Australia: A refurb for the Retail Leases Act in New South Wales

What you need to know

• From 1 July 2017, numerous amendments to the Retail Leases Act 1994 (NSW) will come into force.
• Key changes include a prohibition on landlords from recovering any outgoings that are not properly disclosed in the disclosure statement, removal of the mandatory minimum five-year term for retail leases, and mandatory registration of retail leases that have a term of more than three years (or that are required by the lease to be registered).
• Both landlords and tenants of retail premises in New South Wales should ensure they understand and prepare for the suite of changes.

It has been some 13 years since the Retail Leases Act 1994 (NSW) (RLA NSW) was amended. In that time there have been intermittent opportunities for public submissions to the Office of the NSW Small Business Commissioner, with changes to the legislation finally being debated in the NSW Parliament towards the end of last year. The result is that on 1 July 2017, changes to the RLA NSW will come into force, with an impact on both landlords and tenants of retail premises in New South Wales.

These changes are set to take effect less than a year after Queensland's equivalent legislation – the Retail Shop Leases Act 1994 (Qld) – received a facelift of its own. To read more about the amendments that came into force in Queensland in November 2016, you can visit our previous summary.

Here is what you need to know about the changes ahead for those involved in retail leasing in NSW.

Farewell to the five-year minimum term

One of the most significant changes is the removal of section 16 of the RLA NSW, which imposed a mandatory minimum five-year term for retail leases. With that whole section being abolished, there will no longer be any requirement for a tenant to obtain a solicitor's / licensed conveyancer's certificate if the lease term is less than five years.

Key changes affecting landlords and tenants

• Disclosure of outgoings: A tenant will not be liable to pay an amount in respect of any outgoing unless the liability to pay the amount was disclosed in the disclosure statement. Therefore in the disclosure statement a landlord needs to provide details of all outgoings that it intends to recover from the tenant during the term, otherwise the landlord will not be entitled to recover any outgoings which are not specifically set out (with an estimate).

• Further, if an estimate is provided in the disclosure statement and that estimate is less than the actual amount payable (and there was no reasonable basis for the estimate), the tenant's liability will be limited to the estimate. For example, if the disclosure statement indicates that the tenant is required to contribute an estimate of $2,000 for common area cleaning costs for that year and, at the end of the outgoings year, the landlord invoices the tenant for actual common area cleaning costs of $4,000 (and there was no reasonable basis for disclosing only $2,000 when the actual cost was $4,000), the amount recoverable from the tenant will be limited to $2,000.

• Mandatory lease registration: If a retail shop lease is for a period of more than three years, or if the parties to the lease have agreed that the lease is to be registered, the landlord must lodge the lease for registration at Land & Property Information within three months after the tenant executed lease has been returned to the landlord (or the landlord's solicitor or agent). This three-month period can be extended if there is a delay in obtaining mortgagee or head landlord consent, provided that the delay is not due to any failure of the landlord to make reasonable efforts to obtain consent.

• A landlord must also provide a tenant with a landlord executed copy of the lease within three months from when the landlord receives the tenant executed lease.

• Additional ground to withhold consent to an assignment: Where a retail shop lease has been awarded by public tender, a landlord will be entitled to withhold its consent to an assignment if the assignee fails to meet the criteria of the tender.
• Mortgagee consent fees: A landlord will not be entitled to recover from the tenant any expenses involved in obtaining mortgagee consent.
• Return of bank guarantee: A landlord must return a bank guarantee to the tenant within two months after the tenant has performed all its obligations under the lease.
• Turnover rent excludes most online transactions: Revenue from online transactions (with limited exceptions) will be excluded for the purposes of determining turnover rent. Additionally, a tenant will not be required to provide information to the landlord regarding online transactions (again, with limited exceptions).
• Right to compensation: If a tenant terminates a lease within the first six months due to the landlord's failure to issue a disclosure statement, or due to a defect in a disclosure statement that is issued, a tenant will be entitled to claim compensation for costs reasonably incurred, including fitout costs.
• Demolition: Section 35 of the RLA NSW confers certain protections on a tenant if the retail shop lease contains a provision allowing a landlord to terminate the lease on the grounds of proposed demolition of the building of which the premises forms part. Under the changes, the protection will extend to a proposed demolition of any part of the building (as opposed the building in its entirety). Further, as well as the landlord being required to have a genuine proposal to demolish (under the existing provisions), the landlord can then only terminate if the proposed demolition cannot be carried out practicably without vacant possession of the premises.
• Consent to assignment: When a tenant is seeking consent to assign its lease to an assignee, if the landlord fails to provide that tenant with an updated disclosure statement, the tenant is now required to prepare its own updated disclosure statement which it must complete to the best of its knowledge. Previously, if the landlord failed to provide copy of the disclosure statement within 14 days, the tenant was relieved from its obligations to provide an updated disclosure statement to the assignee.
• Security bonds: The Secretary (previously known as the Director-General) will have the power to establish an online retail bond service to facilitate the transition of the existing regime of lodging cash bonds with the Retail Tenancy Unit to an online platform.

Changes affecting the application of the RLA NSW

• Agreement for lease: The RLA NSW will apply to an agreement for lease in the same way that it applies to a lease. Accordingly, a landlord must ensure that it provides the tenant with a lessor's disclosure statement 7 days before the agreement for lease is entered into. Failure to do so gives the tenant a right to terminate within the first 6 months.
• Excluded premises: Premises used wholly for certain non-retail purposes will be excluded from the scope of the RLA NSW, including ATMs, vending machines, public telephones, children's rides, internet booths, private post boxes and certain storage uses.
• Market stalls: The RLA NSW will not apply to stalls in a market unless the market is a permanent retail market. The RLA NSW has also been amended to allow the regulations to modify the operation of the RLA NSW in relation to shops in a permanent retail market, including by providing for a mandatory code of conduct for landlords and tenants.

Changes affecting dispute resolution and penalties

• Monetary limits for tribunal: Currently, the NSW Civil and Administrative Tribunal (NCAT) can adjudicate a retail lease dispute in its Consumer and Commercial Division. NCAT previously had jurisdiction for claims up to $400,000, but this will be increased to $750,000. NCAT is granted some additional powers under the changes to the RLA NSW – for more information about those additional powers, contact our Disputes team.
• Penalty notice: There is a greater emphasis on the ability for an officer of the Department of Industry, Skills and Regional Development to issue a penalty notice to a person if it appears that the person has committed an offence under the RLA NSW.

Key takeaways

Both landlords and tenants of retail premises in New South Wales will be affected by numerous changes to the RLA NSW and should act now to ensure they are appropriately prepared, come 1 July.

While some of the changes will operate retrospectively, the majority of the significant amendments will not, and will only apply to leases entered into from 1 July 2017.

This article is intended to provide commentary and general information. It should not be relied upon as legal advice. Formal legal advice should be sought in particular transactions or on matters of interest arising from this article. Authors listed may not be admitted in all states and territories