Statutory Review of Commercial Tenancy (Retail Shops) Agreements Act 1985 (WA) - Part 1

This law update is the first in a series of updates that examines the issues that are being canvassed by the current review of this legislation.

The Commercial Tenancy (Retail Shops) Agreements Act 1985 (WA) (Retail Shops Act) regulates retail leasing agreements between landlords and tenants, and aims to remedy the disparity in power and allow for fair and transparent leasing arrangements.

A review of the Retail Shops Act is required to be conducted every five years. This review, however, is well overdue.

The purpose of this review is to ensure that the Retail Shops Act is operating effectively to:

• address imbalances in bargaining power;
• maintain viability for landlords and tenants;
• accommodate the diversity of the sector and an ever changing retail marketplace; and
• promote fair contract terms.

A consultation paper, which forms part of the review process, has been released. The purpose of the consultation paper is to collect feedback on matters relevant to the operation and effectiveness of the Retail Shops Act.

The relevant issues being addressed in the consultation paper include:

• leases covered by the Retail Shops Act;
• minimum five-year lease terms;
• disclosure requirements;
• lease costs;
• first right of refusal;
• early termination due to severe financial hardship;
• trading hours;
• dispute resolution;
• unconscionable conduct;
• the impact of COVID-19; and
• other issues.

Leases Covered by the Retail Shops Act

Leases to small businesses providing retail services

The Retail Shops Act covers retail businesses that sell, or predominately sell, goods. As such, the Retail Shops Act will not automatically cover leases to retail businesses that predominantly sell services, unless:

• the premises are in a retail shopping centre; or
• the business being conducted is a ‘specified business’ under the Retail Shops Act regulations.

The relevant issue under consideration is whether the Retail Shops Act should be extended to automatically apply to leases for small businesses that are predominantly selling services, regardless of where the premises are located.

Lavan comment

The Retail Shops Act, by its regulations, already extends the application of the Retail Shops Act to a range of service businesses. We think a blanket inclusion of service businesses will cast the ‘net’ too wide. For example, in our view, there is no justifiable reason why law practices and medical practices should be covered by the Retail Shops Act.

Excluded businesses or premises

The Retail Shops Act allows for specific premises or leases to be excluded from its application. The only uses that currently exclude the relevant leasing arrangements from the application of  the Retail Shops Act are the operation of a vending machine or automatic teller machine.

The relevant issue under consideration is whether certain leases or premises should be excluded from the Retail Shops Act’s application, in addition to vending machines and automatic teller machines.

Lavan comment

The consultation paper suggests:

• Market stalls or temporary stalls at an agricultural or trade show, carnival, festival or cultural event could come within the scope of the exemption. We think this is unlikely to have a large impact if applied. These types of arrangements are usually short term and the 6 month exemption that already exists under the Retail Shops Act would apply to a majority of these arrangements. Where a market stall tenant has a permanent stall, it is difficult to justify why the Retail Shops Act should not apply. In other jurisdictions, permanent stalls are not included in this category.
• Premises used for charitable or community purposes where the rent is less than $10,000 per annum could come within the scope of the Retail Shops Act. We think it is unlikely that this exemption will be pursued, given the perceived imbalance of bargaining power between a charitable tenant and commercial landlord.
• Premises with an amusement park, bowling alley or cinema. We see that there would be little application of these types of exemptions in WA. Unlike in Queensland (where the amusement /theme park exemption applies) WA does not have large theme parks or a large number of them. Usually, the owners of the parks within WA operate all the business within the park. As a result, there are rarely third party businesses operating within the parks.
• Premises in common areas, such as ride machines for children, display advertisements, public telephones, storage and parking. This suggestion should be pursued. Such uses are akin to an ATM or vending machines, which are already excluded from the Retail Shops Act. Any leasing arrangement where the sale of goods operate solely by a machine (i.e. no human involvement,) should be excluded from the operation of the Retail Shops Act.

Coverage of Small Business Tenants

The Retail Shops Act does not apply to leases where the shop has a lettable area greater than 1,000m² or the lease is held by a publicly listed corporation or its subsidiary.

Despite this, privately owned large retail businesses can still lease multiple small premises and have those leases covered by the Retail Shops Act. Furthermore, small business tenants with a lettable area greater than 1,000m², such as plant nurseries or art galleries, will not be covered by the Retail Shops Act.

The relevant issue under consideration is whether genuine small business tenants should be better protected by either amending the Retail Shops Act to apply to leases for certain businesses with a lettable area greater than 1,000m² (where appropriate) or introducing a monetary threshold which excludes leases with high estimated yearly occupancy costs.

Lavan comment

• The definition of ‘retail shop lease’ in the Retail Shops Act is flawed in its reference to companies listed on stock exchanges outside Australia that are members of the World Federation of Exchanges. Whilst the membership of the World Federation of Exchanges is quite extensive, it does not include all stock exchanges, such as the New York Stock Exchange. This means a lease of a retail shop not exceeding an area of 1,000m² to a company listed on the New York Stock Exchange (one of the largest stock exchanges in the world) or a subsidiary of such a company is regulated by the Retail Shops Act.
• The Victorian retail shops legislation does not apply to leases with an annual rent in excess of $1,000,000 and in South Australia the threshold is $400,000. In our opinion, the rent threshold could be a useful determinant of the retail leases that should be regulated by the Retail Shops Act. The ability of a tenant to meet such a rent threshold would be an indication that the tenant has sufficient financial standing and business acumen that does not warrant the protections (and restrictions) of the Retail Shops Act. In our view, a rent threshold similar to that in South Australia is warranted. However the 1,000m² threshold should also apply.

Minimum Five Year Lease

One of the key protections provided by the Retail Shops Act is the right to a minimum five year lease term. A retail shop tenant with a lease longer than six months has the choice to renew and extend the lease to a term of at least five years (with some limited exceptions).

The relevant issue under consideration is whether the right to a minimum five year lease term should be:

• retained;
• removed;
• amended to include a mechanism to contract out of the right; or
• amended to apply only after a tenant has been in possession of the premises for 12 months (rather than six).

Lavan comment

In our opinion, this five year term concept as applied under the Retail Shops Act is not helpful to landlords or tenants. The South Australian legislation allows for shorter terms provided the tenant’s solicitor signs a certificate that the shorter term has been explained to the tenant. This system seems to work well. In our experience, this is a simple mechanism that achieves much greater flexibility in retail lease negotiations (from the perspective of both the landlord and the tenant).

The rigid application of the minimum five year term under the Retail Shops Act diminishes flexibility in the retail rental market. Also, because the costs of exclusion of leases are not recoverable often a landlord will not grant a lease with an initial term of less than five years. As a consequence, tenants are also often hamstrung by this rigid rule.