Retail Leases Act - the provisions you need to know

No doubt many retail tenants and landlords have had cause to revisit the terms of their lease over the recent past, given the nightmare that has been created by the ongoing COVID-19 pandemic!

You can read our article(s) relating to the COVID-19 rent relief provisions here.

However, when reviewing lease terms, retail landlords and tenants must be aware of what the Retail Leases Act 1994 (NSW) (Act) says about a particular issue. 

Section 7 of the Act makes a clause of a lease void to the extent that the clause is inconsistent with the Act. That is, the Act will override what the lease says if there is an inconsistency between the two. This could also extend to any ‘side-deal’ into which the parties have entered.

We often see leases which contain clauses that are contrary to the Act and, when amendments are requested, the other party sometimes refuses to amend the lease so that it accords with the Act in ignorance of section 7.

Some particularly important sections of the Act of which retail landlords and tenants should be aware in these unusual COVID-19 times include:

• Legal costs – The landlord is not permitted to recover lease preparation costs (which includes mortgagee’s consent fees) from the tenant. The landlord is also prevented from recovering ‘key money’ from the tenant, which includes any money or benefit that is given to a landlord/agent in exchange for the granting, renewal, extension or assignment of a lease (for example, unspecified ‘administration fees’).

• Rent reviews –

  • Base rent cannot be reviewed more frequently than once every 12 months, unless reviewed by a specified amount or percentage (noting CPI and market reviews are not a specified amount or percentage).

  • The lease cannot provide for the rent to be reviewed using one of two methods, whichever produces the greater increase – one method of review must be specified for each review date.

  • The lease cannot contain a ratchet clause, being a clause which states the rent cannot decrease even if the method of rent review produces a lower amount of rent (such as a market review).

• Market rent reviews – If the lease contains an option to renew, and the rent is to be reviewed to current market rent, the tenant can request early determination of what the market rent will be prior to exercising the option and locking itself in to the further term (a luxury that is often not available to non-retail tenants).
  
  The tenant is entitled to request this determination of the current market rent at any time within the period that is 3 to 6 months before the last day on which the option may be exercised under the lease. We strongly suggest that all landlords and tenants carefully diarise these dates so that this important opportunity is not lost to the tenant, or conversely the landlord knows whether the obligation has arisen.
  
  If the tenant makes such a request, the period within which the tenant must exercise the option to renew is varied so that the last day on which the option may be exercised is 21 days after the determination of market rent is notified to the tenant in writing. If the determination of rent is not notified within 21 days before the lease expiry date, the term of the lease is extended by the appropriate period to enable the tenant to exercise the option after the expiry date of the lease.
  
  For any market rent review, the amount of the current market rent is to be determined in accordance with the criteria and process set out in section 31 of the Act (ie. by agreement or, failing agreement, as determined by a specialist retail valuer). The parties are to pay the costs of valuation in equal shares.

• Outgoings estimates – If the lease requires the payment of outgoings, ensure that the tenant receives estimates of those outgoings in the Lessor’s Disclosure Statement (before the lease is entered). If an estimate was not provided for a particular outgoing, or the numbers provided were underestimated or provided with no reasonable basis, the tenant’s liability to pay outgoings could be reduced to the estimated amounts.
  
  The tenant should also receive annual outgoings estimates and statements during the term, providing evidence of the outgoings incurred. If the landlord does not provide such estimates/statements on time, and the tenant requests them, the tenant can withhold payment of outgoings until it does receive such estimates/statements from the landlord. The tenant must pay any withheld contributions within 28 days after the landlord provides the estimate/statement, but the landlord is not entitled to charge interest on the late payment.
  
  There are similar provisions in the Act relating to contributions to advertising and promotions funds, including the requirement for the landlord to provide a marketing plan and statements and the ability to temporarily withhold payment until such documentation is provided.

• Outgoings – Outgoings may include recovery of land tax, but only on a single holding basis (ie. as if the landlord owned no other property). Outgoings cannot include recovery of any capital costs of the building in which the retail shop is located (which would include, for example, contributions to strata levies for the capital works fund or any special levies).

• Assignment – A landlord can only refuse to consent to an assignment of the lease if the incoming tenant proposes to change the use to which the shop is put, or if the incoming tenant has financial resources or retailing skills that are inferior to those of the existing tenant, or if the existing tenant fails to follow the procedure for assignment that is set out in section 41 of the Act. Therefore, the landlord cannot withhold consent merely because the existing tenant may be in breach of the lease (for example, if a tenant is unable to meet its rent payments due to COVID-19 complications).

• Section 44 notice – At least 6 to 12 months before the lease expiry date (where there is no option to renew) the landlord must give the tenant written notice of its intentions by either:

  • offering the tenant a renewal/extension of the lease on terms that are specified in the notice (including rent), and such offer must remain open for 1 month after it is made; or

  • informing the tenant that the landlord does not propose to renew/extend the lease.
    
    If the landlord fails to give such notice to the tenant, the term of the lease is extended until the end of 6 months after the landlord gives the required notice, but only if the tenant requests that extension by giving written notice to the landlord before the lease expiry date. The tenant may terminate any such 6-month extension of the lease by giving the landlord 1 month’s notice. This gives the tenant an opportunity to consider its options (perhaps including testing the market or securing alternative premises) before being required to vacate its premises. Again, we strongly suggest that landlords and tenants carefully diarise these dates.

• Section 8 – This section provides that a lease is ‘entered into’ upon the earlier of:

  • the tenant taking possession of or beginning to pay rent under the lease (whichever happens first); or

  • as soon as both parties have executed the lease.

This means that a lease may have been ‘entered into’ even before both parties have signed the lease document. This includes a situation where, for example, there is an existing tenant, the parties begin to negotiate a renewal of the lease, a new higher/lower rent is agreed but no lease document has been signed, and the tenant starts to pay that higher/lower rent in accordance with the discussions that have taken place – leaving it open to either party to argue that a new lease has been entered into, provided there is sufficient certainty and acceptance of the essential terms. Even though the old section 16 (which mandated a minimum 5 year term in the absence of a section 16 certificate) has been removed from the Act, both parties should be aware of section 8 and the impact it can have on a tenancy. For example, if the landlord has not provided a disclosure statement to the tenant at all or within the required time, the tenant could argue it has an entitlement to termination and compensation under section 11.

If you have any questions regarding this article, please contact Andrew Grima or Melissa Potter.

Author: Kristie Carlile

Contributing partner: Craig Munter