Property update: New Retail Leases Amendment Act introduces substantial changes for landlords and tenantsSep 28, 2020
The new Retail Leases Amendment Act 2020 (the Act) makes substantial changes to the law relating to retail leases in Victoria.
As these changes are now law:
- landlords should immediately review pro-forma lease documents and lease management procedures to ensure compliance with the changes; and
- tenants should consider the benefits of the new early rent review provisions, disclosure requirements and the cooling-off period.
Summary of changes
- Allows landlords to recover costs for essential safety measures from retail tenants if the tenant has in the lease agreed to pay those costs. This applies to existing leases.
- Requires landlords to return security deposits within 30 days of a lease ending.
- Allows a tenant to request an early market rent review, before an option to renew is exercised.
- Gives the tenant a 14 day ‘cooling-off period’ to avoid being bound by the exercise of an option to renew if the tenant has not requested an early market rent review.
- Increases the time within which landlords must give disclosure statements and proposed leases
- to new tenants.
- Requires landlords to give a more comprehensive disclosure statement on renewal.
- Requires landlords to give tenants more detailed information before the last date an option to renew may be exercised.
Essential safety measures (ESM)
In May 2015, the President of VCAT issued an advisory opinion that a landlord could not recover from a tenant costs a landlord incurs in complying with the landlord’s obligations under the Building Act in respect of ESM.
The Act changes that position and provides that a landlord may recover ESM costs from a retail tenant if the tenant has agreed in the lease to pay those costs.
Recoverable costs include the costs of carrying out repair and maintenance work and capital costs of installing equipment and fixtures to satisfy ESM requirements for which the tenant has agreed to pay.
There is, however, an argument that a landlord will not be entitled to recover ESM costs unless the lease specifically provides that the tenant must pay those costs. A condition that the tenant pay repair costs in general terms may not satisfy the requirements of the Act allowing landlords to recover ESM costs.
This change applies to existing leases in respect of ESM costs incurred after 22 September 2020.
Curiously, the right of a landlord to recover ESM costs is only given under the Act to landlords under retail premises leases and not landlords under other commercial leases.
The Act provides that a landlord must return to a tenant a security deposit within 30 days after the lease ends if the tenant has performed all its obligations under the lease instead of ‘as soon as practicable’ as previously required.
Once a lease ends, landlords will need to promptly determine if the tenant has complied with all its obligations, including its’ make good obligations, and draw down as necessary on the security deposit.
Options for renewal — notice to tenant
No later than 3 months before the last date an option for renewal may be exercised, the landlord must notify the tenant of:
- the last date by which the option to renew may be exercised;
- the rent payable for the first 12 months under the renewed lease term;
- the availability of an early rent review under the Act if a market rent review is to take place at the start of a further term;
- the availability of a cooling-off period under the Act; and
- any changes to the last disclosure statement given to the tenant.
If the landlord fails to give to the tenant all that information by the no later than 3 months before the last date an option for renewal may be exercised, the lease term may be extended until 3 months after the landlord has given the appropriate notice (the extended period).
The Act provides that the rent payable for the extended period, is to be:
- when an early rent review is requested by the tenant, the rent then determined if it is less than the rent last payable during the lease term; or
- when an early rent review has not been requested by the tenant, the rent set out in the landlord’s notice, if it is less than the rent last payable during the lease term.
Early rent review
The Act provides that if a lease contains a market review at the start of a further term, a tenant may request an early rent review within 28 days after the landlord gives the tenant all of the information required in respect of the option to renew (see above).
When a tenant requests an early rent review, the last day the tenant's may exercise its option is extended to 14 days after the tenant receives written notice of the valuer’s determination of the market rent.
A tenant does not have the right to request an early rent review in respect of a mid-term market rent review.
The Act provides a tenant with a 14-day cooling-off period after a tenant exercises an option to renew if the tenant has not requested an early rent review.
Within the cooling-off period, a tenant may notify the landlord that it does not wish to proceed with a further term it would otherwise be bound to because of its’ exercise of an option to renew.
If a tenant gives that notice during the cooling-off period then the option to renew lapses and the lease term is extended by 14 days.
Disclosure statements — new leases
Until 1 October 2020, a landlord must give the tenant a disclosure statement and the proposed lease form 7 days before the tenant enters into the lease.
The Act extends that period to 14 days before the tenant enters into the lease.
The lease term is deemed to start 14 days after the documents are given if the landlord fails to give those documents to the tenant 14 days before tenant signs the lease.
It should be noted that under the Act a lease is regarded as being entered into when:
- the tenant enters into possession with the consent of the landlord;
- the tenant begins to pay rent; or
- the lease is signed by both parties;
whichever occurs first.
Also, if the lease given to the tenant to sign contains any change to the proposed lease initially given to the tenant, the landlord must notify the tenant of the changes.
A landlord risks substantial fines, (currently up to $8,261 for individuals and up to $41,305 for corporations), if a landlord fails to notify the tenant of those changes.
Disclosure statements — lease renewals
The Act provides that on renewal, the landlord must give the tenant a disclosure statement that either:
- sets out changes to the information set out in the last disclosure statement given to the tenant; or
- is not more than 3 months old.
What to do now
Landlords should review and update current pro forma leases to ensure the landlord’s interests are not adversely affected by these changes. Landlords will also be required to update leasing management practices.
Tenants should consider the advantages of these changes, in particular the early rent review and cooling-off provision.
The Act also creates a number of anomalies and possible arguments relating to its application in some circumstances.
Further exclusions from retail premises leases
The Minister for Small Business also determined that retail premises do not include premises that may be used wholly or predominantly for agricultural, pastoral, horticultural or apicultural activities, including grazing and agistment.
If you require advice or assistance on how these changes may impact you, please contact Morgan Scholz, Head of Property, on (03) 8600 8890 or firstname.lastname@example.org, Mark Yaskewych, Principal Lawyer, on (03) 8600 8830 or email@example.com, or Geoff Kliger, Senior Special Counsel, on (03) 8600 8878 or firstname.lastname@example.org.
Note: This update is a guide only and is not intended to constitute legal advice.