When it comes to retail leases, most business owners would agree there is currently a severe imbalance between landlords and tenants. But changes to the Retail Leases Act could change retail lease negotiations in New South Wales.
Although the present rent regulations in New South Wales are aimed at stabilising tenancies, they are often arbitrary. A landlord could request rent increases, based on need, directly from the people who pay the rent and who benefit from maintaining standards despite rising fuel costs and inflation.
The primary objective of the Retail Leases Act 1994 is to ensure fair and efficient dealings between parties to retail leases. Although the New South Wales Government made various amendments to the Act in 2004, many concerns have still not been adequately addressed. In response, in April this year, New South Wales Minister for Small Business Joseph Tripodi, released a discussion paper to tackle the major concerns in the retail tenancy, including the power imbalance between shopping centre landlords and their tenants.
Mr Tripodi comments that: “Landlords control rents in shopping centres and have the potential to exploit their negotiating power when dealing with tenants seeking lease renewals.” It is his intention that the discussion paper addresses “specific issues raised by stakeholders and to re-examine areas of uncertainly or ambiguity and potential areas of unfairness, with a view to amending the Act if it is deemed necessary”.
Proposed new provisions
Tenant Advocacy
This latest discussion paper outlines a number of issues affecting the retail leasing industry. It is often the case that a tenant has concerns about their landlord’s conduct, however, the tenant is reluctant to raise the relevant conduct with the landlord because they are afraid that it may have adverse effects to the business or it would be too expensive or difficult to prove.
If problems go unresolved, it can often lead to the failing of the business. Currently, the Registrar of Retail Lease Disputes only has the power to join a matter in court or to prosecute a breach. The Registrar has no power of investigation or advocacy.
The Government is considering the statutory appointment of a Retail Advocate who would represent the interests of retail tenants and landlords and investigate and prosecute retail leasing breaches in certain circumstances.
Education
Advocacy is also coupled with proposed mandatory education programs for tenants as it is considered that many of the issues that arise are attributable to the industry’s lack of understanding of rights and responsibilities under the Act. It was suggested the program cover issues such as how to negotiate and understand a lease, how to select retail premises and how to run a business.
Time limits for bringing claims
In the recent decision of Armstrong Jones Management Pty Ltd v Saies, Bond & Associates Pty Ltd, the Administrative Decisions Tribunal read into section 10 of the Act a time limit of six months after the commencement of a lease that a tenant may be provided compensation where a pre-lease misrepresentation has been made, and where the tenant has relied upon the misrepresentation to his/her detriment. The discussion paper recognises the problems with placing such a limit, and has suggested that the time limit be extended to three years. It is often the case that a pre-lease misrepresentation may not be apparent in the first six months of the lease.
Other areas of focus in the discussion paper include:
-Rent reduction for tenants facing uncertainty at the end of their lease
-Remedies for non-disclosure or incomplete disclosure
-The provision of disclosure statements when an agreement to lease has been entered into
-Registration of leases and lease documentation
-Fit-outs, outgoings, alterations and relocations
-Landlord use of advertising or promotional funds contributed by tenants
-Strata schemes causing significant disturbances to a tenant’s business
-The passing on of land tax to tenants
-Damaged premises
-Unconscionable conduct and unfairness
-The conduct of parties in mediation
-The monetary jurisdictional limit of the Administrative Decisions Tribunal.
Guidelines for Negotiating a Lease
Tenants do not have a lot of bargaining power when it comes to negotiating a new lease. It is a double-edged sword where tenants are faced the choice of staying and paying an exorbitant rent, or losing their business. It is arguable that retailers who prepare properly for lease negotiations with adequate research, appropriate external advice and the right questions for the landlord are less likely to become involved in costly and damaging disputes.
1. Research
Importantly, prior to commencing a lease process potential tenants should analyse residential and business demographics of the area where the store will be located to enable an accurate forecast of sales. It is important to research and understand the market and to check with local councils for required permits and licences to carry on the business.
2. What to look out for in a lease?
Prior to executing the lease, tenants should carefully read provisions in the lease, paying particular attention to the following areas:
-The duration of the lease
-Does it contact an option?
-Amount of rent
-The basis and frequency of rental reviews (usually conducted annually)
-Whether outgoings are payable and to what extent
-Insurance the retailer will be required to arrange or pay for
-Whether the usage clause is wide enough to cover the retailer’s product or services
-What provisions allow assignment of the lease, subletting or franchising
-Whether a rent-free time is allowed for the fit-out
-The design requirements for fit-out and signage
-The costs of repairs and who will bear them
-That each party is to pay their own legal costs in relation to the preparation of the lease
-If the landlord has a mortgage, the mortgagee’s consent must be obtained at the landlord’s expense
-If the lease is for a shop in a shopping centre, any special provisions applicable, such as trading hours
-The effect of retail tenancy legislation in relation to the lease
3. Other documents
Prior to signing the lease and when negotiations are commenced, the landlord should provide a disclosure statement (setting out financial terms and other essential matters), pro forma lease and the Small Business Commissioner’s information brochure.
4. Be aware
It is important to note that once a lease is signed it becomes a binding contract and the terms can be enforced if not observed. When a lease is expressed to last for a specific period, there is no guarantee that it will be renewed when it expires. If problems do arise during the course of a lease it is always preferable to seek mediation (with 80 percent of disputes resolved) to avoid the uncertainty, expense and stress of litigation.
To obtain a full copy of the discussion paper visit: www.retail.nsw.gov.au
—Matthew Hourn is a partner with Clinch Long Letherbarrow Lawyers (www.clinchnevillelong.com.au) in Sydney, specialising in commercial litigation, corporate, commercial, workplace and insurance law.
