Proposed Amendments to the Retail Leases Act 1994 - reduced expenses for lessees

The Retail Leases Amendment Bill 2004 was introduced into the Legislative Council in June 2004.

The Bill has not yet been passed. If passed however, the amendments proposed in the Bill will have important implications for the financial relationships between lessors and lessees of retail shop leases. The proposed amendments also seek to remove an avenue whereby lessees are provided with regular particulars of their financial obligations.

In summary, the Bill proposes to amend the Retail Leases Act 1994 to:

• prohibit (with certain exceptions) lessors under retail shop leases from recovering lease preparation expenses from lessees, and
• remove the current requirement for lessors to provide six monthly statements of actual expenditure on outgoings to which lessees contribute.

Lease Preparation Expenses

The generally accepted practice in retail lease matters is that the lessee agrees to pay the lessor's reasonable costs and disbursements of preparation of the lease. This practice is reflected in section 13 of the Act which makes provision for the payment by the lessee of legal or other expenses in connection with the preparation of a retail shop lease.

The proposed amendments omit section 13 and change sections 14 and 45 of the Act. Those latter sections presently make it an offence for a lessor or anyone on behalf of a lessor to seek or accept key money for the grant, renewal or extension of a retail lease. They also provide that any such provision in a retail shop lease is void to the extent that it requires the payment of key money.

Once amended, sections 14 and 45 will also make it an offence for a person, as lessor or on behalf of a lessor, to seek or accept the payment of lease preparation expenses in connection with the granting, renewal or extension of a retail shop lease. They will make any such provision in a retail lease void to the extent that it requires a lessee to pay lease preparation expenses.

Lease preparation expenses are to be defined in an amended section 3 of the Act as legal or other expenses incurred in connection with the preparation or entering into of a retail shop lease, except for registration fees under the Real Property Act 1900.

Lease preparation expenses include:

• solicitor's costs,
• stamp duty,
• land title searches,
• Bankruptcy searches,
• ASIC searches and
• mortgagee's consent fees.

The effect of the proposed amendments to sections 14 and 45 will be that a lessor of a retail shop can only recover from the lessee Real Property Act registration fees (currently $75.00) and no other expenses. The lessor will accordingly have to bear all other lease preparation costs and disbursements, and as the proposed amendment presently stands, stamp duty also.

A concession of sorts is made to lessors in proposed section 14(5). That subsection provides that the amendment to section14 will not preclude the lessor's right to recover a reasonable sum for lease preparation expenses incurred in connection with making changes to the proposed lease requested by the lessee. Those changes, however, do not include rectification of errors or omissions and do not include changes requested before the lessor is given a lessee's disclosure statement under section 11A of the Act.

It is often the case that the lessee's disclosure statement is not given to the lessor within the time limits imposed by s11A (within 7 days of receiving the lessor's disclosure statement) and more often than not the lessor will not receive it until after lease documents and their covenants have been negotiated and necessary amendments made. In such a case a lessor would be precluded from recovering the cost of negotiating amendments to the lease. In order to minimise its exposure for additional lease costs arising from amendments requested by a lessee, a lessor may well be advised to require that the lessee provide its disclosure statement prior to the submission of lease documents.

Lessor's Six Monthly Statements

Sections 27(c) and (d) of the Act currently impose a requirement for a lessor to make available to the lessee a six monthly written expenditure statement on account of outgoings to which the lessee contributes. The Retail Leases Amendment Bill will omit those sections.

The amendments to sections 13, 14 and 45 are not retrospective and do not apply to the grant, renewal or extension of a retail shop lease that took place before the amendment.

Current Status of Legislation

At the time of writing, debate on the Bill has been adjourned and is likely to re-commence in the Legislative Council when Parliament resumes on 31 August.

To monitor progress of the Bill, go to the website of the NSW Parliament

www.parliament.nsw.gov.au (click on link to Hansard and Papers then link to Legislative Council Hansard and Papers).