This law update is the second in our series of updates that examines the issues that are being canvassed by the current review of the Commercial Tenancy (Retail Shops) Act 1985 (WA) (Retail Shops Act).
Additional Disclosure to Prospective Tenants
The Retail Shops Act currently requires landlords to provide a prospective tenant:
Some states and territories prescribe a standard list of operating expenses or a checklist for landlords to complete, instead of landlords providing their own list (Australian Capital Territory, New South Wales, Northern Territory and Victoria).
Some tenants have raised issue with respect to electricity costs, particularly where there are embedded electricity networks in the shopping centre. They cite a lack of transparency with respect to these costs (and they are concerned that landlords are applying a margin to the cost of this supply of electricity and not passing on to the tenants the benefits of discounted rates the landlord has negotiated to the electricity supplier).
The issue under consideration is:
The Retail Shops Act currently provides that the landlord can recover operating expenses from a tenant (section 12, Retail Shops Act). The definition of “operating expenses” does not allow a landlord to impose a margin on those costs comprised within “operating expenses”.
In our opinion, nothing further needs to be disclosed. The current form of disclosure statement is sufficient.
Disclosure on Renewal of the Lease
The landlord is not required to provide a disclosure statement or a tenant guide on the renewal of a lease consequent upon the exercise by a tenant of a right to renew the term of a lease. This is also the case with respect to the option arising from the right to a minimum five‑year term.
The Australian Capital Territory, New South Wales, The Northern Territory, Queensland and Victoria require the landlord to provide disclosure to the tenant on the renewal of a lease:
We note that, although Queensland permits a tenant to waive the disclosure at renewal, unless the tenant is a ‘major lessee’ the waiver can only be given after legal advice has been obtained. As such the waiver is rarely used by non ‘major lessees’.
In our opinion, such disclosure is not necessary. The Retail Shops Act already places considerable obligations on landlords and, typically, any renewal is on the same, or substantially the same, terms as the original lease.
Any changes in the lease that will apply to the renewed term will be documented in the extension or renewal of lease document. For example, the rent payable by the tenant at the commencement of the renewed term (or at least the mechanism to determine that rent) will be known and documented.
It may be difficult for the landlord to provide information (for example, estimates of operating expenses) when the exercise of the option to renew takes place before relevant information is known (i.e. the operating expenses budget for the relevant year may not yet have been set).
Generally, the only material changes that are likely to occur during a term of the lease, are changes to the Centre/Building which affect the gross lettable area and, in all likelihood, operating expenses. As the landlord is obliged to provide annual budgets in relation to operating expenses, these changes will be evident to the tenant from these documents. Additional disclosure is not necessary.
Disclosure at Assignment of Lease
There is currently no requirement in the Retail Shops Act for any disclosure to be given to the assignee of a tenant’s interest in a retail shop lease. The issue is whether a prospective assignee should receive the same benefit of disclosure as a tenant would, at the start of the lease.
All states and territories, other than Western Australia and Tasmania, require the assignor to provide disclosure to a prospective assignee before assigning the lease.
We support the contention that some disclosure should be given by an assignor to a proposed assignee. An assignee should be provided with an opportunity to understand the particulars of the lease to be assigned to assist the assignee to make informed decisions. This disclosure should set out all financial obligations on the tenant under the lease.
The lease (including the tenant guide that was provided with the lease) should be attached to the assignor’s disclosure statement (together with copies of any previous extensions, assignments or variations), together with a copy of the most recent operating expenses budget (if relevant). This will ensure that the assignee has all necessary information with respect to the terms of the lease.
There should be a requirement that a copy of all information provided to the assignee is also provided to the landlord. This is so that the landlord can establish that the assignor has provided disclosure to the assignee. However, there must be no obligation on the landlord to review the information provided or to determine whether it is correct.
We do not consider it necessary for the assignor to provide any additional disclosure (over and above that discussed above) if the assignee will continue the business in the leased premises. The assignee should otherwise undertake its own due diligence in respect of the proposed transaction.
The consequences of the failure of the assignor to make the required disclosure will need to be specified in the legislation. Currently, the assignor is released from its monetary obligations under the lease on assignment. Such a release should only occur if the required disclosure has been provided to the assignee.
Disclosure and Access to Market Rent Information
The issue under consideration is whether the current provisions of the Retail Shops Act regarding disclosure and access to market rent information with respect to the review of rents is operating effectively.
