A comprehensive summary of changes to the Retail Leases Act NSW which apply from 1 July 2017
Many changes to the Retail Leases Act 1994 (the Act) commenced on 1 July 2017 following the recent passing of the Retail Leases Amendment (Review) Act 2017 No 2 (the 2017 Amending Act) by the NSW Parliament.
Changes to the Application of the Act
Agreement to Lease
The 2017 Amending Act s 3B which provides greater clarity in terms of what types of agreements the Act will apply to. Specifically, the section provides that the Act will apply to both a lease as well as an agreement to lease. Furthermore, a lessor’s disclosure statement that is given for an agreement to lease will be deemed to have been given for the resulting lease. A separate disclosure statement will not be required, nor will it be permitted to be given for the resulting lease.
Retail Shops in Markets
The 2017 Amending Act includes the insertion of s 6B which provides specifications on whether the Act applies to retail markets. The section specifies that the Act will not apply to a retail shop that is a stall in a market place unless the market is a permanent retail market.
The section provides a definition of ‘permanent retail market’ as an assemblage of stalls which are styled and/or described as a market that are mainly used for retail businesses and operate in a building or other permanent structure which is used for the operation of the market.
Wholly non-retail premises such as ATMs, children’s rides, signage display, internet booths, public telephones, storage lockers and vending machines are now excluded from the Act.
Impact of Amendments on Lessors and Lessees
Repeal of Minimum 5 Year Lease Term
One of the most significant changes that will result from the amendments is the removal of the 5 year minimum term for retail leases. Lessors no longer need to obtain a s.16 certificate if a lease is to have a term of less than 5 years.
With the changes that commenced on 1 July 2017 a lessee can no longer elect after a short term lease has been entered into to extend the term of the lease. Accordingly, the provision which removes the minimum five year term will no longer be something which the lessee can benefit from within the first six months of the lease.
Leases entered into before 1 July 2017, that have not obtained a s.16 certificate by 1 July 2017 will remain subject to the 5 year minimum term for retail leases, as s 16 before its repeal will remain in force. However, after 1 July 2017, the lessee will no longer have the benefit of s 16 to change the term to a contracted term of less than 5 years.
Entering into a Lease & Disclosure Statements
The Act further provides a clear procedure that must be followed in relation to the serving of disclosure statements. Relevantly, the amendments provide that at least seven days before a retail shop lease is entered into, the lessor must have given a disclosure statement to the lessee for the lease. The statement must be in writing and is to be in, or at least to the effect of, the prescribed forms provided in schedule 2 of the Act.
Change in format of disclosure statement
The form of the disclosure statement has been updated.
Some key changes include the following:
- The heading of Schedule 2.
- Part 1 is updated.
- Schedule 2 Part 5 relating to outgoings is replaced.
- Schedule 2A relating to assignors disclosure statement has been replaced. This change does not apply to a disclosure statement given before 1 July 2017.
Effect of Undisclosed Outgoings
Before 1 July 2017, the disclosure statement required the outgoings payable by the lessee to be itemised, and there was a lack of clarity around the lessor’s ability to recover outgoings that were not itemised in the disclosure statement.
The insertion of section 12A removes that lack of clarity and provides that a lessee will not be liable to pay the lessor any amount in respect of outgoings unless the amount was disclosed in the lessor’s disclosure statement. In the event that the disclosure statement provides an estimate of the outgoings and the estimated amount is less than the actual amount, then the lessee will only be liable to pay the estimated amount unless there was a reasonable basis for the estimate.
Outgoings that are related to tax, rates or levies that have been imposed by any legislation subsequent to the making of the disclosure statement are exempt from this provision.
The lessor will be able to charge the lessee for services provided by the lessor to the lessee if the services would be an outgoing if it were provided by a third party.
The 2017 Amending Act has extended the definition of ‘outgoings’ to also include fees that are charged by a lessor for services that are provided by the lessor in relation to the management, operation, maintenance or repair of the retail shop building/land. This specifically allows a lessor to include as part of the outgoings, fees charged by a lessor for services provided by the lessor in connection with the management, operation, maintenance or repair of the retail shop building or land. The new specification of management will make it more difficult for a lessee to contend that management fees are not able to be incorporated as part of the outgoings.
Amendment of Disclosure Statement
The 2017 Amending Act makes provision to allow the lessor’s disclosure statement to be amended by the agreement of both the lessor and lessee in writing.
Termination Compensation for valid termination within 6 months
If the lessee is not given a disclosure statement or at the time it was given, the statement contained information that was false or misleading, the lessee may terminate the lease within 6 months after the lease was entered into. The 2017 Amending Act inserts s 11(2A) which provides for guidance on compensation following such a termination. The section provides that the lessee will be entitled to recover compensation from the lessor for costs reasonably incurred by the lessee in connection with entering into the lease including compensation for expenditure in connection with the fit-out of the retail shop.
The lessee can now claim compensation, including compensation for any fitout costs if the lessee terminates the lease for a failure to receive the disclosure statement on time or if a disclosure statement is false or misleading.
