Retail Shop Lease Reform - 2016
At the end of this year a new regime will be in place for tenants and Landlords of Retail Shops as the result of the Retail Shop Leases Amendment Act 2016.
Landlords will have to meet stricter compliance with disclosure rules and Tenants should be aware of the changes to their rights.
The objectives of the amendments are to align the Retail Shop Leases Act 1994 (Qld) (RSLA or the Act) with comparative legislation in other states and address the imbalance in negotiating power between landlord and tenant.
- some premises are no longer covered as a Retail Shop;
- there are no side agreements allowed that attempt to contract out of the Act;
- Disclosure Agreements have been changed to provide better protection for Tenants and Landlords in leases and assignments of leases where a business has been sold;
- Disclosure of Outgoings have been made clearer and market review disclosures have been tightened up to stop Landlords from unfair negotiation tactics.
Retail Shop Lease – when is a Shop not a Shop?
If a shop exceeds 1,000 square metres or the premises located in an area where less than 25% of the business are retail, then these will no longer be covered by the RSLA and considered commercial premises. If business are run out of a retail shop category but the tenant is an employee or agent of the Landlord this will not be covered under the act as a Retail Shop.
Similarly, spaces taken up in a retail shopping centre with Automatic Teller Machines or vending machines will not be considered Retail Shop spaces.
No contracting out with side agreements – not now!
Section 19 of the RSLA has always said that you cannot contract out of the Act and now this is included for “side deeds” for compensation paid to the Landlord in exchange for agreeing to a further right to renew or any payment to the Landlord which is not covered in section 24 of the RSLA. Interestingly, when the proper disclosures (which we will cover later) are made on an assignment, now the guarantors to a shop lease will be released as well as the Tenant. Personal Guarantees will no longer be able to be retained for the remainder of the term of the Assigned Lease.
New Disclosure Requirements and when do you enter into a Lease?
A lease is now entered into by:
- being signed by all parties;
- the tenant having taken possession, or
- the tenant having made a payment of rent (other than a deposit).
Now both the Landlord and the Tenant must provide the disclosure statements 7 days prior to this event.
Don’t forget that under the Land Title Act, a certified copy of the signed lease must be provided to the Tenant within 30 days – delays can be caused by obtaining Sketch Plans or registering the Lease.
If a Tenant asks for an updated Disclosure Statement from the Landlord for a sub-lease or franchise option then this must be provided within 28 days at the Tenant’s cost.
On an Assignment of a Lease now the Assignor must provide the proposed Assignee with disclosure at least 7 days prior to the parties signing a contract for the Business Sale. The Purchaser can make their own enquiries prior to entering into a contract and avoid being caught by a Lease that is not suitable.
Are you Exercising an Option or not?
Probably the most beneficial change to the disclosure regime is on the exercise of an option by the Tenant.
When the Tenant exercises an option to renew, the Landlord must provide a Disclosure Statement within 7 days (including the new rent if there is a Market Review) and the Tenant then has 14 days to withdraw the notice exercising the option.
Currently the major causes of a Rent Determination is when a Tenant has exercised an option and the Landlord has (in some cases) produced an excessive increase. We have been involved in a number of Lease disputes where the rent has been increased by double. With the introduction of these changes retail shop tenants will no longer be taken by surprise by unusual increases on a market review and will be able to negotiate the desired rent or simply move on.
But did you know that a Tenant may request a Market Review prior to exercising an option? Once the Market Rent Review is agreed or determined, then the Tenant must exercise the Option within 21 days.
During a Rent Determination process the parties must now make submissions within nominated time-frames or lose the opportunity to respond.
Outgoings and Marketing Fees in a Net Lease
The Landlord will have new obligations in relation to the annual statement of audited outgoings to include a breakdown of the estimated outgoings and the actual expenses of administrative costs.
Outgoings have to be specified in the Lease otherwise the Tenant is not liable for their payment. Insurance excesses are no longer recoverable as outgoings. Also the area used to calculate the percentage of outgoings payable in a centre will no longer include common areas used for information or ATMs, entertainment, advertising, seating and tables, trade-out areas or storage and parking.
Tenants may withhold payment of outgoings until the Landlord provides them with the estimate or the audited statement.
Where a marketing or promotion fee is paid the Landlord is now obliged to provide a Marketing Plan at least one month prior to each accounting period and an audited statement of expenditure 3 months after the period to which it refers. Any funds not expended on marketing are rolled over to the next period (sorry guys no refunds).
Refurbishment clauses and making good when you leave
Redecorating, make good and refurbishment obligations under the lease must now be specific. In a Shop Lese it’s no longer enough for the premises to be redecorated to the Landlord’s reasonable specifications and any clause that does not detail the specifications of the works and timing will be avoidable.
Compensation and disturbances
Landlords may limit compensation payable to a Tenant resulting from a disturbance within the first year of the Lease if it gives the Tenant written notice containing the nature of the disturbance that will occur.
Where a Tenant suffers losses from the acts of the Landlord of a type of disturbance contemplated under the Act and is entitled to claim compensation because of this, but fails to give the Landlord notice of any problem in a timely manner then compensation for damage that the Tenant suffered may be reduced.
A change in costs payable under the Lease
When a Tenant and Landlord have agreed on the basic terms of a Lease or its renewal and the Tenant has given notice to the landlord that it intends to proceed but backs out of the agreement at the last minute, then the Landlord may recover its costs in having the documents prepared. Where a deposit is taken and the offer to lease or exercise of the option informs the Tenant that it will be liable for the Landlord’s costs if it doesn’t proceed, then these costs may be deducted from a deposit in the case of a new Lease.
Costs in obtaining a Mortgagee’s Consent will no longer be recoverable from the Tenant however costs in obtaining a Sketch Plan or registration of the Lease are still payable by the Tenant.
The financial penalties under the existing Act have mostly been removed and a breach now may simply void that section of the Lease.
Prepare for the changes
Agents and Landlords should review their Offer documents to ensure that legal costs are recoverable;
Outgoings with administration fees should be reviewed and broken down.
Marketing plans should be produced;
Landlords planning a redevelopment should consider their disclosure documents to minimise compensation requirements to incoming Tenants; and
Centre Managers and Landlords should discuss these requirements with their solicitors for upgrading their standard terms and disclosure documents.
If you need further information on any of these or other leasing matters please contact Cameron Burnett at firstname.lastname@example.org or (07) 5532 5944