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Retail Shop Leases Act – changes – ‘catering’ to the needs of restaurant operators or not?

Important changes to the Retail Shop Leases Act 1994 (Qld) (Act) commenced on 25 November 2016 as a result of a statutory review of the Act. The overarching purpose of the Act is to protect operators of retail businesses. However, it seems that Parliament may have forgotten this in respect of some important areas affecting restaurant and catering operators.

This article will highlight some of the key changes to the Act and other issues currently impacting the restaurant and catering industry.

To be, or not to be (a retail shop)

Retail shops with a total floor area greater than 1,000 mare now excluded from the definition of a “retail shop” whereas previously this exception would only apply where the corporation was a listed corporation or a subsidiary of a listed corporation. This means that operators of large restaurants might now be faced with negotiating a lease with a major landlord without the assurance of the protections of the Act.

No need to ‘wait out’ the 7 days

A tenant is deemed to have ‘entered into’ a retail shop lease as soon as either the lease is signed, the tenant enters into possession or the tenant first pays rent. At least seven days before a tenant ‘enters into’ a retail shop lease, the landlord must give the tenant a draft of the lease and a disclosure statement (disclosure period) failing which, the tenant has an ability to terminate the lease.

The Act now allows the tenant to give the landlord a waiver notice and (unless the tenant is a major tenant) a legal advice report, in which case the 7 days disclosure period does not apply, provided that the landlord gives the tenant the disclosure statement before the tenant enters into the lease.

This change will hopefully benefit restaurant and catering operators as it prevents the current practical difficulties where the tenant wants to gain access as soon as possible, but is prevented from doing so until the seven day disclosure period has expired.

Whilst the Act provides for a similar disclosure period waiver process on assignment of the lease, the new legislation introduces uncertainty to the sale of business process, since the relevant disclosure statement must be given to a purchaser of a business at least seven days before the business sale contract is signed (if not waived by the buyer).

Beware the ratchet and multiple rent review provisions

A ratchet clause is a lease provision preventing the rent from decreasing following a rent review. Multiple rent review provisions operate similarly. Historically, these types of clauses in retail shop leases have been void. Major tenants (tenants of five or more retail shops) can now waive ratchet clauses and multiple rent reviews without legal and financial advice. These changes may lead to landlords putting commercial pressure on major tenants to agree to ratchet provisions.

Tricky trading hours

One of the busiest and most profitable trading times for restaurants and catering businesses is usually ‘after hours’. However, the Act now closes off any ability for tenants to recover compensation where landlords prevent the tenant from extending its trading hours. It is important to keep in mind that the Act does not address the emergence of “restaurant precincts” and fails to allow landlords to effectively manage extended trading hours of differing operators. This is because “core trading hours” are determined by a ballot of the majority of tenants over the entire centre leading to uncertain outcomes. Accordingly, it is critical that restaurant and catering business owners specify their desired extended trading hours in the lease.

More accountability for the recovery of outgoings and promotion levies

Outgoings estimates and annual audited statements of outgoings will now need to provide a detailed breakdown of the administration costs (including centre management) of running the centre. A tenant now has the right to withhold payment of outgoings until the estimate or audited statement is given by the landlord.

If a retail shop lease requires the tenant to pay amounts to the landlord for promotion and advertising, the landlord must make available to the tenant a marketing plan and an audited annual statement within specified time periods.

Permission now given to landlord to disturb

There are various compensation provisions in the Act which trigger a right of compensation to tenants in respect of landlord caused disturbance. A tenant must now give written notice to the landlord of any compensable loss or damage as soon as is practicable after it is suffered. Failure to do this will be taken into account in any ultimate compensation award. The clear implication to this new provision is that there could be a reduction in the compensation award if the tenant fails to give the required notice.

A landlord is no longer liable to pay compensation for action taken as a reasonable response to an emergency or acting in compliance with a statutory duty. Furthermore, landlords can now limit compensation for anticipated disturbance up to one year after the lease is entered into, provided that they give the tenant written notice specifying information about the anticipated disturbance. Whilst the Act provides that general statements will not be effective to exclude liability, we envisage landlords will attempt to utilise these provisions as much as possible and tenants need to ensure they obtain full particulars of the nature of any disturbance.

