In brief 5 min read
Landlords and tenants will see changes to their rights and compliance obligations under retail shop leases as a result of proposed amendments to the Building Act 1993 (Vic) (and regulations) (Building Act) and the Retail Leases Act 2003 (Vic) (RLA). In particular, the Retail Leases Amendment Bill 2019 (Vic) (RLA Bill) will make it clear that landlords will be able to recover, in some situations, costs incurred in relation to 'essential safety measures' (ESM). The Bill also changes various other provisions of the RLA.
In this article, we explore the proposed changes and outline the steps both landlords and tenants can take now to prepare.
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How does this affect you?
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The key amendments expected to be introduced when the RLA Bill is enacted are:
- The definition of 'outgoings' is amended to include the cost of repairs and maintenance in respect of an ESM, as well as the costs of an installation relating to fit-out, which the tenant has agreed to pay.
- Parties can agree on which party is to pay for repairs or maintenance in respect of ESMs.
- The Bill contains transitional provisions which will make it clear that existing leases with provisions that allow the landlord to recover costs for ESM repairs or maintenance will be valid.
- A lessor disclosure statement and a copy of the proposed lease must be given at least 14 days before entering into a lease (instead of the current seven day requirement).
- A landlord must notify a tenant of any changes to the proposed lease (from the previous copy given to them).
- Landlords must return security deposits within 30 days of a tenant complying with any obligations under a retail lease.
- Where a tenant has exercised an option or the parties agree to renew the lease, the landlord must give the tenant a disclosure statement setting out any changes to the previous disclosure statement and include information current from within three months before the statement is given.
- Landlords must, at least three months before an option is required to be exercised, give a tenant written notice setting out the date by which an option to renew must be exercised, details of rent payable, the availability of any early rent review mechanisms, the cooling off period and information in relation to changes to most recent disclosure statement provided to the tenant.
- In certain circumstances, after exercising an option to renew a lease, tenants will have a 14 day 'cooling off period' during which they may notify the landlord they no longer wish to renew.
Essential safety measures
On 1 May 2015, the Victorian Civil and Administrative Tribunal (VCAT) issued an advisory opinion dealing with how the Building Act interacts with the RLA, and in particular, whether a landlord under a retail lease could seek to impose on a tenant an obligation to either comply with ESM obligations at the tenant's cost, or reimburse the landlord in relation to the landlord's costs of compliance with ESM obligations.
Briefly, the advisory opinion stated that:
- if an ESM is required by the Building Act to be complied with by a landlord, then an obligation in a lease requiring a tenant to perform the obligation, or requiring a tenant to pay for the cost of performing the obligation, is void;
- if the ESM obligation is that a landlord must ensure a particular result is achieved, or a particular standard is met, while the landlord may agree for a tenant to undertake the relevant works, those works will be at the landlord's expense; and
- if a landlord is obliged to provide or maintain an ESM under the Building Act but fails to do so, a tenant under a retail lease may carry out the required work and recover the expenses of the work from a landlord, or deduct those expenses from rent due to the landlord.
While the VCAT advisory opinion is not a binding legal precedent, since it was published it was arguably considered persuasive to a future tribunal or court (although such a conclusion is not necessarily correct, as there was considerable disagreement before the advisory opinion was given as to how the relevant sections were intended to operate, and how VCAT should decide the matter).
The State is now providing some certainty in respect of these matters with these proposed legislative changes.
The Bill proposes changes to the RLA to provide that a landlord can recover ESM costs as outgoings. In addition, the Bill confirms that an obligation in a retail lease for a tenant to pay for the cost of repairs or maintenance work or an installation relating to fit-out is not void.
A tenant can agree to carry out repairs or maintenance in respect of ESM on behalf of a landlord. If they do, that does not affect any obligation of the landlord to comply with the Building Act. Further, it does not limit a tenant's obligation to contribute to outgoings for repairs or maintenance work in respect of ESM.
