A guide to the Retail Leases Amendment Act 2020
Insights by Emma Milne (Senior Associate), Scott McKenzie (Director), and Rajan Verma (Director), Velocity Legal
Another major change in the commercial leasing landscape
The eagerly awaited Retail Leases Amendment Act 2020 (Vic) (Amendment Act) received royal assent on 22 September 2020. Importantly, the Act amends the Retail Leases Act 2003 (Vic) (Retail Leases Act) and the Building Act 1993 (Vic) (Building Act).
Many of the changes apply to retail leases already in effect. The commencement of the Amendment Act is a timely reminder for landlords and tenants to review their leases and processes to ensure compliance with the amendments.
Summary of Key Amendments
The key amendments have been summarised below:
|Essential Safety Measures.||Could not be passed onto a tenant.||Can be passed onto a tenant by agreement.|
|Provision of Documents||A landlord must give the tenant a copy of the proposed lease and disclosure statement seven days prior to entering into a retail premises lease.||A landlord must give the tenant a copy of the proposed lease and disclosure statement at least 14 days prior to entering into a retail premises lease. The lease must include particulars specific to the tenant.|
|Changes in Proposed Lease||The landlord is not required to notify the tenant of changes between versions of the lease.||
A landlord must notify the tenant of any changes between versions of the proposed lease.
There are significant financial penalties for failure to disclose changes to a tenant.
|Security Deposit||Must be returned to a tenant as soon as practicable after complying with their obligations under the lease.||Must be returned to a tenant within 30 days after complying with their obligations under the lease.|
|Notice to Renew||A landlord must notify a tenant of the latest day to exercise an option to renew at least 6 months prior to the latest date to renew.||A landlord must notify a tenant of the latest day to exercise option to renew at least 3 months prior to the latest date to renew.|
|Notice of Option to Renew Requirements||The notice must state the date after which the option is no longer exercisable.||
The notice must state:
|Early Rent Review||The tenant does not have an option to request an early rent review.||A tenant can request an early rent review prior to exercising an option to renew the lease. The request must be made within 28 days of receiving the landlord’s notice of option to renew. The tenant can elect to renew the lease after determination of market rent by a specialist retail valuer.|
|Cooling Off||A tenant cannot change their mind after an option to renew has been exercised.||Provided that the tenant has not requested an early market review of the rent, a tenant can give the landlord notice within 14 days of exercising an option to renew of their decision to no longer renew the lease.|
Important Notes for Landlords
Landlords should review their processes for providing notices, disclosure statements and proposed lease documents to a tenant. Failure to comply can result in a large penalty being issued to a landlord.
Leases should also be reviewed to determine whether essential safety measures can be passed onto a tenant.
Important Notes for Tenants
Tenants should ensure that they familiarise themselves with the:
- essential safety measure standards and requirements relevant to their tenancy, and ensure strict compliance; and
- time frames for renewal, provision of notices, requests for early market rental review and cooling off periods. Failure to provide notice within the specified time frames can mean losing the benefits of those opportunities.
Elaboration of Key Amendments
Essential Safety Measures:
The Amendment Act implements the following changes regarding essential safety measures:
- the Building Act is amended to clarify the obligations of landlords and tenants under retail premises leases in respect of safety measures; and
- the Retail Leases Act is amended to include essential safety measures in the definition of recoverable outgoings.
More specifically, landlords can pass on costs of repairing and maintaining essential safety measures as an outgoing by agreement. These costs can include items such as smoke detectors, sprinkler systems, fire extinguishers, fire exit signs and annual safety inspections. These changes clarify, and effectively overturn an advisory opinion published on 1 May 2015 by Justice Garde, President of VCAT prohibiting the recovery of essential safety measure costs from a tenant.
For retail leases that were entered into prior to the commencement of the Amendment Act, and that require a tenant to contribute towards the costs of essential safety measures, the Amendment Act confirms that those clauses are not void. However, the recovery of essential safety measure costs are only applicable for costs incurred on or after the day the Amendment Act came into operation (being 23 September 2020).
