When leasing commercial property, it is important for tenants and landlords to understand the relationship they are entering and the rights and obligations they have.
In New South Wales, retail leases are regulated by the Retail Leases Act 1994 (NSW) (the ‘Act’). A commercial lease is classified as a ‘retail lease’ if it falls within the Act’s definition. This is usually determined by the nature and location of the premises but generally includes shops and outlets situated in a retail centre and / or utilised for selling, hiring, or providing goods and services to the public.
With the increase of retail shopping complexes over the years, the Act was introduced to enhance consumer protection for tenants, improve communication and provide access to low-cost dispute resolution for the retail leasing industry. Consequently, retail leases are governed by specific rules designed to promote fairness and transparency before and during lease negotiations, and throughout the term of the tenancy.
A landlord leasing or offering to lease retail premises has specific disclosure obligations. This article outlines the information a landlord must provide during a leasing transaction and the consequences if the disclosure requirements under the Act are not met. This is a general overview only and landlords and tenants should obtain professional advice tailored to their specific circumstances.
Disclosure obligations at a glance
A landlord is required to provide the prescribed information relevant to a prospective tenant’s decision about whether to enter or renew a retail lease. The following documents must be available before the landlord or agent offers a new retail lease.
- A draft copy of the proposed lease.
- A lessor’s disclosure statement.
- The NSW Retail Tenant’s Guide, which outlines the rights and obligations of retail tenants and landlords and explains some commercial matters.
These requirements are widely referred to as a landlord’s disclosure obligations.
What is a disclosure statement?
The disclosure statement outlines important information about the lease, such as:
- the premises to be leased, amenities, shared facilities and services such as air conditioning, cleaning and maintenance;
- the term of the lease and renewal options;
- the rent payable, including turnover rent;
- rent reviews and the method for calculating rent increases;
- the tenant’s estimated liability for outgoings;
- tenant’s fitout requirements;
- relocation or demolition clauses and information regarding planned future works; and
- specific information for shopping centre leases such as trading hours, annual sales for the centre, turnover for speciality shops per square metre, traffic count, and lease termination dates for anchor tenants.
Schedule 2 of the Act sets out the form and content of the disclosure statement.
When must the disclosure statement be provided?
The landlord’s disclosure statement must be provided to the tenant at least 7 days before a new retail lease is entered. Upon renewing a lease, the landlord must either reproduce the original disclosure statement with a written update or provide a fresh disclosure statement.
Consequences of not conforming with disclosure obligations
False, misleading or non-issue of disclosure statement
Information in a disclosure statement must be complete and accurate to allow a tenant to make an informed decision regarding the proposed transaction.
Generally, a tenant may terminate the lease by giving written notice within the first 6 months if the landlord fails to issue a disclosure statement within 7 days prior to the lease being entered or provides a materially false, misleading or incomplete disclosure statement.
A tenant who validly terminates a lease in these circumstances may also have rights to claim compensation for expenses reasonably outlaid in entering the lease including recovery of fitout costs.
The tenant may not terminate on grounds that the disclosure statement is false or misleading if the landlord acted honestly and reasonably, and the tenant is in substantially as good a position as if the error had not occurred.
New South Wales Civil and Administrative Tribunal (NCAT) may resolve claims concerning retail leasing disputes to the prescribed jurisdictional limit. NCAT may also order the rectification of a disclosure statement or deem that a disclosure statement has been provided in certain circumstances.
Disclosure statements may be amended by agreement between the parties before or after the lease has commenced and the amendment will have effect from the date determined in the agreement.
Excluding outgoings or incorrect estimates
Landlords must itemise all outgoings in the disclosure statement and provide accurate estimates of the tenant’s liability for these items. Generally, a landlord cannot require a tenant to pay for an outgoing that has not been included in a disclosure statement. If the amount of an outgoing listed in the disclosure statement exceeds the estimate, a landlord may not claim the excess if there are no reasonable grounds for the estimate provided.
Lessee’s disclosure statement
A lessee’s disclosure statement forms part of the disclosure documentation and is an acknowledgment by the tenant that the relevant disclosure documents have been received and that the obligations under the lease are able to be fulfilled. There is also opportunity for the tenant to include any representations made by the landlord or agent concerning the lease. Such matters might include levels of passing traffic or the mix of tenants within a shopping complex.
The tenant is required to complete the lessee’s disclosure statement and return this to the landlord within 7 days of receiving the lessor’s disclosure statement.
Conclusion
Parties to a retail leasing arrangement should be conversant with their rights and obligations under the Act.
Landlords should ensure that leasing and disclosure documents are carefully prepared with consideration to the content and service requirements. Failing to follow the correct processes or providing incomplete or inaccurate documents can have costly results.