We are not aware of any significant issues with the existing provisions of the Retail Shops Act dealing with access to rent information.
We are not aware of any changes in the retail tenancies market to require any reform in this area.
Turnover Rent
The Retail Shops Act allows for turnover rent to be recovered by landlords under a retail lease. The Retail Shops Act contains some safeguards against misuse by landlords of the information provided to determine the turnover rent.
The issue under consideration is whether online transactions should be included in the calculation of turnover.
New South Wales is the only state that has legislated in relation to this issue. The position in New South Wales is that turnover rent does not include online transactions, unless:
It is well known that there has been a significant increase in online sales over the past five years. The indications are that this trend will continue and that online sales will be a permanent and significant part of retail sales.
We think online sales should be taken into account in the calculation of turnover if there is a sufficient nexus with the retail shop. Where online sales either originate from, are delivered to, or collected from, the retail shop, the retail shop is an integral part of the online transaction. On this basis, there is no logical reason why these types of online sales should be excluded from the calculation of turnover.
Land Tax
There is no prohibition in the Retail Shops Act against landlords requiring tenants to pay land tax (other than the requirement that recovery of the land tax be limited to that calculated on a single ownership basis).
The Northern Territory, Queensland, South Australia and Victoria do not allow land tax to be recovered from retail tenants.
A number of tenant stakeholders have requested that payment of land tax to be reviewed.
In our view, the present position should remain – landlords should be able to recover from tenants land tax, albeit calculated on a single ownership basis.
Other statutory charges are recoverable from tenants (e.g. council and water rates).
If such costs cannot be recovered from tenants, rents will increase to cover landlords having to bear these costs, so the net effect is the same.
If the tenant was to operate its business from a premises it owned, the tenant would be required to pay these costs. It, therefore, is reasonable and sensible that, where a tenant rents a retail shop, the tenant pays its share of the land‑holding costs attributable to that retail shop.
Marketing Funds
The Retail Shops Act allows landlords of a retail shopping centre to require tenants to contribute to a marketing fund for the Centre, provided:
Most other jurisdictions require the landlord to provide the tenant with a marketing plan or budget detailing the advertising and promotion expenditure for the next following accounting period.
The issue under consideration is whether the current provisions in the Retail Shops Act are fair.
In our opinion, landlords of larger centres (say, those with 20 or more retail shops) should be required to provide details of the proposed marketing plan budget before each accounting period.
It is likely that landlords of larger centres already have a marketing plan for the centre. As a result, this should not be a significant imposition or cost for landlords. Such a disclosure will provide transparency for tenants, so they are aware how their contributions to the fund are intended to be used.
Security Bonds, Bank Guarantees and Personal Guarantees
The provision of security by way of a personal guarantee, bank guarantee or security bond (or a combination of them) is a common requirement of retail leases in Western Australia.
The Retail Shops Act does not currently regulate these modes of security.
Western Australia and Queensland are the only jurisdictions that do not have legislation that regulates the use of these securities.
New South Wales, South Australia and Victoria require the security to be returned to the tenant within two months after the tenant fulfills its obligations under the lease.
The Australian Capital Territory, South Australia and Tasmania limit the value of the security to the equivalent of three months’ rent.
In our experience, the main point of contention is the return of the security to the tenant when the lease ends.
Most leases provide a time limit within which the landlord must return the security to the tenant. This is often specified as two or three months after the tenant has fulfilled its obligations under the lease.
We suggest that the Retail Shops Act be amended to contain a requirement for the return of the security to the tenant within two months of the tenant having fulfilled its obligations under the lease. Sometimes it can take up to two months for the landlord to have ensured that the tenant has complied with its obligations and to obtain quotes in relation to any works required to be done for the tenant’s obligations to have been fulfilled.
This is consistent with those jurisdictions that have time limits for the return of securities to tenants. It also reflects what is common practice in Western Australia, in any event.
If a timeframe for return of a security is specified in the Retail Shops Act it must be very clear that the timeframe only begins after the tenant has complied with all of its obligations under the lease – the start of the timeframe cannot be tied to the expiry of the lease.
We do not support the imposition of any cap on the amount of the security that a landlord may require a tenant to provide. This is because the amount of security required is determined by a range of commercial considerations (such as landlord’s works, leasing incentives, and extent of make‑good obligations) as well as the level of risk the landlord believes is associated with a lease to that particular tenant. Therefore, in our view, this is a commercial term of a lease that is to be negotiated between the parties.
