Creating a balance – updated rights for retail lessees

The Retail Leases Amendment (Review) Act 2017 No 2 (Amending Act) came into force on 1 July 2017 and made a number of important amendments to the Retail Leases Act 1994 (the Act).

These amendments will have a significant impact upon the rights and obligations of both retail lessors and retail lessees.  This is the first of two articles that will look at the benefits of the changes to the law for both retail lessees and retail lessors.  This article looks at the benefits for retail lessees.  These are relevant to retail lessors also as, generally, changes in the law that are beneficial to retail lessees create a greater administrative burden for retail lessors.

Changes to Disclosure Statements – Sections 11 and 12A of the Act

Pursuant to section 11 of the Act, a retail lessor must provide a retail lessee with a form of ‘disclosure statement’ (DS) at least 7 days before a retail lease is entered into, which sets out some key information in relation to the retail shop and the lease.  The Amending Act has introduced the following new provisions into the Act regarding disclosure statements:

1. section 11(2) of the Act provides that if a DS is not provided, or if a DS is incomplete or materially false or misleading, a retail lessee can terminate the lease within the first 6 months of the lease. The Amending Act introduces the new section 11(2A) to the Act, that allows the retail lessee to recover from the lessor their reasonable costs in connection with entering into the lease and fitting out the premises when the lease is terminated by the retail lessee in accordance with section 11(2);
2. previously, although the lessor was required to itemise the outgoings payable for the property in the DS, it was unclear what the consequences were for the lessor and lessee if the lessor attempted to recover an outgoing that was not itemised. The new section 12A(1) of the Act clarifies this position by stating that if an outgoing is not itemised in the DS, then a retail lessor cannot recover that outgoing from the retail lessee, even if the outgoing is listed in the actual lease document.  This does not apply to taxes, rates and levies imposed by law that are introduced after the DS is given; and
3. if the DS includes an estimate of the amount of an outgoing and the actual amount of the outgoing is higher, the retail lessee is not required to pay more than that estimate if there was no reasonable basis for the estimate at the time the estimate was made (section 12A(2) of the Act). This will place a greater burden on retail lessors, who will need to ensure that all outgoings are carefully considered at the disclosure stage so that they do not run the risk of being unable to recover an outgoing from the retail lessee down the track.

Bank Guarantees – Section 16BA of the Act

Although the Act deals extensively with security bonds, the Act did not previously address how a retail lessor must deal with bank guarantees, except to state in section 16B that a lessor could not unreasonably refuse to accept a bank guarantee as an alternative form of security.  This could result in problems for retail lessees who were attempting to enter into a new retail lease but could not obtain a new bank guarantee to use as security because their previous lessor refused to return their previous bank guarantee (on the grounds of a term in the lease or otherwise).

Section 16BA of the Act is a new section that places a strict timeframe on a retail lessor to return a bank guarantee to a retail lessee.  The bank guarantee must be returned to the retail lessee within 2 months after the retail lessee has completed all of their obligations under the lease.  If the bank guarantee is not returned in time, the retail lessor must compensate the lessee for any loss or damage suffered as a result, such as the cost of cancellation fees charged by the bank.

Online Transactions – Section 47 of the Act

With the new changes, if a retail lessee offers goods or services for sale online, a retail lessor cannot require the retail lessee to disclose details of those online transactions.  The lessor can only require that this information be disclosed if the goods or services that are the subject of an online transaction will be delivered from or at the retail shop, or if the purchaser will collect the goods or services from the retail shop.

Demolition – Section 35 of the Act

Section 35 of the Act implies terms into every retail lease which prevent a retail lessor from terminating the lease on the ground that they plan to demolish the building containing the retail shop unless specific circumstances are met.  Before the Amending Act came into force, a retail lessor could not terminate the lease where:

1. they did not give the lessee details of the proposed demolition which demonstrated a genuine proposal to demolish the retail shop within a reasonably practicable time after termination of the lease; and
2. the retail lessee was given less than 6 months’ notice of the proposed termination, or, if the lease was for 12 months or less, less than 3 months’ notice.

In addition, pursuant to section 35(1)(c) of the Act, a retail lessee could elect to terminate the lease at any time on 7 days’ notice once they received notice of termination from a retail lessor.

The Amending Act retains all of these provisions of section 35, but extends them by making the following amendments:

1. section 35(1) now clearly extends the restrictions on the retail lessor to circumstances where only part of the building containing the retail shop is to be demolished, not just the whole building; and
2. the new section 35(1)(a1) states that a retail lessor cannot terminate the lease on the ground of proposed demolition unless the demolition cannot be practically carried out without the retail lessor having vacant possession of the retail shop.

Assignment – Sections 41 and 41A of the Act

The previous versions of sections 41 and 41A of the Act were not drafted as clearly as would have been preferred, and seemed to place a disproportionate amount of the burden upon the retail lessee when the retail lessee sought to assign a retail lease.  Although the requirements for the assignment of a retail lease have remained largely similar, the revised sections 41 and 41A provide a clearer procedure of individual steps for a retail lessee to assign the lease to a new retail lessee (the Assignee).  A retail lessee, as well as their covenantors and guarantors, will be relieved of further liability to the retail lessor once the steps in sections 41 and 41A have been completed.  In summary, the procedure to assign the lease to the Assignee whilst relieving the retail lessee of ongoing liability to the retail lessor is as follows:

1. the retail lessee makes a written request to the retail lessor to assign the lease;
2. the retail lessee provides to the retail lessor all information which the retail lessor reasonably requires to assess whether the Assignee has financial resources and retailing skills which are at least equal to those of the retail lessee;
3. the retail lessee must provide an updated DS and a form of assignor’s disclosure statement to the Assignee at least 7 days before the assignment. The assignor’s disclosure statement is prepared by the retail lessee.  The retail lessor must provide an updated DS to the retail lessee within 14 days of receiving a request for the updated DS from the retail lessee.  If the retail lessor does not provide an updated DS, then the retail lessee can complete a DS to the best of their knowledge using the current amount of outgoings rather than estimated outgoings and give this to the Assignee instead;
4. the retail lessee must provide the retail lessor with a copy of the assignor’s disclosure statement and a form of disclosure confirmation signed by the retail lessee and the Assignee at least 7 days before the assignment; and
5. the retail lessor must deal with the request expeditiously and decide within 28 days of receiving the retail lessee’s request whether or not it will consent to the assignment. If the retail lessor does not respond within 28 days, they are deemed to have consented to the assignment.

At Bryks Lawyers, we are experienced in drafting and negotiating commercial and retail leases for both lessors and lessees.  Contact us today to see how we can assist you!