The retail tenancy legislation in Western Australia has gone through major changes in recent times which have increased protection for retail tenants, most of whom are small business owners against shopping centre goliaths. This article provides a clear overview of what a small business retailer should know about the law and their lease agreement. Here is a key summary of the main areas of protection offered by the retail legislation. You should seek legal advice before deciding on entering into a lease agreement.
Currently, retail leases that the Commercial Tenancy (Retail Shops) Agreements Act 1985 (the Act) applies to are required to comply with certain matters including:
- what information a landlord must give a tenant before entering into a lease;
- the minimum term that a tenant is entitled to;
- the landlord’s duties to notify a tenant on matters such as the deadline to exercise the option lease;
- what costs relating to the lease are not recoverable; and
- circumstances in which a landlord may redevelop the Centre or building and what the tenant is entitled to by way of alternate premises or compensation.
A retail shop is defined in the Act to mean any premises located in a retail shopping centre that is used for business. It can also include any premises not situated in a retail shopping centre used for the carrying on of a retail business. This definition means that the Act will protect a real estate agency or a dentist located in a shopping centre, but the same business operating outside of a shopping centre will not be afforded protection from the Act.
The following shop leases are excluded from the Act:
- a shop with a net lettable area of 1,000 square metres; or
- a lease that is held by a listed corporation or a subsidiary of a corporation;
- a lease that is held by a body corporate (or a subsidiary of a body corporate) whose securities are placed on a stock exchange; or
- a lease is a kind that is prescribed to be exempt from the Act.
Disclosure Statement & Consequence of Non-Disclosure
A retail tenant is entitled to receive a Disclosure Statement at least seven days before entering into a lease. A Disclosure Statement is a prescribed document which to set out certain information such as:
- the term of the lease including any option to renew and the dates by which they must be exercised;
- an estimated breakdown of the costs payable under the lease including itemised details
- of the outgoings payable and the tenant’s proportion;
- a plan showing the tenancy and estimate dimension;
- other important details including the permitted use and if the tenant has the exclusivity
- about its business operated from the premises, trading hours, any fit out works and landlord’s works.
If a Disclosure Statement is not provided at least seven days before the lease is entered into or, or if the Disclosure Statement is provided but is incomplete, a tenant may terminate the lease agreement within six months of entering into it (Section 6(1)(a)). This does not apply if the landlord can prove that it had acted honestly, and the tenant is in a good position as they would have been if the Disclosure Statement has been completed or had not contained the false or misleading information.
In summary, a Disclosure Statement only needs to be given to the tenant for a new lease or a renewal of a lease (with new terms) but does not need to be given under an option lease or an assignment of a lease.
Minimum Five-Year Term
A tenant would have the statutory right to a five-year term unless the lease were for a term of fewer than six months. This means that if the term of the lease falls short of the five-year requirement, the tenant can give notice to the landlord (within 30 days of the expiry of the current lease term) using the prescribed form to exercise its right to extend the lease so that the total term is five years. Note that if there are any unremedied defaults under the lease (such as rental arrears), the tenant must remedy the default before it can exercise the statutory option.
The five-year term requirement also applies to a sublease only to the extent that it is consistent with the head lease (that is, the sublease term cannot exceed the head lease term).
The tenant may agree to a less than five-year lease but must make a written application to the State Administrative Tribunal for approval. Once approval is granted, the tenant forfeits its statutory rights to a five-year term and cannot reapply to extend the term.
Option Lease & Renewal of Lease
A landlord has an obligation to notify the tenant in writing of the date after which the option is longer exercisable at least six months but no more than twelve months before that date. If the landlord fails to officially notify the tenant within the time frame specified by the Act, then the retail shop lease is extended so that the date after which the option is no longer exercisable is six months after the landlord notifies the tenant as required. If the lease is extended after the expiry date by operation of the Act, then the lease will continue until that date although the tenant may give written notice of termination of the lease before the extended option expiry date.
