Existing lessee’s preferential rights under Part 4A of the Retail and Commercial Leases Act 1995 (SA)

Part 4A of the Retail and Commercial Leases Act 1995 (the Act) imposes a number of obligations on landlords and gives a number of rights to tenants. Landlords must be aware of these obligations and rights, but many landlords and their managing agents are oblivious to the provisions of Part 4A. As a result landlords may find that a tenant who has no right of renewal in its lease or who failed to exercise a right of renewal is still able to establish rights to extend its lease beyond the original expiry date.

The relevant provisions in the Act apply to “retail shop leases” within “retail shopping centres” in South Australia. Any property in South Australia comprising five or more “retail shops” comprises a “retail shopping centre” for the purposes of the Act.

The definition in the Act of “retail shop” is sufficiently broad to extend not only to retail outlets, but also to most office premises so owners and managing agents of office buildings as well as owners and managing agents of shopping centres need to be familiar with the operation of Part 4A of the Act.

The Act generally applies to all leases in South Australia unless the rent exceeds $250,000 per annum, the lessee is a public company or a subsidiary of a public company, the lessee is the Crown or a Crown agency, an ADI (e.g. a bank), an insurance company or a local council.

The provisions in the Act dealing with renewals, conduct of the landlord at the end of the lease term and “preferential rights” are contained in Division 3 of Part 4A. That division does not apply if the lease is entered into for a fixed term of six months or less, the lease contains a “certified exclusionary clause” (which is a clause excluding the operation of the Act accompanied by an independent lawyer’s certificate) or where the lease is a sub lease, the term of the lease is as long as the term of the head lease allows.

Where Division 3 applies, unless the lessee has notified the lessor in writing within twelve months before the end of the term of a lease that the lessee does not want a renewal or extension, the lessor must “give preference to the existing lessee over other possible lessees of the premises” unless any of the following exceptions apply: the lessor reasonably wants to change the tenancy mix, the existing lessee has been guilty of a substantial breach or persistent breaches of the lease, the lessor requires vacant possession of the premises for the purposes of demolition or substantial repairs or renovation, the lessor does not propose to re let the premises for at least six months and requires vacant possession of the premises for its own purposes during that time (but not for the purposes of carrying on a business of the same kind as the business carried on by the lessee) or the renewal or extension of the lease “would substantially disadvantage the lessor”.

Where an existing lessee has a right of preference “the lessor must, at least six months (but not more than twelve months) before the end of the term, begin negotiations with the existing lessee for a renewal or extension of the lease”.

Also, the existing lessee has what is akin to a right of first refusal. Before agreeing to lease the premises to another person, the lessor must make a written offer to renew or extend the existing lease on terms or conditions no less favourable to the lessee than those of the proposed new lease and provide the existing lessee with a copy of the lease or proposed lease and the disclosure statement required in relation to it. It is generally considered that these obligations on the lessor cease once the existing term has expired and the lessee has vacated.

When the lessor makes an offer in accordance with Division 3 of Part 4A the offer must remain open for a reasonable period after it is given (at least ten days not including any Saturday, Sunday or public holiday) and if not accepted in writing by the lessee within the period, lapses.

Negotiations are to be conducted in good faith.

Negotiations are to continue until the lessee rejects the offer, the offer lapses or the lessee advises in writing that it does not want to continue negotiations.

If the lessee does not have a right of preference, the lessor must at least six months (but not more than twelve months) before the end of the term of the lease notify the lessee in writing of that fact and state why. If the term of the lease is for twelve months or less then the notice must be given at least three months (but not more than six months) before the end of the term of the lease.

If the lessor fails to negotiate or give a notification to the lessee as required by the division and the lessee gives written notice to the lessor before the end of the term of the lease that it wants an extension of the lease, the lease term is extended until the end of six months after the lessor begins the required negotiations or gives the required notice.

In short, assuming the lessee has a right of preference, at least six months before the end of the term (but not more than twelve months) the lessor should offer a renewal or extension to the lessee which must remain open for at least ten business days and must not enter into a lease with another person or entity without giving the existing lessee the opportunity to match the offer (which includes giving the lessee a copy of the proposed lease and the requisite disclosure statement).

The obligations in Division 3 apply notwithstanding that the lessee may have a right of renewal in its existing lease.

Also, if the Act applies to a lease but Division 3 does not apply (refer to the fifth paragraph above) and a lessee does not have a right of renewal in its existing lease then the lessor must not less than six months and not more than twelve months before the end of the term of the lease either make a written offer to the lessee for a renewal or extension or advise the lessee in writing that the lessor does not propose to offer a renewal or extension. If the term of the lease is twelve months or less then the periods of six months and twelve months in the previous sentence are reduced to three months and six months respectively.