Recent changes to the Retail Leases Act 2003: How do these impact landlords and tenants?
On 23 September 2020, the Retail Leases Amendment Act 2020 (Vic) received royal assent, making several changes to the retail leasing framework in Victoria.
The changes include:
• ESM costs may now be claimed by the landlord from the tenant
• Security deposits must be returned to the tenant within 30 days
• Disclosure statements must be given 14 days prior to a lease commencing
• Landlord must provide a ‘renewal notice’ at least 3 months prior to the last date of exercise of option to renew a lease
• Tenants may request an early rent review
• Tenants have 14-day cooling-off period to change their mind after exercising an option to renew a lease
This article provides a summary of the new changes and how landlords and tenants may be impacted.
Brief Summary of key changes
1. Essential Safety Measures (ESMs)
As of 23 September 2020, the costs of installing, repairing, or maintaining ESMs may be recovered by the Landlord if permitted under the governing Lease and Disclosure Statement. ESMs include smoke detectors, sprinkler systems, fire extinguishers, fire exit signed and annual safety inspections.
Tenants may also agree to carry out their own repair or maintenance work in respect of an ESM on behalf of the landlord.
These changes apply to all new and current leases; however landlords are unable to claim these costs from tenants if their current lease does not permit it. Landlords are not able to claim for ESM costs incurred in the past.
This amendment does not affect a landlord’s obligations as a building owner under the Building Act, however, the costs of the same are now properly an outgoing payable by the tenant, if permitted under the Lease.
2. Security Deposits
Landlords are now obliged to return a tenant’s security deposit within 30 days of the lease ending if the tenant has met their obligations, giving tenants greater certainty than the previous requirement of return ‘as soon as practicable’.
This provision does not expressly deal with bank guarantees; however, it is sensible to assume that the same time frame with apply.
3. Disclosure Statements
A Disclosure Statement must now be provided together with a copy of the proposed Lease, no later than 14 days before the lease begins, extending the previous 7-day period. If the landlord fails to do so the commencement date of the lease will be delayed until 14 days after disclosure is given.
A landlord must also notify the tenant of any changes to the lease no later than 14 days before a lease is extended. This operates, for example, where a tenant does not necessarily exercise an option, but rather elects to extend the term of the Lease. Landlords who fail to do so will be subject to a fine.
Finally, if a Disclosure Statement is provided with an Agreement to Lease, but the subsequent Lease itself is not strictly in accordance with the Agreement to Lease, then a further Disclosure Statement will be required.
4. Options to renew – notice by landlord
Where a lease provides for a further term, a landlord is now required to provide a renewal notice to the tenant at least 3 months prior to the last date of exercise of the option to renew a lease. The renewal notice must include the following:
(i) The last date the tenant may exercise its option.
(ii) The rent payable for the first 12 months of the further term.
(iii) The availability of an early rent review (see below).
(iv) The availability of a cooling off period (see below).
(v) Any changes to the most recent Disclosure Statement provided to the tenant (excluding rent-related changes).
This obligation on landlords commences immediately for all retail leases where the tenant is required to exercise their option to renew on or after the 1 January 2021.
(a) Early rent review
If the lease provides for a market review, a tenant may request a landlord for a market rent review within 28 days of receiving the landlord’s renewal notice. If a landlord fails to provide the early rent review amount at least 14 days before the last date for exercise of option, the last date to exercise an option may also be extended by 14 days after receipt of the rent review amount.
An example of the timeline for operation of the option notice period is as follows:
• Lease expires 30 June 2021
• Latest date for exercise of option is 31 March 2021
• Notice must be served no later than 31 December 2020
• If the tenant wants an early rent review, it must notify the landlord by no later than 28 January 2021
• Rent review is conducted and tenant informed of rental on 30 April 2021 (one month after the option exercise date)
• Tenant therefore has until 14 May 2020 to exercise option
• If tenant does not exercise option, lease termination date is extended to 13 August 2020.
If the landlord’s renewal notice is not provided within the time required, the date by which the tenant must exercise the option is extended to the date being 3 months after the tenant receives the required notice and the rent review process still applies.
(b) Cooling off
If the tenant has exercised its option to renew, but has not requested an early rent review, they now have a cooling off period of 14 days after exercising an option to renew to notify the landlord that it no longer wishes to exercise its option to renew the lease. If the tenant provides such notice, the term is extended by 14 days, the lease is not renewed, and the tenant is unable to exercise the option to renew.
Key takeaways
These amendments generally impose additional obligations on landlords; however, we recommend that both tenants and landlords alike familiarise themselves with the amendments and consider the impact the changes may have on their lease rights and obligations.
Takeaways for Tenants:
• Greater degree of certainty and ability to make more informed decisions when exercising an option to renew
• Right of cooling-off after exercising an option to renew
• Ability to request an early rent review
• Receive earlier disclosure information from your landlord
Takeaways for Landlords
We recommend all retail landlords take this opportunity to review their leases and make the following adjustments to your processes and procedures in managing your leases:
• Review your annual estimates of outgoings to include estimated costs of ESMs where applicable so that these future outgoings may be recovered;
• Ensure you understand the landlord’s new disclosure statement obligations;
• Review your long-term diary notes to ensure that security deposits and bank guarantees are returned to compliant tenants within 30 days of the expiration date of the lease; and
• Review and update your processes regarding exercise of options, particularly to ensure that the relevant renewal notice is provided to the tenant at least 3 months before the last day of exercise of each option to renew the lease.
Questions?
If you have any queries in relation to the recent amendments to the Retail Leases Act 2003 and how they may impact you, please contact our Commercial Department for assistance.
Phone: (03) 9845 8200
Email: commercial@aughtersons.com.au
Author: Kathy Adams
Respected and Trusted