For a lease that does not have an option term, the tenant may request in writing at any time during the twelve months before the lease expiry date if the landlord intends to offer a new lease. The landlord must respond within thirty days in writing. Otherwise, the lease expiry date is extended by that period of non-compliance. So if the landlord took three months or 90 days to respond, the lease would be extended by two months or 60 days (being the time it took the landlord to respond in addition to its one 30-days statutory timeframe). Note that the tenant is not locked in during this period of statutory extension to the lease term but may terminate at any time after the original lease term expiry date.
Recoverable and Non-Recoverable Costs
A landlord cannot recover its legal costs about a new lease, an option lease or a renewal of a lease. The lease related costs that are prohibited from recovery includes lease preparation costs, negotiation, obtaining mortgagee’s consent or the landlord’ cost in complying with the Act.
The landlord may still claim legal expenses related to an assignment or sublease, including the costs of investigating a proposed assignee or sublessee.
A lease can contain a provision which requires the tenant to carry out refurbishment works to the premises. However, such a provision must provide which indicate the nature, extent and timing of the require refurbishment or fitting. If the refurbishment and refitting obligations expressed in general terms, it might be interpreted to be void.
A relocation provision in the lease must be in the prescribed form as set out in the Commercial Tenancy (Retail Shops Agreements Regulation 1985 (the Regulation). If a relocation clause in the lease does not comply with the Regulation, the onus is on the landlord to make an application to the State Administrative Tribunal for approval . Otherwise, it is void and will be read down.
A relocation clause complies with the Act if it contains provisions to the following effect:
- the tenant’s business cannot be required to be relocated unless the landlord has given
- the tenant at least six months’ written notice (a relocation notice).
- the relocation notice gives details of an alternative retail shop.
- the tenant is offered a new lease of the alternative shop on similar or better terms and conditions. Note that the term of the new lease is to be no shorter than the remainder of the term if the existing lease. Moreover, the rent for the alternative shop is to be no more than the rent for the existing retail shop, taking into account any difference in the commercial values at the time of relocation of the current retail shop and the alternative shop.
- the landlord is to pay for the tenant’s reasonable cost of the relocation, including but not limited to the cost of the dismantling of the tenant’s fit-out, the cost of re-installing and modifying its fit out, packaging and removal costs and legal costs incurred.
- if the landlord does not offer the tenant a new lease of an alternative retail shop, then the landlord is liable to pay reasonable compensation as agreed in writing between the parties or determined by the Tribunal if the parties fail to reach an agreement.
A market rent review provision in the lease must comply with the definition of market rent in the Act. Market rent is defined in the Act as the rent obtainable at the time of that review in a free and open market, and that retail shop was vacant to let on similar terms as contained in the current lease.
The calculation of market rent cannot take into account:
- The goodwill of the business,
- Any stock, fittings, fixtures in the retail shop that is not the property of the landlord;
- Any structural improvements, or alterations, of the retail shop, carried out, or paid for, by the current tenant.
Market rent can be initiated by either party to a lease by sending written notice to the other.
Any dispute as the determining of the current market rent can be resolved by either a person licensed under the Land Valuers Licensing Act 1978, a person licensed under the Act and nominated by the Small Business Commissioner or 2 licensed valuers, one appointed by the tenant and one appointed by the landlord.
The landlord is required to provide any relevant information requested by the valuer(s) to assist in determining the market rent.
Until the current rent is determined, the tenant is required to pay for the existing rent until the market rent dispute is determined. Once it is determined, the reviewed rent becomes due and payable as from the date that the rent review was due.
Leasing a premises is a long-term investment that requires careful negotiation to cover all aspect of your leasing rights about your shop premises. It is important to understand your rights that are safe guarded by the retail legislation. There is also a lot of compliance issues imposed on a landlord that you should be aware of such as the right to provide written notice of when an option lease is no longer exercisable so that you are not out of time and the consequences on the lease term for non-compliance. Further, not all leases state a tenant’s rights to compensation for matters such as relocation but these rights are offered by the Act, and any inconsistency will be read down. It is, therefore, worthwhile to seek legal advice before you enter into negotiations for a lease. If you would like assistance with your lease or get advice before entering into a lease transaction, get in touch with our experience leasing team on 1300 544 755.