The Retail Shop Leases Act (“the Act”) sets mandatory minimum standards for retail shop leases in Queensland and offers tenants more protection than standard commercial leases.
Refer to our recent article “How Do I Know if the Retail Shop Leases Act Applies to My Shop?” which discusses what leases the Act applies to.
The protections under the Act can’t be contracted out of in the lease (and if there is any inconsistency between the terms of the lease and the Act, the terms of the Act will prevail) and are designed to give the tenant detailed disclosure before it enters into a lease and provide it with additional protections in relation to a number of key leasing issues.
Below is a brief summary of a number of these protective provisions for the tenant.
The Act requires the landlord to provide the tenant with various disclosures in relation to different lease situations (unless the lease is a periodic tenancy or a tenancy at will) so that it can consider this additional information before it commits to the lease. A tenant should of course also obtain legal advice in relation to the terms of the lease before committing to it.
For example, the landlord must provide the tenant with:
- for a new retail shop lease – a draft of the lease and a disclosure statement at least 7 days before the tenant enters into the lease; and
- for any renewal of the lease due to the exercise of an option – a current disclosure statement within 7 days of it receiving the tenant’s notice exercising the option.
If the landlord does not provide this disclosure (or gives a defective disclosure statement), the tenant can terminate the lease within the first 6 months after entering into it (and the landlord has to pay the tenant reasonable compensation for any loss or damage it suffered because of the non-compliance).
The Act also allows the tenant to give the landlord written notice, within 14 days of it receiving the renewal disclosure referred to above, that the exercise of the option is withdrawn (even if the renewed lease period has commenced).
The Act also provides that any proposed assignee of a retail shop lease:
- must be provided with a copy of the current lease and a disclosure statement by the current tenant at least 7 days before the landlord is asked to consent to the assignment of the lease (or, if the assignment is associated with the purchase of the business operated from the premises, the date the assignee enters into the business purchase contract); and
- must be provided with a disclosure statement and copy of the lease by the landlord at least 7 days before the lease is assigned.
If either of the landlord or the assignor doesn’t provide this disclosure, the assignee can apply to the Tribunal for an order requiring that it be provided to you.
Special disclosure obligations also apply if the tenant is licencing the premises from a franchisor (who is the tenant under a retail shop lease).
We also note in passing that the Act also places an obligation on the tenant and assignee to provide certain disclosure and financial and legal advice reports to the landlord and assignor.
Although standard commercial leases allow the landlord and tenant to commercially negotiate what outgoings the tenant must pay, the Act places a number of restrictions on what outgoings are payable and obligations on the landlord in relation to its recovery of outgoings.
Under the Act:
- The landlord can only recover outgoings that are:
- its reasonable expenses directly attributable to the operation, maintenance and repair of the centre; and
- charges, levies, premiums, rates or taxes payable by the landlord because it owns the centre,
and it specifically provides that outgoings can’t include a number of items – including land tax.
(2) A tenant is not required to pay any outgoings unless the lease specifies the outgoings that are payable, how they will be determined and apportioned to the tenant and how they may be recovered from the tenant.
(3) The percentage of outgoings payable by the tenant can not be more than the proportion that their leased area bears to the total of all leased or occupied (or available for lease or occupancy) areas owned by the landlord in the centre.
(4) The Landlord must provide the tenant with an annual:
- estimate (in the approved form and meeting the obligations of the Act) of the outgoings and the proportion of them that the tenant will be liable for; and
- audited statement of outgoings prepared by a registered auditor (in the approved form and meeting the obligations of the Act) within 3 months of the end of each period.
If the landlord does not provide these, the tenant can withhold payments for apportionable outgoings until they are given.
- Restrictions on Tenant’s Obligations to Make Payments
The Act also restricts the other costs that can be passed on to the tenant – including legal fees (which are usually payable by the tenant in a standard commercial lease).
The Act specifically provides that a tenant under a retail shop lease is not liable to pay any amount for the landlord’s costs in:
- preparing, renewing or extending the lease;
- obtaining its mortgagee’s consent to the lease; or
- complying with the Act.
