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Funds Management - Real Estate & Superannuation

Client Update: Leasing – April 2008

NSW Government calls for submissions on the Retail Leases Act 1994

In brief: A New South Wales Government discussion paper foreshadows wide-ranging amendments to the Retail Leases Act 1994. If the proposals identified in the discussion paper are adopted, there will be a significant impact on how landlords lease, operate and manage their assets, and potentially on the value of those assets. Partner Grant Higgins (view CV) and Lawyer Mark Ryan look at what will change.

Issues and solutions

The discussion paper identifies more than 30 issues and possible solutions to matters that have been raised by industry stakeholders about their experiences with the retail leasing market and the Retail Leases Act 1994 (NSW) (the Act). These issues include the efficiency of the current provisions of the Act and new matters that are not currently regulated by the Act but require clarification following recent judgments of the Administrative Appeals Tribunal.

Clearly, the introduction of some, or all, of these proposals would not only represent a dramatic shift in the balance between the rights of landlords and tenants, but could also impact significantly on the value of retail properties.

The major proposals put up for consideration in the paper include:

  • appointing a Retail Advocate to investigate and prosecute retail leasing breaches and to report on the efficacy of the Act;
  • introducing mandatory education for retail tenants prior to the tenant entering into a retail lease;
  • regulating access to, and charging arrangements for, parking facilities within a shopping centre;
  • extending the time period for bringing a claim for compensation for pre-lease misrepresentations to three years from the time the pre-lease misrepresentation becomes known;
  • broadening the range of remedies available to a tenant who has not been provided with a landlord's disclosure statement or has been provided with an incomplete disclosure statement (currently the only remedy under the Act is termination within six months of entering the lease);
  • requiring the landlord to provide to the tenant a disclosure statement prior to entering an agreement to lease (ie letter of offer);
  • requiring all leases of three years or more to be registered in order to protect the tenant's leasehold interest and to ensure that all financial details of the lease and the size of the leased premises are available on public record;
  • extending the time period for the lease's registration by the landlord from one month to three months;
  • introducing a penalty (eg this can include the tenant withholding rent payments) against landlords who fail to register the lease within the specified time period without a legitimate reason for doing so;
  • introducing a penalty against landlords who fail to provide the tenant with a copy of the lease once the lease has commenced;
  • requiring a minimum lease term of five years following completion of major fitout works (presumably, refurbishment works) by the tenant;
  • extending the time period for notice to all tenants (including those holding over) before the landlord can commence any alteration, refurbishment, relocation or demolition of the building or centre from a minimum of three months' notice to at least six months' notice;
  • prohibiting the use of an advertising and promotion fund for the benefit of one particular tenant (as opposed to all tenants in the building or centre);
  • introducing an ability for the tenant to renegotiate rental where competition is introduced to the shopping centre, or the tenancy mix of the shopping centre is changed in a manner that affects the profitability of the tenant's business;
  • introducing measures to ensure that tenants in strata developments can address disturbance issues arising from the actions of the strata managers;
  • prohibiting landlords from seeking personal guarantees from tenants;
  • allowing the tenant to terminate a lease within the first two years of that lease if the landlord is given six months' notice;
  • requiring the landlord and tenant to agree to or commence dispute proceedings before the landlord can draw down on a bank guarantee (in the same manner as the Act currently provides for drawing on a cash deposit);
  • prohibiting the landlord from recouping land tax from tenants;
  • requiring landlords to disclose effective rents paid by tenants, to redress the information and power imbalance during lease renewal negotiations;
  • allowing a tenant to seek compensation from a landlord who has engaged in 'bad faith' negotiations;
  • allowing a tenant to pay reduced rent during a holding-over period until either a new lease is negotiated or the tenancy is terminated;
  • preventing a landlord from unfairly terminating a lease under section 36(1)(c) of the Act  to avoid repair obligations;
  • allowing tenants to deduct capital repair costs from the rent where the landlord refuses to undertake capital repairs;
  • extending the remedies available for unconscionable and unfair conduct;
  • regulating the retail adviser industry by introducing either a code of practice or licensing requirements;
  • allowing submissions to be made in a retail lease dispute regarding a party's conduct in mediation and the dispute;
  • clarifying the definition of capital costs, management fees, premises and outgoings as well as introducing a definition of what is 'reasonable' in the context of the recovery of outgoings;
  • extending the list of the businesses covered by the Act by either modifying the definition of a retail shop or refining or extending the regulated businesses set out in the Act's regulations;
  • clarifying the procedures for the appointment of a retail valuer, the timing associated with the provision of market valuations, the industry experience required by the retail valuer and whether there should be a mediation process that can utilised by the parties to determine the market rent;
  • increasing the monetary limit of $400,000 for claims heard by the Administrative Appeals Tribunal;
  • allowing the tenant to waive the five-year minimum lease requirement under the Act; and
  • clarifying that the prohibition on ratchet clauses applies to a rent review on the commencement of an option term.

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The timing of the discussion paper

The timing of the release of the discussion paper is somewhat intriguing. This paper has been released just two weeks after the Productivity Commission submitted its final report on the retail industry to the Federal Government. While the final report is not yet public, it is understood from an earlier draft report that the Productivity Commission has concluded that the retail tenancy market is overregulated and recommends that the current retail lease legislation needs to be relaxed so efficiencies in the market are encouraged. 

In its discussion paper, however, the New South Wales Government dismisses this recommendation and states that the 'legislation [is] necessary to provide a clear framework for the conduct of partes to retail leasing matters and in limiting the number of disputes that arise'. 

The New South Wales Government has invited stakeholders to make submissions responding to the discussion paper and will consider these stakeholder submissions before it pursues further amendments to the Act.

If you are interested in making a submission, submissions must be received by the Retail Tenancy Unit (NSW) by 26 May 2008. The discussion paper is available in full from the Department of State and Regional Development website.

If you wish to discuss any of these issues with or are concerned about the ramifications these proposals may have on your business, please feel free to contact us.

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