Major changes to the Retail Leases Act 1994 (NSW) have been introduced by the Retail Leases Amendment Act 2005 (NSW). The Act, which commences on 1 January 2006, will increase transparency and access to information in retail leasing arrangements. This Alert summarises some of the key amendments and their likely practical implications for landlords and tenants respectively.

A more detailed summary of the impact of these amendments can be found in our Brief Outline of the Retail Leases Act (where the changes are highlighted). In addition, our working copy of the consolidated Retail Leases Act is marked up to show the changes made by the Act.

Existing leases and transitional arrangements

Many of these amendments will impact upon existing leases, as well as option leases under existing leases, as detailed further in the summary. In this respect the Act has a significant retrospective operation.

Landlords have until 1 July 2006 to comply with their obligations under the Act regarding the use of the new form of disclosure statement, and for both new and existing leases, new requirements for outgoings estimates and statements, and advertising estimates and statements. However the new disclosure requirements under section 34 to avoid claims for compensation for disturbance will apply to leases entered into on and from 1 January 2006. Therefore we recommend that the new disclosure statement (or at least the part headed “Details of any anticipated disturbance to trading”) be used for all leases immediately.

Short term leases - section 6A

Where a tenant is on a short-term lease (being a lease for less than six months) and has been in continuous possession for more than one year, the Act will apply. Accordingly, the tenant (or its assignee) can seek the protection of the Act and may extend the period of occupation to five years. This means landlords will have to be careful if they allow tenants to hold over.

Tenant’s contribution to fitout - section 13

If the tenant is required to contribute to the costs of fit out of the premises, the maximum cost of the works (or a formula to calculate the maximum cost) must be agreed to by the landlord and tenant before entering into the lease. The agreed amount is the maximum cost the tenant is liable to pay.

Standard of fitout - section 13A

If the landlord requires the tenant’s fitout to be completed to a particular standard, the landlord must provide a tenancy fitout statement (such as a fitout guide) to the tenant, setting out the requisite standard. Landlords will need to be careful about how these documents are drafted.

Retail tenancy guide - section 9

The landlord must give the tenant a copy of the NSW Government’s retail tenancy guide at the same time as a copy of the proposed lease is given to the tenant. The guide should be available by 1 January 2006 on the Retail Tenancy Units’ website.

Minimum “five year term” - section 16 and 21

A section 16(3) certificate (negating the statutory five year term) can now be validly given on behalf of a tenant up to six months after entering into a lease.

Market rent review - sections 3, 19, 31, 32, 32A, 72AB and 85

Where rent review is by reference to current market rates and the parties are unable to agree on the rent, either party may apply to the Administrative Decisions Tribunal for the rent to be determined by a specialist retail valuer. Previously, valuers were appointed by the Australian Property Institute.

Outgoings - sections 3, 27, 28 and 28A

The amendments to the Act bring greater transparency about outgoings for tenants. Landlords will be required to provide tenants with a breakdown of fees paid towards the administration costs of running the specific retail centre and other fees paid to the management company. Tenants must be given the opportunity to make a written statement to the auditor on the accuracy of the landlord’s proposed outgoings statement. The auditor must consider any written submission. If the landlord does not give the tenant the outgoings statement, the tenant can withhold contributions to outgoings until 28 days after the landlord gives the information.

Relocation - section 34A

Under the Act, landlords will have additional obligations to pay tenants’ reasonable fit-out costs and legal costs for relocating premises. These costs include (but are not limited to) the tenant’s costs in dismantling fittings, equipment or services, and in replacing, reinstalling or modifying finishes, fixtures, equipment or services. If the parties are unable to agree on these costs, the amount will be determined by a quantity surveyor.

Disturbance - section 34

Currently, a landlord may prevent or limit a tenant’s claim for compensation in respect of a particular disturbance by disclosing (in writing) details of the disturbance to the tenant before entering into the lease. The amendments mean that the landlord will be required to provide the tenant with very specific information detailing the nature of the disturbance, its likelihood, timing, duration and effect. Failure to do so before the lease is entered into could expose landlords to substantial claims for compensation.

Notice of landlord’s intentions - section 44A

Currently, if there is no option, between 6 to 12 months before the expiry of the lease, the landlord must give the tenant a written notice, either offering a renewal or extension of the lease, or informing the tenant that a renewal or extension will not be offered. The amendment prohibits the landlord from advertising the premises for lease until this notice has been given.

Security bonds - sections 16A to 16ZC

A new regime will apply for security bonds from 1 January 2006. Under the Act, the landlord must deposit any security bond with the Director General of the Department of State and Regional Development within 20 business days after the bond is paid. The balance of any deposit bonds held by landlords before 1 January 2006, must also be deposited with the Director General by 31 March 2006. Access to bonds is no longer automatic and can only occur if the procedures in Part 2A are adhered to.

Marketing plans and advertising and promotion statements - sections 54, 55 and 55A

The landlord must give the tenant half-yearly and annual written statements detailing all expenditure on advertising and promotion costs in the retail centre and must give an annual marketing plan relating to the proposed expenditure. The tenant must be given an opportunity to make a submission to the company auditor as to the statement’s accuracy. If the landlord fails to give these statements, the tenant can withhold payment of advertising and promotion contribution until 28 days after the landlord gives the information.

Misleading and deceptive conduct - part 7A - division 2

Parties to a retail lease are now prohibited from engaging in misleading or deceptive conduct. The prohibition is worded similarly to section 52 of the Trade Practices Act 1974 (Cth).

Retail leasing: looking forward

It is essential that landlords and tenants familiarise themselves with these changes immediately, not only because of their impact on new leasing arrangements, but also because of the substantial statutory variations imposed on existing retail leases.

We are amending our own standard retail leases and related documents to reflect these changes, and would be happy to assist clients to amend their standard documents.