Landlords Beware! Unfair Terms In Precedent Leases

By Nasiya Goldberg, Associate, MST Lawyers

Landlords should take note of the ACCC’s recent success in obtaining substantial orders against serviced apartment provider, Servcorp Limited, in the 2018 Federal Court case ACCC v Servcorp [2018] FCA 1044.  This case involved the use of unfair terms in Servcorp’s precedent leases and contracts and was one of the first cases on the new Treasury laws which expanded unfair contract term laws to standard form small business contracts which include leases.  This case and new legislation should prompt landlords to seek expert legal advice as to their exposure to risk under existing precedent leases and contracts.

A Summary Of The “Unfair Terms” Legislation

The Australian Consumer Law (ACL) protects small businesses from unfair terms in standard form contracts entered into or renewed from 12 November 2016, where:

  1. The contract is for the supply of goods or services or the grant of an interest in land
  2. At least one of the contracting parties is categorised as a ‘small business’, meaning it employs less than 20 people in total
  3. The upfront price payable under the contract is less than $300,000 or $1million if the contract term is more than one
  4. A standard form contract is provided by one party to the other party, with no opportunity to negotiate the contract terms, essentially on a “take it or leave it” basis.

Some examples of contract terms which will be deemed to be ‘unfair terms’ under the ACL include terms which penalise one party (but not another) for breaching or terminating the contract; or enable one party (but not another) to:

  1. avoid or limit their obligations under the contract;
  2. terminate the contract; or
  3. vary the terms of the contract.

Contracting parties can apply for court or tribunal orders determining that contract terms are unfair under the ACL.  These matters will be determined considering factors such as the following:

  1. Does the contract term cause a significant imbalance in the parties’ rights and obligations?
  2. Is the contract term reasonably necessary to protect the legitimate interests of the party advantaged by the term?
  3. Would the contract term cause financial or other detriment (such as delay) to a small business if it were relied on?
  4. How transparent is the wording of the contract term?  Is it expressed clearly or hidden in fine print or phrased in legalistic language?
  5. Is the term fair when considered in context of the contract as a whole? 

If a court or tribunal deems a contract term to be ‘unfair’, the contract term will be void and not binding on the contracting parties.

The Application Of “Unfair Terms” Legislation To Precedent Contracts And Leases

Servcorp Ltd is one of the largest suppliers of serviced office space to small businesses in Australia and is a publically listed company. The ACCC received complaints from multiple Servcorp customers that their contracts had been automatically renewed and office rents had automatically increased. In September 2017, the ACCC instituted proceedings against Servcorp Ltd and two of its subsidiaries in the Federal Court alleging that a number of terms in Servcorp’s standard form contracts with small businesses are unfair under the ACL.  This was only the second court action initiated by the ACCC to enforce the unfair contract terms laws.  The ACCC alleged that the following contract terms in Servcorp’s standard Service Agreement were unfair and were not reasonably necessary to protect Servcorp’s legitimate interests:

  1. terms permitting Servcorp to unilaterally:
    1. acquire the customer’s property without any notice;
    2. terminate the contract and to impose penalties on the customer;
    3. determine whether the contract has been breached;
  2. terms which unreasonably limit Servcorp’s liability or which impose unreasonable liability on the customer; and
  3. terms which automatically renew a customer’s contract and allow Servcorp to unilaterally increase the contract price after the renewal and without prior notice to the customer.

Servcorp did not challenge the ACCC’s allegations and the Federal Court orders:

  1. declared that the unfair terms in the services contracts were unenforceable under the ACL;
  2. required Servcorp Parramatta, Servcorp Melbourne and Servcorp Administration Pty Ltd to establish and implement a program to facilitate compliance with the unfair contract laws; and
  3. required Servcorp Parramatta and Servcorp Melbourne to pay the ACCC’s costs of $150,000.

Landlords should also take note that of the Treasury Laws Amendment (Australian Consumer Law Review) Bill 2018 (Cth) which was granted Royal Assent in October 2018.  Upon the commencement of the ensuing Act, the ACCC and ASIC will be empowered to conduct extensive investigations as to alleged use of unfair terms in contracts.  The extended powers include investigations into unfair terms alleged to exist within precedent leases. 

Implications For Landlords

The ACCC’s success in the Servcorp case is a good prompt to landlords to obtain expert legal advice in respect of any template contracts and precedent leases to mitigate any risks of exposure due to unfair provisions.  Many of the clauses considered by the Federal Court are found in retail and commercial leases.

Landlords should be proactive in obtaining expert legal advice as to any template contracts, and precedent leases to ensure that they are compliant with the unfair contract term laws, identify potential exposure and mitigate any risks. For prompt and professional advice, you can email our Property and Leasing  team or call us on +61 3 8540 0200.