Post Commercial property 2

Leases for business

The law of business leases

The primary legislation covering retail leasing in Victoria, and for most shops and businesses – is the Retail Leases Act 2003 Vic (the Act) and the Retail Leases Regulations 2003 Vic (the Regulations).

The commencement date for the Act and Regulations was 1 May 2003.
All current leases that are renewed after 1 May 2003 or new leases are subject to the Act.

Who is covered by the Act?

The Act does not apply to all premises and businesses. The Act applies to premises that are used fully for, or principally for the sale or hire of goods by retail or the retail provision of services. A further threshold in the Act is that the occupancy cost is less than $1 million per year with the occupancy cost being a combination of rent and outgoings. The Act also applies to leases between franchisors and franchisees.

The Act does not apply to

• Tenants in the businesses of wholesaling, manufacturing and storage, a commercial lease may be more suitable in these instances and the transaction will not be regulated by the Act;
• Tenants that are listed corporations or their subsidiaries; and
• Leases less than a term of one year unless consecutively renewed; and
• As determined by the Minister for Small Business (MSB).
Businesses that are not covered by the Act as determined by the MSB include:
• Where a retail business is in a multi storey building over the 3rd floor and also excludes the basement level, unless located in a shopping centre;
• Barrister’s Chambers Limited;
• A lease of longer than 15 years duration excluding renewals;
• Premises located and defined as Melbourne Market Land as defined by the Melbourne Market Authority Act 1977 (Vic);
• Lease premises by Councils under the Local Government Act 1989 (Vic); and
• Tenants of which is a body corporate whose securities are listed locally or overseas or a subsidiary.

The landlord’s obligations once lease negotiations commence

Once parties enter into negotiations for a lease governed by the Act, the Landlord must provide a prospective tenant with the following documents as soon as possible:
1. A copy of the Retail Lease;
2. A Disclosure Statement (at least seven days before signing the Retail Lease);
3. The Tenant’s Guide (at least seven days before signing the Retail Lease).

The practical effect is that a Landlord cannot sign a tenant up on the spot and a prospective tenant has a minimum seven (7) days  to conduct its own due diligence, seek legal advice and consider the Retail Lease in detail.

Once the Retail Lease is signed the Landlord must give a signed copy to the Tenant.

If a Tenant does not receive a signed copy of the Retail Lease within 28 days of giving a signed copy to the Landlord or entering into the Retail Lease, the Tenant may give the Landlord notice to terminate the lease.

5 year minimum term

Section 21 of the Act requires a minimum 5-year term (including) options for all Tenants not just first time tenants. This only applies to new leases and not to a renewal of a lease where there is no break in possession. You will need the permission of the Victorian Small Business Commissioner (VSBC) if you want a shorter lease term.

Options to renew lease

Section 27 of the Act states that, “if a lease contains an option to renew then the lease must state:
• The date until which the option is exercisable;
• How the option is to be exercised;
• The terms and conditions on which the lease is renewable under the option; and
• How the rent payable during the term for which the lease is renewed is to be determined.

Section 28 of the Act requires the Landlord to give the Tenant notice in writing of the last date to exercise an option not more 12 months nor less than 6 months (previously 3 months) before the last date for the exercise of the renewal. If the notice is not given the Retail Lease continues and the option is exercisable until 6 months after the notice is given.

Ratchet clauses and underpinning are prohibited by the Act
A ‘ratchet clause’ is one that increases rent and prevents it from decreasing on review by linking it to the greater of a combination of rent review formulae, i.e. the greater of a fixed percentage increase or CPI.

‘Underpinning’ has a similar effect by prohibiting the rent from being less for the new term than it was for the old term, i.e. by stating that the new rent, “shall not be less than $1 less than the rent for the previous term”.

Both these types of clauses benefit the Landlord by ensuring that rent cannot decrease regardless of the prevailing market conditions but are prohibited by section 35(3) of the Act.

Key money

Section 23 of the Act prohibits the payment of key money and renders void any such clause in a Retail Lease. Key money means a payment for which the Tenant receives no or no adequate consideration (benefit from) and is expected from a tenant in order for a lease being granted, renewed or modified. Such payment is illegal under the Act.

Recovery of outgoings

There are a number of restrictions in this area, including:
• Sections 41 – 45 and 50 of the Act prohibit the recovery of capital costs, depreciation, contributions to sinking funds, interest on borrowings head lease rents and land tax;
• Section 49 limits the recovery of management fees; and
• Section 47 requires reporting on actual outgoings.

Landlord’s liability for repairs

Under section 52 of the Act the Landlord has a specific obligation to repair Retail Premises and the values of such repairs are not capped. Further it sets out the respective rights and obligations of the Landlord and Tenant regarding repairs.

In short the Landlord must maintain the premises ‘in a condition consistent with the condition of the premises when the Retail Lease was entered into’.

Legal costs

Section 51(1) states that a Tenant is not liable to pay the Landlord’s legal or other expenses relating to:
• The negotiation, preparation or execution of the Retail Lease;
• Obtaining the consent of the mortgagee to the lease; and
• The Landlord’s compliance with the Act.

Dispute resolution and VCAT

Section 81 of the Act defines a retail tenancy dispute as a dispute between a Landlord and Tenant, “arising under or in relation to a retail premises lease”. It does not however include a dispute relating solely to the rent.

Disputes under the Act are adjudicated on by the Retail Tenancies List of the Victorian Civil and Administrative Tribunal (VCAT).

Under section 87 of the Act, retail tenancy disputes must first be referred for alternative dispute resolution and a party to a retail tenancy dispute cannot file a proceeding at VCAT unless the VSBC certifies that mediation or another form of alternative dispute resolution has failed, or is unlikely, to resolve the dispute.