Changes To The NSW Retail Leasing Legislation

By Evelyn Marcou, Senior Associate, MST Lawyers

The Retail Leases Amendment (Review) Act (NSW) No 2 (“the Amendment”) has received royal assent and is due to come into effect on 1 July 2017.

The Amendment makes significant changes to the Retail Leases Act 1994 (“the Act”).

What are the key amendments?

The Act makes the following changes:

• Landlords are required to provide full disclosure in the disclosure statement of any contribution which the tenant will need to make in outgoings. A Lessee cannot be held liable for outgoings not disclosed;

• A landlord can now include some management, operation, maintenance or repair of the retail shop, building or land as part of outgoings;

• Removal of the five-year minimum requirement for retail shop leases. The NSW legislation now aligns with Queensland, but differs from all other jurisdictions which call for a minimum five-year term;

• A tenant who terminates a lease in the first six months has the right to compensation if they were not provided with a disclosure statement;

• Clarification of the demolition provisions. If the lease includes a demolition clause applicable to any part or all of the premises, a Lessor must prove that the demolition cannot occur without vacant possession;

• The Lessor’s Disclosure Statement will be in a new form;

• The obligation by a Lessor to provide a Disclosure Statement at least seven days before the retail lease is entered into will now also extend to any Agreement for Lease;

• A Lessor will not be able to include revenue from online transactions when calculating turnover rent;

• The definition of “retail shop” will change. Markets within a permanent building structure and shops in an office tower that form part of a shopping centre now fall under the Act while storage of goods for use or sale in a retail shop (not including storage on premises from which the goods are sold) will be excluded. Further exclusions include car parking (not provided as part of a car park business), ATM’s, vending machines, public telephones, internet booths and children’s rides.

• In the event of an assignment, the Lessee will be required to prepare an updated Lessor’s Disclosure Statement if the Lessor does not provide the same within 14 days of a written request from the current Lessee.

• A Retail Lease for a term of three years or more will require registration within three months of the Lessee’s return of the executed retail lease to the Lessor (or its solicitor). This may be extended where the consent of a mortgagee or head lessor must be obtained.  The Lessee cannot be held liable for any fees involved in obtaining a mortgagee’s consent.  There is also now a penalty of 50 units for non-compliance;

• A Lessor will be required to return an executed Retail Lease to the Lessee within three months after it is returned to the Lessor (or its solicitor); and

• Any bank guarantee must be returned within two months after the Lessee completes all of its obligations under the Retail Lease.

Disclosure Statements

The disclosure statement as it relates to outgoings has been amended. Landlords should be sure to use the amended form.

Section 11(2A) has been introduced so that if a tenant terminates the lease because of a breach by the landlord of its disclosure obligations, the tenant is entitled to reasonable compensation (including money thrown away on fit-out).

Section 11(6) has been introduced so that a disclosure statement can be amended “with the agreement in writing of the landlord and tenant”.  I envisage that this change will cause some problems. Assume the parties agree on a rent of $200,000, but after the issue of the disclosure statement, the tenant negotiates the rent down to $150,000. Further, assume an amended disclosure statement is not issued. How can it be possibly said that there has been a breach of the disclosure obligations when the tenant itself has initiated the change for its benefit?

Another example of where this change could be problematic is, assume the landlord omits an outgoings estimate in the disclosure statement, discovers the mistake and issues an updated disclosure statement to correct the omission.  The new section 11(6) seems to be trying to say that the disclosure statement can only be amended with the written agreement of the tenant. If the tenant does not agree to the correction of the disclosure statement, where does that leave the landlord?

Many have commented that under the circumstances, the landlord remains entitled to issue an updated disclosure statement, whether the tenant agrees or not. The section says that the landlord “may” issue an amended disclosure statement with the written agreement of the tenant. It fails to say that the landlord “must not” issue an amended disclosure statement unless the tenant agrees. However, until this section is tested, the position remains unclear.

There is much opposition to the notion of negotiating disclosure statements. However, in light of this amendment, in cases where the landlord negotiates a commercial change to the deal after the disclosure statement has been issued (for example if the rent is increased), it is now probably prudent to issue an amended disclosure statement.

When do these changes apply?

Some of the Amendments will apply to all leases, and others will apply to leases entered into or disclosure statements given after the commencement of the Act on 1 July 2017.

It is important that all landlord, tenants, franchisors and franchisees become accustomed to the new timeframes and obligations.

Of particular importance is the new form of the Disclosure Statement.  Landlords should be sure to use the amended form.

For further information, please contact our Property & Leasing team by email or by phone +61 3 8540 0200.