Further, a retail shop lease can not require the tenant to make any payments other than:
- rent (noting that up to one month’s rent in advance is allowable);
- outgoings (if specified in the lease);
- damages for any breach of lease (if specified in the lease);
- an indemnity to the landlord for any loss or damage it suffers as a result of any actions or omissions by the tenant;
- interest on arrears of rent and outgoings (so long as the rate and calculation method is detailed in the lease);
- the landlord’s reasonable legal or other expenses incurred in responding to any request by the tenant to vary the lease or for its consent for a sublease or licence;
- half of the costs of any valuer retained to determine market rent;
- the landlord’s costs in investigating any proposed assignee, obtaining its consent and the reasonable costs of the assignment;
- a repayable bond;
- mounts spent by the landlord for fitting out the leased premises;
- Payments to a sinking fund;
- Payments for promotion and advertising of the retail shopping centre; and
- surveyors and registration fees to register the lease.
The Act also prohibits the landlord from seeking or accepting payment of any key money or any amount for the goodwill of the tenant’s business operated on the premises (noting a penalty applies if it does).
Under relatively new amendments to the Act, the proposed landlord can now however recover its reasonable legal and other expenses incurred in preparing a lease if:
- the tenant agreed on the terms of the proposed lease with the landlord;
- the tenant have the landlord a written notice to prepare a final lease (and it is prepared);
- the tenant didn’t sign the lease; and
- the landlord provides the tenant with a copy of its invoice for the costs incurred in preparing the lease.
- Rent Reviews
Again, rent review is a commercial matter negotiated between the parties in a standard commercial lease and leases often provide that the rent is to be calculated on the better of two basis (e.g. the higher of CPI and 4%) and can’t decrease in any year (e.g. the rent remains the same if a market review would result in a decrease).
The Act however provides that a retail shop lease:
- can’t allow for rent review more than once every year (except for in the first year of the lease);
- can only allow for each review to be made on 1 basis (although different basis can be used during the term) – noting that the Act lists the allowable bases (which includes, among other things, fixed, CPI and market review); and
- must not include any ratchet provisions.
The Act also provides that if the current market rent can not be agreed by the parties, an independent specialist retail valuer must be appointed, at the equal cost of the parties, to determine it. The Act contains a number of provisions in relation to how the market rent is to be calculated and timeframes in that regard. Any clause of the lease that requires the determination to be made other than in accordance with the Act is void (to the extent that it does so).
- Options to Renew
The Act also contains a number of protections (in addition to the disclosure discussed above) in relation to the exercise of any option.
Given the implications to the tenant’s business of losing its premises, the Act provides that at least two months (but not more than 6 months) before the date the tenant must exercise its option, the landlord must give the tenant written notice of the option date.
The Act also provides that if the lease does not contain any provision for an option, the landlord must give the tenant written notice (at least six months before, but no more than a year before, the end of the term – noting however that a shorter period applies for leases with a term of less than a year):
- offering the tenant a renewal or extension of the lease (and detailing the terms of the offer) – this offer can’t be revoked for one month after it is made or if the tenant accepts it; or
- advising it that it does not intend to offer it a renewal or extension.
If the landlord does not give this notice and the tenant gives notice before the expiry of the term asking for an extension, the term of the lease is extended until six months after the landlord gives the notice (although the tenant may terminate the lease before this extended term ends on one month’s written notice).
If the rent for the renewed term is to be reviewed to market, the tenant can give the landlord notice (during the period commencing 6 months before the expiry of the current term and ending 3 months before its expiry – noting this period is different for leases under 1 year) requiring the market rent to be determined. The Act also provides that despite any other provision of the lease, the last day which the tenant can exercise the option is 21 days after it receives written notice of the current market rent.
Under the Act the landlord has to pay the tenant reasonable compensation for any loss it suffers because the landlord (unless it is due to an emergency or required by law):
- substantially restricts the tenant’s access to the premises;
- takes action that substantially restricts or alters access by customers or the flow of potential customers past the premises;
- causes significant disruption to the tenant’s trading from the premises (or doesn’t take reasonable steps to stop any disruption within its control);
- doesn’t rectify, as soon as is practicable, any breakdown of plant or equipment that the landlord is responsible to maintain or any defect (that wasn’t reasonably apparent when the tenant entered into the lease) in the centre/building that the premises are located it;
- doesn’t undertake any cleaning, maintenance or repainting the centre/building that the premises is located in that the landlord is responsible for under the lease; or
- causes the tenant to vacate the premises before the end of the term because of any refurbishment or demolition of the centre/building where the premises are located.
