Security of Tenure
While there is support for harmonized retail tenancy legislation around Australia, retail tenancy legislation remains a state matter. Fifteen years ago the Victorian Parliament passed legislation that specifically regulated the relationship between landlords and tenants in retail tenancies for the first time. The legislation was designed to protect small business tenants against perceived inequities when dealing with their landlords. The first legislation was the Retail Tenancies Act 1986. In 1998 the Retail Tenancies Reform Act came into force in response to perceived deficiencies in the 1986 act. However, the Reform Act's effectiveness has been questioned. There are now three regimes that might potentially apply to retail tenancies:
- the Property Law Act 1958, which applies to all tenancies and is the only legislation relevant if a lease was entered into before September 1987, or if the lease is outside the scope of the 1986 act or the Reform Act because of special factors, including the area of the premises let and the status of the tenant;
- the 1986 act, which still applies to leases granted between September 1987 and June 1998; and
- the Reform Act, which applies to leases granted (or renewed) since July 1 1988.
The Victorian government has implemented an extensive review of the workings of the 1986 act and the Reform Act with a view to eliminating inconsistencies, addressing anomalies and identifying other reforms that are necessary or desirable to provide retail tenants with appropriate protection.
Under the Reform Act the focus of protection falls on small retail businesses, because of a general lack of sufficient relevant information available to them in order for them to make a commercially advantageous decision, and their weaker bargaining position in the marketplace. The current approach limits protection by excluding tenants with a lease for premises with a floor area of over 1,000 square metres, as well as public corporations and franchisees. The review addresses these exemptions and acknowledges the difficulty in identifying a suitable criterion for identifying a business as a 'small business'. The current drafting of the exemption relating to public corporations unfairly excludes small businesses operating under a company structure from the scope of the Reform Act. The suggested response is to differentiate between listed and unlisted companies as defined in the Corporations Act 2000, extending protection only to unlisted companies. The rationale behind exempting listed companies is based on the suggested close correlation between listed companies and big business. However, this recommendation is far from adequate. The reality is that some privately owned retail chains are larger than retail businesses operated by a listed public company. The proposed criteria would thus retain protection for large retail chains with bargaining power equal to or greater than the landlord's.
The proposed distinction between small and large companies is coupled with a prescribed rent threshold as the most effective way of determining which retail tenants should be afforded protection under the Reform Act. Currently there is no proposal to set different market rent levels based on the area in which the retail business is located.
The Reform Act's scope extends to businesses involved in providing professional services, such as lawyers, architects and medical specialists. Doubts as to whether protection should be extended to professional practices were based on policy considerations. In particular, the successful operation of a professional practice is generally not dependent on its location and a location change would do little to affect adversely its business. Despite this argument the review recommends that commercial tenants retain coverage under the Reform Act. The justification is based on two factors. First, some tenants operating professional services businesses face the same information and negotiation disadvantages as retail tenants. Second, there is a growing trend for professional services to locate in shopping centres. The need for legislative intervention is questioned as commercial and professional tenants possess the resources to negotiate a lease.
By virtue of its definition of a 'lease', the Reform Act excludes from the scope of protection tenants with leases for less than a year. This provision can be used as a device to circumvent the Reform Act's protection whereby leases with a term of 364 days or less are continually renewed. The review has isolated this device as a method of thwarting the operation of the Reform Act, and proposes that arrangements of successive short-term leases be deemed a 'lease' and subject to the legislation. However, despite abuse in some cases, this provision is a legitimate means of allowing the landlord and tenant to opt out of the legislation. If this recommendation is implemented an alternative 'opting out' arrangement must be provided.
The mandatory disclosure statement was a critical element in the drafting of the Reform Act, providing a fundamental tool that facilitated informed decision-making by prospective tenants. The review has focused particularly on the sanctions imposed by the Reform Act, where a landlord fails to provide a statement or provides a deficient one to a prospective tenant. The existing sanctions have been deemed oppressive from the landlord's point of view and the review recommends alternatives. The existing sanctions allow the tenant:
- to withhold payment of rent until seven days after the statement is provided;
- to terminate the lease up to seven days after being given the statement; and
- to negate its liability to pay rent for the period before being given the statement.
This provision is subject to abuse by tenants who may choose not to raise an issue about the statement until a substantial part of the lease period has expired, entitling them to claim that the rent paid for this period should be refunded. Suggested proposals for redress include provisions precluding the tenant from relying on the failure to receive a statement or the receipt of a deficient statement 12 months after the statement was required.
Under the Reform Act first-time retail tenants are guaranteed tenure for up to five years, which is the standard term legislated in most Australian states and territories. Retail tenants' security of tenure under the Reform Act has been considered during the review. The common issue identified with security of tenure is the lack of certainty of a further lease upon expiry of the initial term. Recent research has shown that the key issue surrounding security of tenure is the alleged unfair bargaining position of 'sitting' tenants during lease renegotiation. Provision for disclosure of turnover figures under the Reform Act enables landlords to obtain insight into the trading performance of tenants. This knowledge of a tenant's capacity to pay places landlords in a stronger position during renegotiations.
The Reform Act obliges landlords to provide tenants without an option to renew an offer of a new lease or inform them that the lease will not be renewed. This provides tenants with reasonable time to consider whether to accept or decline the offer and search for other premises, but does not address the unfair bargaining position of tenants during negotiations. The review recommends against statutory security of tenure, but proposes that the current notification obligation be coupled with other rights in order to improve the bargaining position of tenants while also maintaining landlord rights.
For further information on this topic please contact Katerina Petrogiannakis or Toby Mittelman at Arnold Bloch Leibler by telephone (+61 3 9229 9779) or by fax (+61 3 9229 9889) or by email ([email protected] or [email protected]).