A poorly drafted lease can be the downfall of a business and cause the tenant or landlord disastrous consequences. Negotiating a lease can be a complicated process, particularly for those renting business premises for the first time but it is worth spending the time and energy to get it right. The foundation to a successful tenant/landlord relationship is a clear lease agreement and one that knows whether it is covered by the Retail Lease Act 2003 (‘The Act’).
The Act’s purpose is to enhance fairness and certainty of leasing arrangements between landlords and retail tenants and to better resolve disputes about retail premises.
Retail premises are covered by the Act and are ‘premises that are used wholly or predominantly for the sale or hire of goods by retail or the retail provisions of services’ but excluding any part used as a residence. If the premises fall under the protection of the Act, it will override any clause in the lease.
The goalposts do change from time to time, often through decisions made by VCAT. For example, this year, it was clarified that the status of a retail lease cannot change during the lease, even where the occupancy costs exceed the threshold of $1 million. This decision, however, has been appealed to the Victorian Supreme Court so it will be interesting to see how the court deals with a lease potentially ‘jumping in’ and ‘jumping out’ of the Act.
Recently, there are some significant changes on the table through the Retail Leases Amendment Bill 2019 (‘the Bill’).
The Bill is currently before the Victorian Parliament. The Bill would bring in reforms from the Small Business Regulation Review into the retail sector.
The amendments are intended to make retail leases fairer and easier to understand by improving the information provided to tenants and to facilitate more informed decisions. The changes will enable businesses to move quickly as they develop and expand, remove confusion around legal obligations and lease terms and conditions, and enhance building safety.
Some of the main amendments are summarised below.
Essential Safety Measures
There has been confusion between landlords and tenants around who pays for Essential Safety Measures. These safety measures include items such as smoke detectors, sprinkler systems, fire extinguishers, fire exit signs and annual safety inspections. The amendments would add a new definition of “Essential Safety Measures” and include essential safety measures in the definition of outgoings. This proposed amendment clarifies that landlords can pass on the cost of repairs and maintenance of Essential Safety Measures to tenants as outgoings where provided for in the lease. Landlords will not be able to retrospectively recover the costs of Essential Safety Measures that they have already carried out.
Disclosure Statement and Proposed Lease
The time for a landlord to provide a disclosure statement would be increased from 7 to 14 days, before committing to the lease.
When the landlord provides a disclosure statement on the renewal of a lease, the landlord must identify any changes from the previous disclosure statement.
The amendments will require landlords to return security deposits to tenants within 30 days after the end of the lease as opposed to ‘as soon as practicable’ under the current law. This will also apply to leases entered into before the passing of the Bill.
Option to Renew
The amendments change the timeframe within which the landlord must provide notice to the tenant (at least 3 months) in relation to an option to renew a lease and the information that must be included in the notice. The tenant will have at least 14 days after being notified of the rent determination to decide whether to exercise an option to renew the lease. The notice must also include:
- the rent for the first 12 months of the lease;
- availability of an early rent review; and
- availability of a cooling-off period.
Early Rent Review
There will be an early rent review process to help a tenant decide whether to exercise an option to renew a lease. The tenant may request an early rent review within 28 days after the landlord provides the notice. The last date to exercise an option to renew is deferred until the tenant is aware of the market rent. This protects tenants from landlords intentionally delaying the notice to get the lease extended at a higher rent.
If a tenant has exercised an option to renew without requesting an early rent review, there is a 14-day cooling-off period in which they can withdraw from the further term.
We will keep you up to date as any changes are finalised in Parliament. In the meantime, here are some tips from an earlier blog that may assist you through your lease negotiations.
- Security Deposit or Bond and Guarantees
While the Act does not require a tenant to pay a security deposit, it is common practice for the landlord to request an amount, generally the equivalent to a month or two month’s rent. It is highly recommended that tenants negotiate the amount with their prospective landlord.
Landlords will often ask for personal guarantees from the directors of the tenant, but it is advised that tenants should avoid this. Although if you are not incorporated and enter into the lease in your own name then you are effectively giving that personal guarantee. Usually, the compromise is the provision of a Bank Guarantee by the tenant.
- Rent and Outgoings
Although simple in theory, determining the practical elements is crucial to a smooth lease period. Setting out how the rent is to be paid and at what intervals (quarterly, monthly or weekly) is imperative for both parties, as this can have an impact on the liabilities and deductibility of tax, but also decreases the risk of disputes arising regarding payment of rent.
Also, the contract should be clear about the additional costs of the commercial premises. Rates, taxes, insurance and other outgoings for the building and land must be considered when negotiating the lease, clearly stating who is responsible for each element.
A disclosure statement will set out these costs but is not required for a non-retail commercial lease.
Knowing how the rent can change over time is critical. Will it be a fixed percentage increase annually? Consumer Price Index? Some retail leases involve turnover rent, a percentage of gross sales. Will a market rent review be available for a new term?
Maintenance obligations are often shared between a landlord and the tenant within most commercial leases. However, where there is no obligation listed, neither the tenant nor the landlord is required to act – which practically becomes the tenant’s problem. You should agree in advance who is responsible for any maintenance, especially plant such as air-conditioning, elevators and fire protection systems.
Early termination may be prohibited under the lease or can be extremely costly for tenants. Will you negotiate for more, shorter terms for flexibility or, as a landlord, will you insist on fewer, longer terms for certainty? A shorter lease with options to renew provides greater flexibility.
If you are considering leasing business premises, we recommend you contact Bayston Group to review your position and ensure that your risks are covered.
 Verraty Pty Ltd v Richmond Football Club Ltd  VCAT 107