The landlord must also pay reasonable compensation for any damage the tenant suffers because:
- it entered into the lease (including any renewal and assignment) based on any false or misleading statement or misrepresentation made by the landlord; or
- the premises was not available for trading by the date stated in the disclosure statement due to default by the landlord.
These provisions however do not apply to periodic tenancies or tenancies at will (unless they arise from holding over provisions).
- Relocation and Demolition
If a lease allows the landlord to relocate the tenant’s business or terminate the lease due to demolition of the premises, the landlord must adhere to the procedures and compensation provisions under the Act.
If the landlord wishes to relocate the tenant’s business it must give the tenant written notice:
- giving sufficient details of the proposed refurbishment, redevelopment or extension to indicate a genuine proposal that is to be carried out within a reasonably practicable time after the relocation and is not practically possible without vacant possession of the premises;
- that details a reasonably comparable alternative premises (in the centre if the current premises is located in a retail shopping centre) that will be made available to the tenant; and
- detailing the date the tenant must vacate – which has to be at least three months after the notice is given.
A tenant can terminate the lease within one month of receiving the notice if it does not wish to relocate (noting that if it doesn’t terminate in this time, it is taken to have accepted the offer contained in the landlord’s notice).
Any new lease of the relocated premises will be the same as the original lease except that:
- the term of the new lease will be the same as the remaining term of the original lease; and
- the rent for the new lease will be adjusted to take into account the difference in the commercial values of the premises (if necessary).
If the landlord relocates the tenant, it must pay the tenant’s reasonable costs of relocation including (but not limited to):
- the costs of dismantling and reinstalling fixtures and fittings and modifying or replacing fixtures and fittings to the standard immediately before the relocation; and
- its legal costs.
If the landlord wishes to terminate the lease under any demolition provision it must give the tenant written notice:
- giving sufficient details of the proposed demolition to indicate a genuine proposal to demolish the building within a reasonably practicable time after the lease is terminated; and
- detailing the date the lease terminates – which has to be at least six months after the notice is given.
The tenant can terminate the lease before the termination date by giving the landlord at least one months written notice.
If the landlord gives a demolition notice it must pay the tenant reasonable compensation for the loss and damage the tenant suffers:
- because of the early termination of the lease, if the demolition is not carried out, or is not carried out within a reasonable time after the termination (unless the landlord can prove that at the date the termination notice was given it did have a genuine proposal to demolish within a reasonably practicable time); and
- for the fitout of the premises (to the extent it was not carried out by the landlord), whether or not the demolition is actually carried out.
- Release of Guarantee
In standard commercial leases, as a condition to consenting to any assignment of the lease, the landlord will often insist that the outgoing tenant (assignor), and their guarantors, remain liable if the new tenant (assignee) defaults under the lease after the assignment.
The Act however protects the assignor and its guarantors in this regard and provides that so long as the assignor has complied with all of its disclosure obligations under the Act (and the disclosure is not defective), it, and its guarantors, are released from any liability under the lease resulting from a default by the assignee once the assignment is entered into.
- Dispute Resolution
The Act also includes a low cost, streamlined dispute resolution process – providing firstly for non-compulsory mediation and if the matter is not resolved at the mediation, referring the dispute to the Queensland Civil and Administrative Tribunal for determination.
Refer to our article “Resolving a Retail Shop Leasing Dispute in Queensland” http://www.murdochs.com.au/resolving-retail-shop-leasing-dispute-queensland/) for more detailed information in relation to this process.
Note also that any provision under a lease requiring a dispute to be referred to arbitration or to be heard by a court or tribunal does not limit the party’s rights under the above provisions.
- Miscellaneous Provisions
The Act also places a number of restrictions and obligations on the landlord in relation to:
- calculation of turnover rent (and confidentiality of information provided for that calculation);
- collection and use of sinking fund fees and promotion and advertising levies;
- unconscionable conduct;
- the tenant’s right to join or form commercial associations;
- retail trading hours; and
- refurbishment and refitting.
The above is by no means an exhaustive summary of the provisions, protections and obligations under the Act. It is important that landlords understand their obligations under the Act and tenants understand the protections that are provided to them and we invite you to contact our office if you have any queries in relation to, or are experiencing any difficulties with, your retail shop lease.