General disclosure obligations
landlords should give tenants a compare or marked up copy of the lease prior to signing any lease to avoid any breaches of this proposed new requirement.
The Bill introduces stricter disclosure obligations for landlords. In line with the requirements in the Australian Capital Territory, a landlord must now give a lessor disclosure statement and a copy of the proposed lease at least 14 days before the lease is entered into, rather than seven days.
However, unlike the Australian Capital Territory, there is no ability to shorten this timeframe. Instead, if a disclosure statement is given less than 14 days before the lease is entered into, the term is taken to commence 14 days after the disclosure statement and proposed lease are given to the tenant.
In addition, landlords must notify tenants of changes in the proposed lease (from the previous copy given to them). If the landlord fails to comply with this new obligation, they will be liable to a penalty (250 penalty units for a body corporate). Accordingly, landlords should give tenants a compare or marked up copy of the lease prior to signing any lease to avoid any breaches of this proposed new requirement.
Keep your copies - disclosure on renewal of lease
A disclosure statement must set out any changes to the previous disclosure statement given to the tenant in respect of the lease and include information current from no more than three months before the disclosure statement is given. This relates to lease renewals by way of exercise of an option as well as agreed renewals.
Landlords should ensure they keep copies of previous disclosures so that they can easily provide such details to renewing tenants. Where a landlord purchases a Centre, it should consider obtaining copies of disclosure statements from the previous owner to enable the landlord to comply with this obligation for subsequent lease renewals at the Centre.
Security deposits – 30 day return
The Bill proposes amendments so that security deposits must be returned within 30 days of a tenant performing its obligations under a retail lease, rather than 'as soon as practicable'.
Three months' lead time for lease renewals / exercise of options
The Bill proposes to significantly amend the obligations of landlords in respect of retail leases containing options to renew.
Where a lease contains an option to renew, landlords must, at least three months before the last date on which a tenant must exercise an option, give the tenant a notice which sets out:
- the date by which an option must be exercised;
- the rent payable during the first 12 months of the new term;
- the availability of an early rent review;
- the availability of a cooling off period; and
- any changes to the most recent disclosure statement provided to the tenant (other than rent).
If the notice and the above information is not given to the tenant in the required timeframe, the option period is extended to the date which is three months after the notice is given (rather than six months).
If this extended date falls after the expiry date of the lease, the lease will be extended until the date three months after the notice is given unless the parties agree otherwise.
Early rent reviews
Where a lease provides for a market rent review, a tenant can request an early rent review by giving notice to the landlord on or before the last date the option to renew the lease may be exercised.
If a valuer is appointed but the tenant is not notified of the rent at least 14 days before the last day to exercise the option, the date to exercise the option is extended to the date 14 days after the date on which the tenant is notified of the rent (Extended Expiry Date).
If the Extended Expiry Date is after the expiry date of the lease, then the lease is extended until the Extended Expiry Date unless the parties otherwise agree.
Cooling off period
Where a tenant has exercised an option to renew and has not requested an early rent review, the tenant has a 14 day 'cooling off period' after exercising the option, during which the tenant may notify the landlord it no longer wishes to exercise that option. If the tenant gives a notice to the landlord, the term will be extended by 14 days, the lease is not renewed for the further term and the option will no longer be exercisable by the tenant.
Actions you can take now
Landlords should:
- review their standard leases, particularly with respect to the definition of outgoings and how ESM costs are dealt with; and
- review their processes for providing tenants with details of changes in disclosures and leases, particularly noting the large penalties should this not be complied with.
Tenants should (once the changes are introduced):
- ensure they take advantage of the early rent review provisions so they can make an informed decision as to whether or not to exercise an option;
- understand the 14 day cooling off period if they do not utilise the early rent review provisions; and
- check they receive a copy of the changes to a proposed lease and disclosure statements so they are fully aware of what has changed.
We are committed to keeping our clients updated on all areas of interest. If you have any questions about the effect of any of the amendments, we are happy to discuss.