Let’s face it. Life is full of unfair moments.

Who can forget the 2016 Bachelor outcome where the favourite, Nikki Gogan, was pipped at the post by Alex Nation with Richie Strahan declaring she had his heart. Or the ubiquitous moment in Australian Idol 2003 when Guy Sebastian beat the favourite Shannon Noll.

On 12 November 2016, new legislation protecting small business from unfair contract terms will commence in the form of changes to:

  • The Australian Consumer Law (Competition and Consumer Act 2010 (Cth)); and
  • The Australian Securities and Investments Commission Act 2001.

Fortunately, the new legislation provides small businesses with a reprieve from such unfair conduct. After 12 November 2016, a court can declare any term in a standard form contract with a small business an unfair term, following which the term will be void and unenforceable.

Does This Apply to Leases?

In our view, a lease will usually be considered as a “standard form contract” and so these changes are likely to  impact the majority of leases where one of the parties (either the landlord or tenant) is considered a small business.

The new legislation defines a small business contract as follows:

  • A contract for the supply of goods or services, or sale or grant of an interest in land;
  • At the time of entering into the contract, at least one party to the transaction employs less than 20 people (including part-time and casual employees); and
  • The “upfront price” payable under the contract does not exceed $300,000 or $1,000,000 if the contract is more than one year.

Given many landlords in shopping centres operate trusts to act as the landlord and these entities do not have employees, the new legislation will apply to the majority of retail leases, regardless of the tenant’s status.

What Terms Can Be Considered “Unfair” Under a Lease?

If the new legislation applies to the lease, the following terms may be deemed unfair:

  • Clauses that allow the landlord to carry out the tenant’s obligations under the lease and recover costs from the tenant for doing so. Any such clauses must be limited to “reasonable” costs and be reasonable.
  • Any clause that allows the landlord to terminate the lease for a breach by the tenant.
  • A clause which appoints the landlord as the tenant’s power of attorney if the tenant defaults under the lease.
  • Terms that do not allow for the landlord to provide the tenant with reasonable compensation where the property has been the subject of public acquisition or demolition.
  • A clause that requires the tenant to enter into a then standard form of lease and/or pay costs where the landlord requires them to relocate their premises due to the landlord’s refurbishment of a shopping centre or the leased premises.
  • A clause that provides the tenant must pay the landlord liquidated damages for not opening during any specified trading hours or any other unfair liquidated damages.
  • Any restrictions on the right of the tenant to claim compensation from the landlord for any reason.
  • Any term that releases the landlord from its liability to the tenant which arise from the landlord’s negligence or omission or failure to perform duties under the lease. Further, any term that excludes the landlord having to indemnify the tenant if it caused loss or damage may also be considered unfair.
  • Any clauses that vaguely prohibit broad ranges of conduct such as “offensive conduct”, “noise” etc.
  • Clauses which permit a landlord to take possession of its tenant’s property if it is left on the premises after the end of the lease and/or the tenant vacates the premises. Further, the landlord should not be able to charge the tenant exorbitant fees for disposing of any such property.
  • Clauses containing acknowledgements which ask the tenant to certify that the landlord has made no promises about the suitability of the premises or any other representation.
  • Any term that allows the landlord to grant an easement over the premises.
  • Guarantor provisions which provide that a guarantor remains liable to the landlord, even where the tenant’s liability under the lease becomes unenforceable.
  • Any terms which prohibit the tenant from claiming compensation for a matter brought to its attention before the commencement of the lease. For example, some landlords attempt to exclude compensation for disturbance from proposed renovations that the tenant was aware of when entering into the lease.
  • Any term requiring the tenant to take out additional insurance specified by the landlord.
  • Any clause which requires the tenant to obtain the landlord’s consent before engaging in actions which do not directly impact the landlord. For example, restructuring its company or advertising its business.

Importantly, the party preparing the Lease (usually the Landlord) should only do so after the parties have discussed the matter. The party the contract will impact must receive a chance to negotiate any terms of the contract they are uncomfortable with (this is usually the tenant who is in a weaker bargaining position).

Finally, just because a lease complies with the relevant states’ Retail Leasing legislation, it does not make the lease immune from being declared an unfair contract and certain clauses being struck out.

Key Takeaways

The unfair contract provisions are far ranging for both landlords and tenants where leases are concerned. This is especially as most leases can be considered “standard form contracts” with at least one of the parties meeting the “small business” definition.

  • Landlords, take action now and have your standard form leases assessed for terms that may be considered “unfair”, making them at risk of being declared void.
  • Tenants and landlords, identify leases that will come under the coverage of the new legislation to identify unfair terms.

If you require more information about the unfair contract terms as they relate to leases or require a review of your lease, get in touch with our commercial leasing lawyers on 1300 544 755

Emma Heuston

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