for parts of the common areas of the shopping centre leased or licensed for information, entertainment, community or leisure facilities, telecommunications equipment, ATMs, vending machines, advertising displays, seating, tables and other furniture, trade out areas, storage and parking.
Where a lessee contributes to a promotions fund, the lessor must provide to the lessee a marketing plan detailing the proposed advertising and promotion spending for at least one month before the accounting period commences. The lessor must also provide the lessee with an audited statement of promotions expenditure within three months of the relevant accounting period. Any unused promotions funds must be carried forward to the next accounting period.
Compensation provisions are amended to apply to a lessee holding over following the expiry of a lease. If a lessee claims compensation for disturbance from the lessor, notice of the loss or damage must be given as soon as possible and any failure will be considered when deciding any compensation payable.
A lessor is not liable to pay a lessee compensation for loss or damage if the lessor takes action as a reasonable response to an emergency or as a result of a duty imposed by law or a relevant authority.
A lessor can now include a lease provision limiting a claim for compensation by a lessee for an anticipated disturbance within a year of entry into the lease. To rely on this provision, the lessor must give the lessee a notice specifically describing the anticipated disturbance, a statement with an indication of the basis on which the assessment was reached and a statement of the timing, length and effect of the anticipated disturbance as far as practicable.
Relocation and refurbishment provisions
The relocation regime in the Act now applies to all relocations regardless of the reason. Where the premises are in a retail shopping centre, the lessor is restricted to moving the lessee’s business to alternative premises in that centre. If the lessee does not wish to relocate and instead wants to terminate the lease, the lessee must give the lessor at least one month’s notice of the earlier termination, which is greater than the seven days’ notice required previously.
A lessor is prohibited from passing on to the lessee any costs of obtaining its mortgagee’s consent to the lease and complying with the Act but, if a lessee fails to sign a final version of the lease, the lessee may be required to pay the lessor’s reasonable legal and other costs incurred.
A clause in a lease which requires the lessee to refurbish the premises is void unless the clause sets out the nature, extent and timing of the refurbishment required.
Many of the monetary penalties for breaching the Act have been omitted and, instead of imposing a penalty, the obligation contravening the Act is simply void.
However, there are parts of the Act which will not apply in certain circumstances depending upon the lease and when the lease was entered into or renewed. For example if the premises become a retail shop after the lease commences, the Act will not apply to the lease, an assignment of the lease or a renewal under an option. Conversely, if the premises cease being a retail shop after the lease commences, the Act will continue to apply to the lease, an assignment of the lease or a renewal under an option.
For previous amendments to the Act, the ‘status quo’ for existing leases is maintained. But this will not necessarily be the case for the amendments to the legislation. Comprehensive transitional arrangements mean that some changes will apply to existing leases and others will only apply to leases entered into after the Act commences.
We recommend specific care be taken when reviewing existing leases to determine whether the amendments apply.