Monday 30 September 2019

So I'm a 'retail' landlord - but what does that mean?

Government agencies are often landlords of 'retail premises' under the Retail Leases Act 2003, for example where the agency leases land at a train station for use as a café or part of a public hospital for use as a florist or kiosk.

The Retail Leases Act was introduced in 2003 to provide greater certainty and fairness in the commercial relationship between landlords and tenants. This was driven by a desire to protect and provide greater security of tenure for small businesses.

When you are negotiating a lease, it is crucial to identify at the outset of negotiations whether it is a 'retail lease' within the meaning of the Act. Where the Act applies, the parties to a lease cannot agree otherwise. A provision in a lease is void if it is inconsistent with anything in the Act.

In some instances, if the Act applies, a landlord may even prefer not to proceed with the transaction, for example, if the premises are likely to require significant and expensive capital repair or refurbishment, as this burden could fall on the landlord. It may be more economical to find a tenant who wishes to make use of the premises for non-retail purposes, if the nature of the premises permits.

Landlords' obligations

The Act imposes quite onerous obligations on landlords. Depending on the circumstances, there can be serious consequences for failure to comply, for example, the tenant may have a right to terminate (or conversely, to extend) the lease.

Some of the main obligations which the Act imposes on landlords are:

  • Provide a copy of proposed lease and information brochure: the landlord must provide to a tenant copies of the proposed lease and the Victorian Small Business Commission information brochure, as soon as the parties enter into negotiations. Failure to do so is an offence against the Act.
  • Disclosure requirements: the landlord is required to provide a Disclosure Statement to a tenant at least 7 days before entering into the lease, which sets out the key information about the lease.  If the landlord fails to provide a Disclosure Statement, the tenant may, after complying with certain notice requirements, withhold rent owed and is not liable to pay rent for the period from the day on which the tenant's notice was given until the tenant receives a Disclosure Statement. The tenant may also terminate the lease at any time before the end of 7 days after receiving the delayed Disclosure Statement.
  • 5-year minimum term: the landlord must offer an initial term of at least 5 years (but the tenant can waive its right to a 5-year term with the Small Business Commissioner's approval).
  • Provide a copy of the executed lease: the landlord must give the tenant a copy of the lease signed by the parties within 28 days of it being signed. If the landlord fails to do so, the tenant may give written notice terminating the lease.
  • Obligation to notify tenant of options for renewal: where a lease contains an option to renew, the landlord must give the tenant notice in writing of the last date to exercise the option, between 6 and 12 months in advance of the date on which the option is no longer exercisable. Failure to do so means that the lease continues, and the period for exercising the option extends to six months after the landlord notifies the tenant as required.
  • Notice of landlord's intentions concerning renewal: where a tenant does not have an option for renewal under the lease, the landlord must also give written notice between 6 and 12 months before the end of the lease. This notice must either offer lease renewal or state that the landlord is not offering a lease renewal. If the landlord fails to give notice within the period, the lease continues until six months after notice is finally given to the tenant, or when the tenant terminates the lease.
  • Must allow transfer of lease: a landlord can only refuse consent to assign a lease in limited circumstances set out in s 60(1) of the Act, such as where the proposed use is not consistent with the permitted use under the lease.
  • Obligation to maintain premises: the landlord must maintain the structure, fixtures and plant and equipment in the premises consistently with their condition at the beginning of the lease. The landlord cannot pass on capital costs incurred in complying with this obligation, such as major repairs and replacements, to the tenant.1
  • Cannot pass on certain costs: the landlord cannot recover from the tenant any capital costs (unless the lease expressly requires the tenant to undertake certain specific capital works at the tenant's own cost), depreciation, land tax or legal costs related to preparing the lease.
  • Unconscionable conduct: the Act prohibits unconscionable or unfair conduct by both landlords and tenants, and allows for compensation for loss caused by that conduct. 

Resolving disputes

Where parties cannot agree on resolution of an issue arising under a retail premises lease, either party may refer the dispute for mediation to the Victorian Small Business Commission (VSBC).

Only once the VSBC certifies that mediation has failed, can the parties apply to the Victorian Civil and Administrative Tribunal (VCAT) for a formal hearing.

VCAT has exclusive jurisdiction to hear and determine some disputes arising under a retail premises lease. VCAT also has the same jurisdiction and powers as the Supreme Court in relation to proceedings for relief against forfeiture. This means that tenants can seek an order allowing them to stay in the premises, even in circumstances where they have breached the lease and failed to rectify the breach within time, by satisfying VCAT that the tenant is in a position to promptly rectify the breach and the lease should be reinstated.

As property law experts within Government, the VGSO Property Team is well placed to assist you with retail leasing arrangements and other property issues.

For advice and assistance, please contact:

Anthony Leggiero
Managing Principal Solicitor
Ph: 9947 1430

Margaret Marotti
Managing Principal Solicitor
Ph: 9947 1410

Elizabeth Wortley 
Principal Solicitor
Ph: 9947 1433

This blog was prepared with the assistance of Margie Brown, Law Graduate.

Small Business Commissioner Reference for Advisory Opinion [2015] VCAT 478