The Act also closes the potential for tenants to “double dip” with compensation for relocation/demolition by confirming that landlords only need to pay this once. In our experience, compensation awarded to tenants under the Act does not usually cover all of the financial costs of relocation and demolition and wherever possible, tenants should attempt to negotiate these clauses out of the lease.

Costly consequences 

Tenants were previously not responsible for paying landlord’s legal fees associated with lease preparation. Now tenants may need to pay fees where they fully agree to the lease terms, instruct the landlord to prepare the lease but ultimately refuse to sign. Recent case law shows that lease negotiations by email can be binding. Accordingly, tenants should be wary when negotiating lease terms and ensure they obtain appropriate legal advice.

In welcome news to tenants however, the payment of an excess in relation to a claim on the landlord’s insurance policy for the centre/building is no longer recoverable as part of outgoings. Equally mortgagee consent fees are no longer recoverable from tenants.

Revamping refurbishment obligations

Tenants are now only required to refurbish or refit premises where the lease gives details of the nature, extent and timing of the refurbishment. It is critical that tenants understand the extent of their obligations to refurbish and make good both during the lease term and on expiry or earlier lease termination. This is particularly important for restaurants as the premises often contain expensive kitchen equipment.

Get out of jail free card – release on assignment

Guarantors are now released from liability after an effective lease assignment has occurred. This is a huge relief for restaurant and catering owner/operators who were previously ‘on the hook’ for the lease even after they had sold or closed their business. However, this new provision will not apply if the outgoing tenant has not complied with their disclosure obligations on assignment. Accordingly, any restaurant operator proposing to sell their business should obtain legal advice before signing the business contract.

Turnover rent – negotiate, negotiate

Tenants can now negotiate whether they need to provide landlords with monthly turnover certificates and an annual audited statement of turnover. Tenants should take the opportunity to moderate their reporting obligations in respect of turnover wherever possible.

Key takeaways and general observations

Whilst there are some ‘pluses’ for the industry with the new changes, there are plenty of ‘minefields’ left to navigate. These changes also need to be viewed in the context of the current state of the ‘tenant friendly market’. In particular:

  • Now is a good time to renegotiate lease terms if the lease term is close to expiry, particularly if a tenant finds itself paying above market rent but is willing to offer the landlord a commitment to a longer lease term for lower rent now.
  • Proper lease negotiation is always recommended before committing to any offer to lease, particularly in light of the changes to the Act allowing recovery of legal costs.
  • It’s not just the lease terms that matter. Tenants should always ensure they conduct a full due diligence of the proposed premises including issues such as the building classification to ensure their occupation is not unlawful.
  • Currently, we are seeing more favourable incentives on offer to tenants. It is important to get taxation advice on incentives to ensure full utilisation of the benefit.
  • Landlords are more willing than in the past to accept bank guarantees without additional director guarantees.
  • Make good at expiry of the lease is becoming increasingly negotiable which can result in significant cost savings at the end of the lease.
  • Ensure all representations that induced entry into of the lease are actually set out in the lease. In the recent case of Crown Melbourne Limited v Cosmopolitan Hotel (Vic) Pty Ltd [2016] HCA 26, the tenant was not entitled to rely on a pre-contractual promise in relation to renewal of the lease and was forced to forfeit some $2 million of fit out on expiry of the lease.

Whether you are looking to lease new premises, sell or coming close to the end of your lease term, now is the time to take action to ensure you fully understand the recent legislative changes and get proper advice on your lease.

For more information, please contact:

Cathy author-cathy-russoRusso 
Prinicipal – Property and Construction
E: Cathy.Russo@mk.com.au
T: 07 3235 0403

 

Paris Grayauthor-paris-gray
Lawyer – Property and Construction
E: Paris.Gray@mk.com.au
T: 07 3235 0441