Compulsory Registration and Copy of Executed Lease
Prior to 1 July 2017, if a lease was not to be registered, the lessor was to provide the lessee with a copy of the signed lease signed by the lessor, within one month after the lease was returned to the lessor or the lessor’s lawyer/agent. If it was to be registered, the lessor was obligated to lodge the lease for registration within one month after the lease was returned to the lessor or lessor’s lawyer/agent.
From 1 July 2017 a lessor must provide the lessee with a signed copy of the lease within three months after the lease is returned to the lessor or its lawyer or agent after it is signed by the lessee. This three month timeframe is an extension of the previous timeframe of only one month.
The timeframe can be extended for delay due to obtaining any mortgagee or mortgagees consents provided the delay is not caused by the lessors failure to make reasonable efforts to obtain that consent or consents.
This change will not apply to a lease that was entered into before 1 July 2017.
Registration of a lease for a term of more than three years
The lessors are required to sign and lodge a lease with a term of more than three years for registration within three months after receiving the lease signed by the lessee.
Just like the Real Property Act in NSW, the length of the term of the lease is a combination of the initial term and the options to renew the term. Therefore if the initial term is one year but an option to renew is three years, then the lessor must register the lease within three months.
This three month period can be extended to allow for time to obtain mortgagee/s consents to the lease and also to satisfy any requirements arising under the Real Property Act NSW that are beyond the reasonable control of the lessor. This includes the answering of any requestions which may be requisitions which are caused by the execution of the lessee or maybe requestions raised by the LPI which are beyond the reasonable control of the lessor to anticipate.
This new section will not apply to a lease which was entered into before 1 July 2017.
Return of Bank Guarantees
The insertion of s 16BA will require a lessor who receives a bank guarantee for a lease to return the original bank guarantee to the lessee within 2 months after the lessee completes its obligations under the lease for which the bank guarantee was provided as security.
A lessor will be liable to pay compensation should the lessee suffer any loss or damage because of the failure to comply with the return of the bank guarantee obligation and reasonable costs incurred by the lessee in connection with the cancellation of a bank guarantee because of the lessor’s failure to return the original bank guarantee within the stipulated time period.
Assignment of Lease, Consent & Procedure
The amendments formalise the procedure for obtaining consent to assign a retail lease. Specifically, the procedure is broken down as follows:
- A request for the lessor’s consent must be made by the lessee in writing.
- The lessee must provide the lessor with information that the lessor may reasonably need to be satisfied that the assignee has the financial resources and retailing skills that are at least equal to the lessee’s.
- The lessee must provide the proposed assignee with an updated lessor’s disclosure statement which includes any changes that have occurred regarding the information contained in the disclosure statement that was initially given to the lessee.
- The lessor must provide the lessee with an updated lessor’s disclosure statement within 14 days after being requested to do so by the lessee.
- The lessor will have 28 days to either provide consent or refuse consent to the assignment. Should the lessor fail to provide a decision within this period of 28 days, the lessor will be taken to have consented to the assignment.
The insertion of s 41A also emphasises that an assignor of a retail shop lease will have no liability to the lessor regarding amounts payable under the lease by the assignee after the lease has been assigned. However, this section will only take effect if the assignor has complied with the specific requirements specified in 41A. Indeed, the 2017 Amending Act provides an easier to follow, step by step guideline on the relevant requirements. In order to be protected by s 41A, the assignor must:
- Provide the assignee with an updated lessor’s disclosure statement which comprises the lessor’s disclosure statement and details any changes that have occurred since the disclosure statement was given to the assignor; and
- Provide the assignee with an assignor’s disclosure statement in or to the effect of the form set out in Part A given in schedule 2A of the Act. This document must also include a document signed by the assignor and assignee that is in or to the effect of the form set out in Part B in schedule 2A of the Act.
In complying with the first requirement, the lessor must provide the updated disclosure statement within 14 days after being requested to do so by the lessee, but if they fail to do so, the lessee will have complied with their obligations if they provide the lessor’s disclosure statement that is completed to the best of the lessee’s knowledge.
Additional Grounds on Which Consent to Assignment can be Withheld
In addition to the grounds already provided in s 39, the 2017 Amending Act provides an additional reason a lessor can rely on to withhold consent to assignment. The 2017 Amending Act has inserted s 39(1)(e) which provides that the lessor will be allowed to withhold consent when the retail shop lease has been awarded by public tender and the assignee fails to meet any of the criteria of the tender.
However, this amendment poses additional issues given that the term ‘public tender’ is not actually defined in the Act. Furthermore, it begs the question as to whether lessors should award leases by public tender if it will mean that they can set additional criteria for lessee’s to meet. Finally, the phrase “fails to meet any criteria of the tender” is difficult to interpret given that it may mean that the lessor will be entitled to withhold consent if even one criteria point is not met. Conversely, the phrase could also be interpreted to mean that if the assignee meets none of the criteria set, only then will the lessor be able to withhold consent. That is, if the assignee meets some of the criteria but not all, the amendment could be interpreted as allowing the prospective assignee to nonetheless have the lease assigned to them.
