Major changes to the NSW Retail Leases Act, which are now in effect, are set to impact retail businesses and landlords throughout the Hunter Valley region.
It has been 13 years since the last change to the NSW Retail Leases Act. Some changes may seem contentious, including new rules and penalties which could impact some retail tenants and landlords.
But there are also potential benefits for both parties.
Legal advice is recommended for retail landlords or tenants to ensure compliance with the new Act.
The main changes include:
1. Minimum five-year terms scrapped.
Retail leases are no longer required to have a five-year minimum term. Accordingly, the certificate required to reduce the minimum term under the previous section 16 of the Act is no longer needed (and the consequences of failing to obtain such a certificate have been removed).
2. A new definition of outgoings for landlords.
This potentially broadens what landlords can claim. For example, outgoings now specifically include fees for services provided by the landlord regarding the management, operation, or repair of the retail shop building or land.
3. New rules about passing on outgoings to tenants.
A new section to the Act, section 12A, provides more protection to tenants regarding outgoings, and requires landlords to be more prepared in how they recoup outgoings from tenants. Under the new rules, tenants are not liable to pay any outgoings to the landlord unless this liability is disclosed in the landlord’s disclosure statement for the lease.
Landlords need to be careful in the cost estimates for outgoings they provide to tenants. Under the new rules, if an outgoing’s estimated amount is less than the actual amount, then the tenant will only be liable to pay the estimate – even if the actual amount is much higher. Landlords may be able to contest if there was a reasonable basis for the estimate when it was first given.
The new section also includes a claw-back provision, which entitles a tenant to recover any amount paid to the landlord that the tenant was not liable to pay.
4. Agreements to lease now covered by Act.
Agreements for leases are now specifically covered by the Act. Landlords must now ensure the tenant is provided with a lessor’s disclosure statement at least seven days before the agreement for lease is entered. Failure to do so gives the tenant a right to terminate within the first six months.
5. Tenants now entitled to compensation when disclosure statements not in order.
A tenant will be entitled to compensation from the landlord where the tenant terminates the lease during the first six months and the landlord gives the tenant an incomplete, false or misleading lessor’s disclosure statement, or fails to give the tenant any statement at all (clause 11(2A)).
Landlords will also be responsible for paying compensation for costs reasonably incurred by the tenant when entering the lease, including compensation for expenditure on the retail shop’s fit out – this is a huge potential cost imposition on landlords who mismanage their disclosure statements.
Previously, tenants could terminate the lease but had no additional right to claim compensation.
6. New time frames and penalties for lease execution and registration.
Signed leases must now be returned to the tenant within three months of the date it is provided to the landlord’s lawyer – this gives landlords more breathing space as signed leases were previously returned after one month.
Any lease exceeding three years must be registered within three months after the executed lease is provided to the landlord by the tenant, unless there is a delay in obtaining head lessor or mortgagee consent or requirements under the Real Property Act 1900 (NSW) outside of the landlord’s reasonable control. Failure to register within three months is an offence with a maximum $5,500 penalty.
7. New rules around demolition.
Landlords can now terminate a lease where there is a proposal to demolish any part of the building. The term demolition has also been expanded to include repair, renovation and reconstruction, which is a significant change.
However, there is a potential catch for landlords. Landlords will only be entitled to terminate a lease for demolition purposes where that proposed demolition cannot be carried out without vacant possession of the retail shop. (See amendments to section 35.)
8. Mortgagee consent fees.
Landlords are no longer entitled to recover mortgagee consent expenses from a tenant.
9. Turnover rent and online sales.
In some cases, revenue from online transactions may be excluded from turnover rent calculations, and landlords will not be able to require a tenant to provide information regarding the tenant’s turnover from online transactions.
Based on the changes, the key action points for retail tenants and landlords:
• Review your lease templates and disclosure statement templates;
• Use the new Retail Tenant’s Guide 2017;
• Review any leasing manuals and procedures to ensure compliance; and
• Implement practices for appropriate management of bank guarantees and return of bank guarantees by the required date to avoid paying compensation for late release
Katrina Reye is a partner in Hall & Wilcox’s Newcastle office, practising in property law and commercial transactions law Katrina is often working on leading property and infrastructure projects in the Hunter region, alongwith other parts of Australia and NZ.