Retail landlords beware: proposed changes to retail leasing law

In an earlier edition of the Kells Report this year, Jean-Paul Fraticelli reported on recent changes to retail leasing law which came into effect on January 1, 2011.

Since then, further amendments to retail leasing law have been proposed by the current NSW government which, if enacted, will implement more onerous obligations on landlords leasing retail premises.

Calls for submissions to the government on the draft laws recently closed on February 11, 2011. Government literature suggests that the proposed legislation is positive in effect in that it will generate more transparency and simplicity in the realm of retail leasing.

However, criticisms towards the draft laws have not been insubstantial, with critics concerned at the onerous obligations the proposed changes would generate for both landlords and tenants of retail shop premises. Other criticisms voiced against the laws have asserted that the changes are unwarranted due to the adequacy of existing retail leasing law.

What is a retail lease?

By definition, a retail lease is a lease of premises to be used by the tenant as a “retail shop”.

The Retail Leases Act 1994 (Act) provides an exhaustive list of classes of retail shops which fall under the umbrella of the Act. It is essential that this list is consulted when determining whether the Act applies to a given lease. Interestingly, under NSW law, businesses such as hairdressing salons, restaurants and travel agencies fall with the ambit of the Act’s definition of a “retail shop” whereas tattoo parlours, tyre shops and lawnmower sales and repair shops are either omitted or explicitly excluded from the definition.

Generally speaking, a lease will be considered a retail lease under the Act where the subject premises are to be wholly or predominantly used to operate a retail shop as defined in the Act or where the premises are located within a retail shopping centre.

What are the proposed key changes?

The Retail Leases Amendment Bill 2011 (Bill) proposes a number of changes to the existing laws regulating retail leases, some of which are summarised below.

1. Stricter disclosure obligations

In addition to the new disclosure requirements of landlords which were summarised in Jean-Paul’s earlier article, the proposed laws, if implemented, will:

• require landlords of retails leases to provide tenants with 6 months’ notice of any alteration or refurbishment that would adversely impact the tenant’s business. This is in contrast to the 2 months’ notice required under the Act in its present form; and

• allow tenants to require a landlord to provide them with a lessor’s disclosure statement before exercising an option to renew a lease not less than 7 days before the last day for exercise of the option.

2. Relocation

The Bill also proposes to change the existing provisions in the Act relating to relocation of premises.

Under the Bill, if a landlord proposes to offer new premises to a tenant due to relocation, then the premises offered to the tenant must have a commercial value that is reasonably comparable to the existing premises. If the new premises do not meet this standard and a tenant chooses to terminate rather take the new retail lease, the proposed laws would require the landlord to pay the tenant’s depreciated fit out costs.

3. Non recoverable outgoings

The Bill proposes to prevent landlords from recovering from the tenant contributions to outgoings in respect of land tax.

The changes, if enacted, would also only allow landlords to recover from tenants those outgoings which are set out in the disclosure statement provided prior to the commencement of the lease. This places an onerous obligation on landlords to ensure that the disclosure statement is detailed, accurate and complete notwithstanding any clauses detailing outgoings contributions within the lease document itself.

4. Compulsory registration of leases

The proposed laws would also require that retail shop leases for aggregate terms of three years or more be registered. This in itself is not a major change but rather replicates the existing legal position which is encapsulated in the Conveyancing Act 1919.

What is more dramatic is the Bill’s proposal to set timeframes in which a landlord must register a lease with the Department of Lands.

This proposed change has attracted criticisms to the effect that the government should not be allowed to impose such a restrictive requirement on private commercial agreements. The proposed timeframes also do not contemplate any delays to registration which are beyond the control of the landlord, for example, a mortgagee’s requirements and procedures for consenting to the registration of a lease.

5. Refund of unused marketing contributions

Under the proposed changes, a tenant will be entitled to a refund of such proportion of its contributions made towards a landlord’s advertising and promotional costs which remain unspent at the end of the lease term.

The legislation would require landlords to refund the unused contributions within 4 months after the expiry of the retail lease.

Conclusion: shifting power from landlords to tenants

It is important to note that the Bill has only been presented by the government as a draft and would need to be scrutinised through parliamentary process before being implemented. The likelihood of the changes being made may also be affected by the result of the NSW state election on March 26, 2011. It is unknown at this stage whether the State Opposition will support the draft laws proposed by the current government if they succeed at the polls.

If the Bill does manifest into law, it will cause a further shift in the balance of power between landlords and tenants under retail leases. Most notably, the new expectations of landlords will be more onerous, limiting the costs they will be capable of recovering from tenants and increasing  disclosure obligations.

It will be interesting to observe the place these proposed laws will have in parliamentary debate in the upcoming weeks prior to the election.