Provision of Disclosure Statement and Lease
Landlords must give a tenant a copy of the disclosure statement in the prescribed form and the proposed lease (including particulars of the tenant, rent and the term of the proposed lease) to a tenant at least 14 days prior to entering into a retail premises lease. If the landlord gives the tenant the disclosure statement and proposed lease less than 14 days before the lease is entered into, the term of the lease is taken to commence 14 days after the documents are provided. Previously, the prescribed period was only seven days.
Changes in Proposed Lease
If a landlord provides a revised proposed lease to a tenant, the landlord must notify the tenant in writing of the changes to the proposed lease. This can be done by way of ‘mark up’, identifying the changes, or by emailed summary. There are heavy penalties for non-compliant landlords of up to $8,261 for an individual, and up to $41,305 for a body corporate.
A security deposit must now be returned to a tenant within 30 days of the tenant performing all of the tenant’s obligations under the lease (including any ‘make good’ obligations to restore the premises to an appropriate condition).
The time frame for return of the security deposit was previously ‘as soon as practicable’. This amendment is particularly relevant for any leases that end off the back of the COVID-19 pandemic with a residual deferred rent repayment due. Unless the lease is varied to allow the security deposit to be retained until all deferred rent is repaid, a landlord may still be required to release the deposit if all other obligations under the lease have been satisfied by a tenant.
Notice to Renew
Landlords must provide a notice to the tenant at least three months prior to the latest date for a tenant to exercise an option to renew. The notice must include:
- the date by which the option to renew the lease may be exercised by the tenant;
- the proposed rent payable for the first 12 months of the further term;
- the availability of an early rent review;
- the availability of a cooling offer period; and
- any changes to the most recent disclosure statement.
If the landlord fails to provide all of the specified information within the time frame, the latest date to exercise the option is extended to the date which is three months after the notice is provided to the tenant, or if that date is after the lease would have expired had the notice been provided in time, the lease continues until the end of the three months notice period.
Early Rent Review
If the lease provides for a market rent review upon renewal then, within 28 days of receiving a landlords notice to renew, a tenant may request an early rent review. The tenant can refrain from providing notice to exercise the option to renew until the latter of:
- the latest date to exercise the option to renew; or
- if a specialist retail valuer is appointed to determine the current market rent, 14 days after the date which the tenant is notified of the specialist retail valuers market rental determination.
Cooling Off Period
The Amendment Act provides a tenant with a 14 day cooling off period after exercising their option to renew, provided that the tenant has not requested an early rent review. If the tenant elects to exercise their rights to opt out of a renewal under the cooling off period, the lease is not take to have been renewed and the tenant is not able to subsequently exercise an option to renew the lease.
The commercial leasing landscape in Victoria is becoming increasingly complex. Given the value and importance of leasing arrangements, it is critical that landlords and tenants are familiar with the full extent of their rights and obligations.
If you would like any specific advice regarding your lease, please contact us.
Emma is a gun at property law. She is relentless and meticulous in finding solutions for her clients. Whether developer, landlord, tenant or investor, she gets the job done. You’ll also be in good company if you’re a Melbourne Storm, Renegades or Pies fan.
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Scott has been recognised as a leading commercial lawyer in Australia. He is held in high regard for his strategic mindset and is renowned for being technically sharp. Scott’s practice covers all aspects of commercial law, with a strong emphasis on complex transactions and business co-ownership matters. Scott is focused on leading by example. He provides precise advice and tenaciously protects his clients.
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Rajan is all about tax structuring and restructuring. He gets satisfaction from helping his clients obtain real tax benefits, such as CGT concessions or stamp duty exemptions. He has also learnt that saving tax is a great way to make friends. When things get too hard, Rajan is the guy you need to sort things out.