Retail lease preparation expenses includes mortgagee consent fees
Presently, the lessee cannot be required to pay lease preparation expenses in connection with the granting, renewal or extension of a lease. The Act extends the concept of lease preparation expenses to include the cost of obtaining the mortgagee’s consent; therefore lessees will not be required to pay expenses for obtaining mortgagee consent.
Turnover from Online Transactions
Section 47 will now provide rules regarding the provision of information relating to turnover from online transactions. Under the new section, the lessee will not be required to provide the lessor with information about the turnover of the business that is turnover from online transactions. Any provision in a lease agreement which purports to require such information will be void.
However, s 47(2) provides an exception in that s 47 will not apply to turnover from online transactions where the goods/services concerned are delivered from or at the retail shop or where the customer is at the retail shop to purchase the goods/services.
In short, information relating to online shopping transactions that do not actually involve the retail lease premises does not need to be provided to the lessor.
The definition of demolition has been replaced with an inclusive definition. ‘Demolition includes repair, renovation and reconstruction’. This definition is wider than the previous definition as it does not require the repair, renovation or reconstruction to be ‘substantial’.
Section 35 of the Act confers certain protections on a lessee if the retail shop lease contains provisions allowing a lessor to terminate the lease on the grounds of proposed demolition of the building of which the premises forms part. Under the changes, the protection will extend to a proposed demolition of any part of the building, as opposed to the entire building. Further, as well as the lessor being required to have a genuine proposal to demolish, the lessor can only terminate the lease if the proposed demolition cannot be carried out practicably without vacant possession of the retail shop.
A retail lease cannot include any requirement for people employed in the shop to have police and security clearances and checks unless the written approval of the Registrar is given.
Specialist Retail Valuer
From 1 July 2017, the Registrar at the Office of the Small Business Commissioner may appoint a specialist retail valuer to determine a market rent review when the parties cannot agree on the choice of valuer.
The new s 32B will be inserted to deal with the appointment of a specialist retail valuer by the Registrar.
The specialist retail valuers will now be appointed from lists prepared by industry bodies and the regulations are going to be able to regulate the required training for a specialist retail valuer.
Section 32B will change the method for appointment of the specialist valuer. Before 1 July 2017 the Tribunal held and administered the list of specialist retail valuers. The 2017 Amending Act requires the specialist retail valuers to be appointed from a list of nominees prepared by the President of the Australian Property Institute Limited (NSW division), the Chief Executive Officer of the Royal Institution of Chartered Surveyors, and President of the Australian Valuers Institute and President of the Real Estate Institute of NSW Limited.
The industry bodies will put in place training programs which specialist retail valuers must attend before they will be accepted to be a specialist retail valuer and placed on such a relevant list.
The experience and the training requirements for a specialist retail valuer will also be able to be prescribed by regulations.
The Registrar may attach conditions to the appointment of a specialist retail valuer including conditions about the fees that may be charged.
A useful change which was something that had worried many valuers, is a claim can now not be made against a specialist retail valuer for the doing or omitting to do something if the thing was done or not done, in good faith for the purposes of a determination of rent by valuation under the Act. The amendment will apply to specialist retail valuers appointed before the commencement of the relevant section.
Online Retail Bond Service
The amendments allow the Secretary to establish an online retail bond service. This service comprises online facilities and systems that can, amongst other things that allow the facilitation of doing of any other thing required by the Part to the Act, be used to:
- Deposit security bonds with the Secretary
- Make claims for the payment of a security bond
- Make a payment of a security bond
However, the lessor cannot force a lessee to use this online service.
Effect on Dispute Resolution and Penalties
Service of Documents
The insertion of s 16ZA provides some further procedural guidance in relation to the service of notices and other documents on the Secretary. Specifically, service of any notice, summons, writ or other relevant document may be served by being left at the office of the Department of Industry, Skills and Regional Development (the Department) with a person employed there. If the document is a notice, it may simply be posted to the Secretary at an office of the Department. Documents may also be validly served using an electronic service, however it must be an electronic service which is authorised by the Secretary.
The amendments increase the New South Wales Civil and Administrative Tribunal’s (The Tribunal) monetary limit jurisdiction from $400 000 to $750 000.
Tribunal Powers to Order Rectification of Lease or Disclosure Statement
The amendments to s 72AB provide the Tribunal with a power to rectify a lease or a disclosure statement in certain circumstances. Specifically, a rectification order will only be able to be given when:
Both parties have consented, or:
- The Tribunal is satisfied that the order is necessary to give effect to the intention of the parties when the lease was entered into;
- The Tribunal is satisfied that the order is necessary to give effect to the actual disclosure of information between the parties;
- The Tribunal is satisfied that the order is necessary to correct an error or admissions.
Pursuant to the insertion of s 83A, a member of staff of the Department who is authorised by the Secretary as an authorised officer may issue a penalty notice to a person if it appears that the person has committed a penalty notice offence under the Act.
A penalty notice offence is defined in s 83A as any offence against the Act or regulations that is prescribed by the regulations of the Act as a ‘penalty notice offence’. The regulations will also prescribe the amount payable for the relevant offence.
Gary Newton, Partner
Khushaal Vyas, Law Clerk
Henry Yuan, Law Clerk