The Retail Leases Amendment Bill 2019: What do the proposed changes mean for landlords and tenants of retail premises?
By Angela Kordos
14 January 2020
The Retail Leases Amendment Bill 2019 (the “Bill”) was recently tabled before Parliament. The Bill is expected to receive Royal Assent in late 2019/early 2020, and applies only to retail premises leases.
The Retail Leases Act 2003 (the “Act”) as presently drafted is intended to provide certainty and fairness in retail leasing. According to the Victorian Commissioner for Small Business, the Retail Leases Amendment Bill if enacted will introduce a higher level of transparency in requiring retail landlords to provide more upfront and timely information.
The Bill is not a complete review of the Act, however it does propose changes to the obligations of retail landlords and tenants in respect of:
- Essential Safety Measures;
- the timing for provision of a Disclosure Statement and draft lease;
- the information a landlord is required to give to a tenant on renewal of lease;
- changes to requirements regarding the return of security deposits;
- early rent reviews; and
- the introduction of a cooling-off period when renewing a lease.
Essential Safety Measures (ESM)
ESM include smoke detectors, sprinklers, fire extinguishers and exit signs, and annual safety inspections.
Presently, the status quo on ESM is recorded in VCAT’s 1 May 2015 advisory opinion which essentially states that:
- a retail landlord must pay the costs of compliance with ESM and cannot pass these onto a tenant;
- a retail landlord may, at the landlord’s own expenses, agree with a tenant to meet the requirement for some ESM obligations;
- a retail landlord cannot claim as recoverable outgoings the costs of compliance with certain repair and maintenance obligations under the Act.
If the Bill is enacted, a retail landlord will be able to recover ESM costs from a tenant if the tenant has in the lease agreed to bear those expenses. Recoverable ESM expenses will include the cost or part of the cost of repairs or maintenance work in respect of ESM, or an installation relating to fit-out of the retail premises for which the tenant has agreed to pay.
The Bill will not operate to affect a landlord’s paramount obligations under the Building Act 1993 or any regulations made under that Act.
The Bill is silent on situations where a tenant has caused damage to an ESM item. It remains to be seen whether the 2015 advisory opinion will continue to permit landlords in some circumstances to seek compensation.
The provisions relating to ESM will apply even for existing leases.
In moving forward, landlords should ensure their leases are negotiated to specifically include expenses in relation to ESM as recoverable items.
Provision of a Disclosure Statement and draft form of lease
The present position under the Act is that a Disclosure Statement must be given to a tenant at least seven (7) days before entering into a retail premises lease. The Bill amends this requirement to fourteen (14) days.
If changes are made to the proposed retail lease, a landlord will be obligated to notify the tenant of those changes. There are penalties for non-compliance, including the payment of significant fines. If the landlord fails to comply, the lease term is deemed to start 14 days after the documents are given.
This amendment, although placing a higher onus of disclosure on landlords, will see tenants receiving more prompt and detailed information when entering into a retail premises lease.
It is presently the case that if a tenant performs all of its obligations under a retail premises lease, the landlord must return the security deposit “as soon as reasonably practicable after the lease ends”.
The Bill if enacted will require landlords of retail premises to return the security deposit within thirty (30) days of the lease ending.
It remains to be seen whether the amendment will be interpreted by the Courts and Tribunal as applying only to cash security deposits or if it will be deemed to extend to security deposits by way of bank guarantee or other form of deposit, bond, or third party guarantee.
In any event, the deadline if introduced could have substantial implications for landlords. This is particularly so where the parties are in dispute and or where the tenant has failed to satisfactorily carry out its make good repair and reinstatement obligations.
In any event landlords should review their lease provisions regarding security deposits to ensure they make a prompt assessment prior to lease expiry as to whether the tenant has or will comply with its lease obligations, and whether any dispute or issue is anticipated.
Disclosure on renewal of lease
At current, where a retail premises lease is renewed a landlord must provide a Disclosure Statement however the form of disclosure is relatively brief.
The Bill amends the Act to require that the Disclosure Statement sets out any changes to the previous disclosure statement given to the tenant in respect of the lease. It is anticipated that this will result in a more detailed and meaningful disclosure than what is presently required.
Presently, where a retail tenant has an option to renew the lease for a further term, the landlord must notify the tenant in writing of the date after which the option is no longer exercisable, at least 6 months and no more than 12 months before that date but is not required to do so if the tenant exercises the option or purports to do so before being notified by the landlord.
The Bill expands the landlord’s obligations, and if enacted it will require that where a retail tenant has an option to renew the lease for a further term, the landlord must at least three (3) months before the last date that the option can be exercised, give the tenant a written notice setting out all of the following:
- the date by which the option to renew may be exercised;
- the rent payable for the first 12 months of the renewed term;
- the availability of an early rent review;
- the availability of a cooling off period;
- any changes to the most recent disclosure statement provided to the tenant, other than any changes in relation to rent.
If the Bill is enacted and the landlord fails to comply with the above, the retail premises lease is taken to provide that the date after which the option is no longer exercisable is instead 3 months (rather than the current requirement of 6 months) after the landlord notifies the tenant.
Early rent review
The Bill proposes to amend the Act in respect of market reviews of rent and certain associated timeframes and determination processes.
In particular, where a retail lease provides for a rent review to be made on the basis of the current market rent of the premises, if enacted the Bill will allow a retail tenant to request an early rent review.
The tenant may do so within twenty eight (28) days after the landlord gives the tenant all of the information required to be given before the option to renew the lease expires, as set out above.
Once the current market rent has been determined, the tenant must be notified and failure to do so will have the effect of extending the last day on which the tenant can exercise its option to renew the lease to a date that is 14 days after the date on which the tenant was notified.
Where an early rent review results in a rent determination that is less than the rent payable under the lease during the extended term, the Bill provides certainty in that the rent payable during the extended term is to be equal to the rent determination.
It remains to be seen whether the sections of the Bill regarding early rent reviews and the cooling off period will apply to leases already on foot.
The Bill introduces a 14-day cooling-off period where a retail tenant exercises its option to renew.
During the cooling-off period, the tenant may notify the landlord that it does not wish to exercise its option to renew provided that the tenant has not requested an early market review of rent.
If the tenant exercises its cooling-off rights the option to renew lapses and the lease term is extended by a period of fourteen (14) days.
This amendment offers retail tenants a new safeguard when renewing leases. This is good news for tenants, and it would be prudent for tenants to diarise and carefully monitor the cooling-off period in consultation with their solicitors, to ensure that, where required, cooling-off rights are validly exercised.
A Ministerial determination was issued 30 October 2019 pursuant to which the Victorian Small Business Commissioner confirmed that certain leases are non-retail.
Pursuant to section 5(1)(e) of the Act, the Commissioner determined that premises used wholly or predominantly for the following purposes are not retail premises leases for the purposes of the Act:
a) agricultural, pastoral, horticultural or apicultural activities;
b) poultry farming, dairy farming, aquaculture, tree-farming or any business that consists of the cultivation of soils, the gathering of crops or rearing of livestock;
c) grazing, including agistment;
d) any other activities prescribed as a farming operation for the purpose of the Farm Debt Mediation Act 2011.
If you are a landlord or tenant and would like more information or advice on the proposed changes to the Act, if you require advice in respect of the recent Ministerial determination, or if you otherwise have any questions in relation to leasing, please contact Angela Kordos or Phillip Leaman.
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