From 12 November 2016, many contracts where one party to the contract is a small business will be subject to the "unfair contract terms" regime under the Australian Consumer Law (as found in the Competition and Consumer Act 2010 (Cth)) and the Australian Securities and Investments Commission Act 2001 (Cth). Under this regime, a court may declare any "unfair term" in a "standard form" "small business contract" to be void and unenforceable. This will have implications for most leases where one of the parties is a "small business." 

Any new lease entered into on or after 12 November 2016, any overholding commencing on or after 12 November 2016, and any renewal entered into on or after 12 November 2016 may be affected. Any lease varied on or after 12 November 2016 will also be affected. Landlords should be reviewing:  

  • terms of their standard form leases to determine if any terms may be vulnerable under this new regime; and
  • assessing whether any terms that will be affected in a renewal of lease may be vulnerable.

Besides the Australian Competition and Consumer Commission (ACCC) and State and Territory consumer protection agencies, such as Consumer Affairs Victoria, sharing responsibility for the enforcement of the unfair contract term legislation, an aggrieved party to a standard form small business contract, such as a tenant, can take civil action, which would likely involve, in the Victorian context, proceedings in the Victorian Civil and Administrative Tribunal (VCAT). 

Gadens has significant expertise in retail leasing and these new laws, and can assist by conducting a review of your standard retail leases to minimise the risk of terms being declared void under the new legislation. 

What is a "standard form contract"?

There is no definitive test for what constitutes a "standard form contract." If proceedings are issued, the court or tribunal must presume that the contract is a "standard form contract." The onus is on the party who issued the contract to prove otherwise. 

The law provides that contracts, such as retail leases, are likely to be caught if:  

  • one of the parties has all or most of the bargaining power relating to the transaction;
  • the contract was prepared by one party prior to discussions between the parties;
  • the other party was, in effect, required to either accept or reject the terms in the form presented;
  • the other party was not given an effective opportunity to negotiate the terms of the contract; and
  • the terms of the contract take no account of the specific characteristics of a party or the particular transaction.

For landlords, providing an effective opportunity for a tenant to negotiate may be a means by which the unfair terms regime will not apply to the lease. As yet, there is little guidance from the legislature or the courts as to what an effective opportunity to negotiate looks like, however a "take it or leave it" approach will leave the lease inside the regime. 

What is a "small business contract"?

A "small business contract" is a contract:  

  • for the supply of goods or services, or the sale or grant of an interest in land;
  • where at the time it was entered into, at least one party employs fewer than 20 people (including full time, part time and casual employees who work on a regular or systematic basis); and
  • where the "upfront price" payable under the contract does not exceed:
    • $300,000; or
    • $1,000,000 if the contract has a duration of more than 12 months.

As many properties are held by landlords who are landholding trustees or other forms of special purpose vehicles that do not employ people directly, this may mean that all leases that fall under the "upfront price" threshold will be subject to the regime, regardless of the size of the tenant.

Any amounts that cannot be calculated with certainty at the time the contract is entered into are unlikely to be included in the calculation of the upfront price payable. Examples in a lease context would be outgoings, percentage rent and CPI rent reviews. On the other hand, GST can be calculated with certainty and therefore should be taken into account when determining what constitutes the upfront price.  

What is an "unfair term"?

Terms that define the main subject matter or set out the upfront price of a contract, or a term that is required by law, cannot be declared unfair. Any other term will be at risk of being declared void for being unfair. 

A term is unfair if it satisfies all three elements of the following test.  

  • It would cause a significant imbalance between the rights and obligations of the parties.
  • It is not reasonably necessary to protect the legitimate interests of the business imposing the term.
  • It would cause detriment to a party if it were relied on.

Examples of terms in the retail leasing context of terms that could be target as not being reasonably necessary to protect the legitimate interests of a party can be found here. We understand that the ACCC has reviewed standard leases from different landlords and commented on them but in the ACCC's latest commentary it has indicated that it will not be reviewing any additional leases other than the standard leases of five members already submitted. 

A term's "unfairness" is also assessed by taking into account the extent to which the term is transparent and the term's context in the contract as a whole, however a term will be presumed not to be reasonably necessary (ie. the second element) and the onus will be on the party who is advantaged by the term to prove that the term is reasonably necessary to protect its legitimate interests. 

Unfortunately for landlords, leases that comply with retail leasing legislation will not automatically be immune from this regime. While moves are afoot to have leases that comply with retail leasing law exempt from the regime, it is far from certain that this will occur. If the regime continues to apply, landlords will most likely argue that leases that comply with retail leasing law do not cause significant imbalance and/or are reasonably necessary to protect the landlords legitimate interest, however   there remains uncertainty as to how effective these arguments will be.

Recommended next steps

Landlords who meet the "small business" definition or who grant leases to tenants that are "small businesses" should undertake the following steps well ahead of the 12 November 2016 to minimise the risk of key provisions in their retail leases being declared void:  

  • Clarify whether they enter into leases that are likely to be standard form contracts. In most cases we believe this test will be satisfied.
  • Assess the extent to which they enter into leases with businesses who employ less than 20 people.
  • Ascertain whether the upfront price payable under the lease does not exceed $300,000 or, if the contract has a duration of more than 1 year, $1,000,000.
  • Review standard form leases to identify any terms that are at risk of being "unfair" (and therefore void).
  • Determine whether to amend or delete any terms at risk of being void. 
  • Identify any existing leases that may be renewed on or after 12 November 2016 or where there is a prospect of overholding from that time, to determine whether terms currently permissible may become vulnerable once incorporated into a renewed lease or that have effect during overholding.
  • Review lease negotiating procedures to minimise the risk of terms being considered unfair.