A Guide to Preferential Rights in Retail Leasing in the ACT

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Table of Contents

• Who is Given a Preferential Right?
• What Does the Lessor Need to Do?
• Key Takeaways

The Leases (Commercial and Retail) Act 2001 (Act) governs retail leasing in the Australian Capital Territory. Specifically, Section 108 of the Act deals with preferential rights of shopping centre tenants. In Australia, there are only two States that currently have mandatory preferential rights, being the ACT and South Australia. So what does it mean for tenants to be given a preferential right?

Who is Given a Preferential Right?

The purpose of Section 108 is to give first preference to those tenants with existing shopping centre leases that are about to expire with no further option term. In this situation, a lessor must assume that the tenant wants to renew or extend its lease unless the tenant has advised the lessor in writing within 12 months before the lease ends that it does not want to extend or renew its lease. The onus is therefore on the lessor to obtain this notice from the tenant. Otherwise, it must give the tenant first right of refusal (otherwise known as preference right) of a new or extension of the lease term before it offers it to another potential tenant.

The lessor is not obliged to give the tenant preferential rights if:

• The lessor wants to change the tenancy mix of the shopping centre – in other words, the lessor cannot lease the shop to another tenant with the same permitted use but has to show that it wants a different type of business to lease the shop.
• The tenant has substantially or persistently breached its lease.
• The lessor requires vacant possession of the shop premises and does not propose to re-lease the premises within a period of at least six months after the end of the lease term. A common scenario is if the lessor needs to close the premises to carry out renovation works.

What Does the Lessor Need to Do?

If the tenant has a right of preference, the lessor must, at least, six months but no more than 12 months before the end of the lease term, begin negotiations with the tenant for a renewal of the lease.

Before the lessor agrees to enter into a lease with another tenant, the lessor must:

• Make a written offer to the current tenant to renew the lease on terms no less favourable than those of the lease proposed to be entered into with another tenant;
• Provide the current tenant with a copy of the proposed lease and disclosure statement in relation to it;
• The offer of the lease must remain open for a period stated in the offer (at least ten business days) or until its earlier acceptance by the tenant; and
• If the tenant does not accept the offer within the period stated, then the offer is deemed to have lapsed. If the tenant makes a counter offer, then negotiations must continue until the tenant rejects the offer or the tenant confirms in writing that it does not want to continue negotiations for a renewal.

There is an onus on the parties that they negotiate a renewal or extension of lease honestly.

Key Takeaways

A preferential right under Section 108 of the Act provides clarity for a tenant at the end of its lease term. Lessors, however, must satisfy this compliance requirement. Either way, if you have any questions in relation to your shop lease in the ACT, get in touch with our retail leasing lawyers.