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Changes to the Retail Shop Leases Act 1994
Are you aware of the upcoming changes?
Changes to the Retail Shop Leases Act 1994 (the Act) take effect on 25 November 2016 and it is critical that Landlords and Tenants are aware of how the changes, particularly in relation to options to renew, will affect them.
The Act will not apply to:
1. a retail shop lease with a floor area of more than 1000m2;
2. a lease of premises for a non-retail business purpose located on a level of a retail shopping centre or in a building that is part of a retail shopping centre where, on the date the lease is entered into, 25% or less of the total lettable area of the level or building is used for retail business purposes.
Disclosure obligations are amended to:
1. allow for waiver of disclosure periods by any Tenants and Assignees (not limited to Major Lessees), and simplifying waiver for Major Lessees. This will avoid the need for the parties having to wait 7 days before the lease can be entered into;
2. require a Tenant to give a disclosure statement to the Landlord at least 7 days before it enters into a lease;
3. require Landlords to provide an updated disclosure to enable Tenants to give a disclosure statement on the grant of a sublease or franchise/licence. The Landlord must respond within 28 days The Tenant must pay the Landlord’s reasonable costs to prepare the updated disclosure statement;
4. require the Landlord to give a current Tenant a current disclosure statement within 7 days after the day on which the Landlord receives the Tenant’s notice exercising an option to renew. The Tenant may withdraw from the option within 14 days of receipt of the disclosure for any reason. Failure to provide the current disclosure statement will also give the Tenant a termination right in the first 6 months of the option; and
5. (where a lease is being assigned in connection with the sale of a retail business) require the Assignor to give the Assignee a disclosure statement and a copy of the current lease at least 7 days before the earlier of the day that the Assignee enters into the business sale contract and the day that the Llandlord is asked to consent to the assignment. The Assignor must give a copy of its disclosure statement to the Landlord on the day that the Landlord is asked to consent to the assignment.
A Tenant whose rent under the lease is calculated wholly or partly as a percentage of their business turnover is no longer required to give the Landlord turnover certificates and audited turnover statements (although the Lease may still require this).
Current market rent review process
1. If a Tenant exercises its right under the Act to have an early determination of the market rent before exercising an option to renew, the Tenant is required to exercise an option to renew no later than 21 days after the Tenant receives written notice of the determined market rent, even if that date extends beyond the expiry date of the retail shop lease.
2. Timeframes will apply for submissions made to specialist retail valuer in the process of determining a market rent.
Key changes relating to Landlord’s outgoings are:
1. certain common areas are excluded when calculating the apportionment for outgoings as between individual tenants of the shopping centre or building;
2. the Landlord’s annual estimate of outgoings (to be apportioned to the Tenant) must include a breakdown of the estimated fees to be paid by the Tenant towards the administration costs of running the centre and any other fees to be paid to a centre management entity;
3. the Landlord’s audited annual statement of outgoings (apportioned to the Tenant) must include the total management fees paid by the Tenant, broken down into administration costs and payments to centre management;
4. a Tenant may withhold payment of the Landlord’s outgoings until the outgoings estimate or audited annual statement is given to them by the Landlord.
Promotion and advertising amounts
The Landlord must:
1. before the start of each accounting period, make a marketing plan detailing the proposed promotion spend for the period available to Tenants;
2. carry forward unspent promotion amounts to be applied towards future centre promotion; and
3. make an audited annual statement of the landlord’s expenditure for promotion amounts available to Tenants within three months after the end of the accounting period.
Implied compensation provisions
Key changes to the compensation provisions are:
1. delays by the Tenant in informing the Landord of loss or damage will be taken into account when determining the amount of compensation payable;
2. a Landlord is not liable to pay compensation to a Tenant for action taken as a reasonable response to an emergency, or in compliance with a statutory duty (i.e. closure of a shopping centre due to flooding); and
3. a lease may limit a claim for compensation for an anticipated disturbance that occurs within 1 year from the date the lease is entered into if, before the lease is entered into, the Landlord gives the Tenant a written notice detailing the disturbance.
Liability for costs associated with lease
The Act now includes the following new provisions about liability for lease costs:
1. the Landlord is responsible for paying the legal and other expenses of obtaining their mortgagee’s consent, and for the Landlord’s compliance with the Act; and
2. a prospective Tenant can be required to pay the Landlord’s reasonable and invoiced legal or other expenses of preparing a final lease where the Tenant has given the Landlord a written notice to prepare the final lease which the Tenant does not then sign.
Implied relocation and demolition provisions
1. clarify the relocation provisions in the Act. The relocation provisions are taken to be included in a retail shop lease that provides for the relocation of the Tenant’s business during the term of the lease; and
2. amend the timeframe within which a Tenant’s termination notice must be given to the Landlord under the demolition provisions.
Release of Assignor and Guarantor
When an assignment of a retail shop lease is entered into and the Assignor has complied with their disclosure obligation to the Assignee under the Act, the Assignor’s Guarantors (previously only the assignor) are released from any liability under the lease resulting from default by the Assignee.
Refurbishment and refitting
A retail shop lease requiring the Tenant to refurbish or refit the retail shop is void unless the lease gives general details of the nature, extent and timing of the requirement.
Previous amendments to the Act did not affect existing leases. However, this will not necessarily be the case for the amendments that take effect on 25 November 2016. The amendments generally apply to all existing leases although there are some that only apply to leases entered into after 25 November 2016. Accordingly, careful consideration must be given to whether or not the amendments apply to an existing lease.
Dan McManus | Special Counsel | +61 7 3238 0611 | email@example.com