Unfair contract terms in the property space

A version of this article was published in the Hire and Rental Industry Magazine - The unfair contract terms regime and what it means for your leases or licences', May 2024, page 22

The unfair contract terms regime first came into operation back in 2010. The latest iteration of the regime came into effect on 9 November 2023 and has wider application than one would expect.

What types of contracts are covered by the unfair contract terms regime?

The unfair contracts regime applies to unfair terms in contracts that are:

1. consumer contracts, namely contracts for the supply of goods or services or the sale or granting of interests in land involving an individual for personal, domestic, or household use or consumption

2. small business contracts, namely contracts for the supply of goods or services or the sale or granting of interests in land involving a party that:

(a) employs less than 100 people; or

(b) has an annual turnover for the last income year of less than $10 million,

and which involve a standard form contract.

Given precedents are commonly deployed in the property space, we would expect the regime to apply to a significant number of property-related contracts, such as:

• land sales contracts, including those for off-the-plan developments

• residential tenancy or accommodation agreements, including those that may be subject to industry-specific legislation such as specialist disability accommodation and retirement village accommodation

• retail and commercial property leases or licences

• property easements and covenants

especially where there is a disparity of bargaining power and limited ability to negotiate or change the terms of the contract.

When is term considered unfair?

A term is generally considered unfair if the term:

• causes a significant imbalance in parties' rights and obligations

• is not reasonably necessary to protect the legitimate interests of the benefiting party

• is detrimental (financial or otherwise) to the other party.

Whilst each term does need to be assessed on a case-by-case basis and in the context of the relevant contract as a whole, terms that could potentially be considered unfair include for example only:

• in land sale contracts:

  • clauses that allow a vendor to unilaterally make changes (for example, to plans and materials), especially where those changes are material and the implications are not apparent

  • termination clauses that allow a vendor (but not the purchaser) to terminate the contract for any reason, such as the project not being viable or insufficient presales being reached

  • clauses that penalise one party (but not the other) for a breach or termination of the contract; clauses that extend due dates or conditions at the discretion of the vendor.

• in commercial leases or licences:

  • ratchet clauses (that is, clauses that prevent rent from going down after a review), especially given their prohibition already in retail leasing legislation in multiple states and territories

  • automatic renewal clauses

  • termination for convenience clauses which give the landlord only the right to terminate the lease for any reason at any time

  • clauses which allow a landlord to terminate the lease for breach by a tenant, without giving the tenant reasonable time to remedy such breach (for example, assignment without consent, failure to comply with a specific obligation)

  • clauses which allow a landlord to carry out obligations of a tenant under a lease (for example repair or maintenance) and to recover costs from the tenant to do so without limiting such costs to reasonable costs

  • unlimited indemnity clauses which require a tenant to indemnify the landlord for broad or unclear indemnities, losses outside a tenant’s reasonable control or losses caused or contributed to by the landlord’s negligence or breach

  • clauses which allow landlords to take possession of and deal with a tenant’s property without prior notice to the tenant, for example, where a tenant has failed to remove their property at the end of the lease.

Note that some of the above provisions are already prohibited under the Retail Leases Act 1994 (NSW) and retail leases to which the Act applies may already have these protections.

What can happen if I get it wrong?

In addition to being void or unenforceable, the courts do have the power now to:

1. make declarations that a term is unfair

2. make orders for redress for loss or damage

3. order an injunction

4. issue penalties:

(a) against individuals of up to $2.5 million; and

(b) against companies of up to the greater of:

(i) $50 million;

(ii) three times the value of the benefit obtained by the corporations directly or indirectly, if able to be determined (the Benefit Multiple Amount); and

(iii) 30% if the corporation’s turnover during the offence period if the value of Benefit Multiple Amount cannot be determined.

As a contract may contain multiple unfair terms, multiple penalties could be applied in relation to the same contract.

What should I be doing?

While there are certain carve outs and exceptions that can apply under the unfair contracts regime, property owners that are small businesses or deal with individuals or small businesses generally should work on the assumption that the regime applies to them and their contracts, leases and other agreements.

This means that property owners (including vendors and landlords) should be taking steps, if they haven’t already, to ensure that their contracts don’t contain unfair terms moving forward. This would involve, amongst other things:

• commissioning a thorough review of all precedents and considering, on a clause-by-clause basis, whether a term could be considered unfair and modifying them as appropriate

• providing the other party an opportunity to negotiate the contract, rather than providing the contract on a ‘take it or leave it’ basis and keeping records of pre-contract negotiation

• acting reasonably in contract negotiations

• where a lease or other agreement is due for renewal, consider moving existing tenants onto new leases or agreements (that don’t contain any unfair terms), rather than simply renewing those leases or agreements.

Authors: Eric Kwan and Stella Sun

Contributing Partners: Rebecca Hegarty and Andrew Grima