Commercial Leasing Articles
One of the most contentious issues in any commercial lease is about each party’s obligations about the air conditioning services.
A dispute between a commercial tenant and landlord over the air conditioning made its way to the Victorian Civil and Administrative Tribunal (Tribunal) late last year. The tenant abandoned the premises because it claimed that the landlord was in breach of its obligations concerning the air conditioning. The landlord attempted to enforce its rights under the lease.
In a turn of events for the landlord, the Tribunal found against the landlord in S 3 Sth Melb Pty Ltd v Red Pepper Property Group Pty Ltd. The landlord was found to have “repudiated” its lease for failing to repair or replace the air conditioning.
The lease provided that the tenant was responsible for maintaining and servicing the air conditioning while the landlord was responsible for capital repairs. This is a very standard clause in most commercial leases. The air conditioning was old and performed very poorly. Each party relied on the relevant lease provision that the other was responsible.
The Tribunal found that the fundamental term of the lease was that the landlord was required to install air conditioning to service the premises. This was consistent with the terms of the heads of agreement. A relevant consideration in this case was that the premises were used as a pilates and barre studio where customers require an ambient temperature in which to work out.
By failing to carry out repairs to the existing air conditioning or replacing it altogether, the landlord failed in its contractual duty to provide air conditioning that could service the premises. This obligation superseded the tenant’s obligations to maintain the air conditioning. The failure to comply with a fundamental term of the lease amounted to a repudiation of the lease by the landlord which meant that the tenant could validly terminate the lease.
If the permitted use under the lease was say that of an office, it is arguable whether the Tribunal would have arrived at the same conclusion.
Although this is a Victorian decision, the reasoning is likely to persuade Tribunals in other jurisdictions where cases containing similar facts are examined.
We recently discussed the obligation on the parties to a franchise agreement to act in good faith that is enshrined in the Franchising Code of Conduct and the timing requirements of providing your franchisee with a disclosure statement.
But what must be included in the Disclosure Statement?
The prescribed form of the Disclosure Statement is set out in Annexure 1 to the Code.
Some of the key elements that must be contained in the Disclosure Statement are:
- A summary of the relevant business experience of the franchisor and each officer of the franchisor for the past 10 years;
- Details of any current legal proceedings against the franchisor (and details of any convictions against the franchisor or a director or associate of the franchisor) in the last 10 years;
- For each marketing or other cooperative fund that the franchisee may be required to contribute: the kinds of persons who contribute to the fund (for example, the franchisee, franchisor or outside supplier), the amount, who controls or administers the fund(s), whether the fund(s) is audited and if so, by whom, how the fund’s financial statements can be inspected by the franchisee and whether the franchisor must spend part of the fund on marketing, advertising or promoting the franchisee’s business.
- Description of the trade mark used to identify the franchise system, details of the franchisee’s rights and obligations in connection with the use of the intellectual property and details of any agreement that significantly affects the franchisor’s rights to use the intellectual property.
- Whether the franchise is for an exclusive or non-exclusive territory or limited to a particular site.
- If the franchisor requires a payment before the start of the franchise agreement: why the money is required, how the money is to be applied, who will hold the money and the conditions under which the payment will be refunded.
- Establishment costs: including real property type, location and building size details, equipment, fixtures, decorating costs, inventory and other payments required by a franchisee to begin operations and each recurring or isolated payment payable by the franchisee to the franchisor or an associate of the franchisor; and
- Earnings information for the franchised business, projected earnings, the assumption on which those projections are based and a statement of the franchisor’s solvency and financial reports for the last 2 completed financial years.
An Information Statement to prospective franchisees must also be provided in the form prescribed by Annexure 2 to the Code. This Information Statement does not replace your own financial and independent legal advice but is a starting point for considering the risks and rewards of becoming a franchisee.
You’ll find that the team at Conditsis Lawyers is here to demystify the franchising process.
A number of amendments were made to the Retail Leases Act 1994 by the Retail Leases Amendment (Review) Act 2017.
No minimum Term
The provision mandating a five year minimum term was removed. This means that there is no longer a need for a solicitor’s certificate for leases for a term of less than five (5) years.
Mandatory registration of Lease
If a retail shop lease exceeds a term of 3 years or if the parties to the lease have agreed that the lease is to be registered, the lessor must lodge the lease for registration within 3 months after the lease is returned to the lessor following its execution by the lessee. There are financial penalties for a failure to comply with this registration requirement. The 3-month period is to be extended for any delay attributable to the need to obtain any consent from a head lessor or mortgagee.
For the purposes of the term, the term includes any option to renew. For example, if the lease provides for a 1 year term with an option to renew of greater than 2 years, the retail shop lease must be registered.
Lessee to be provided with an executed copy of Lease
A retail shop lease is taken to include a provision to the effect that the lessor must provide the lessee with an executed copy of the lease within 3 months after the lease is returned to the lessor following its execution by the lessee. The 3-month period is to be extended for any delay attributable to the need to obtain any consent from a head lessor or mortgagee.
Lessee not required to pay undisclosed contributions or outgoings
A lessee is not required to pay contributions towards the cost of providing any finishes, fixtures, fittings, equipment or services in or for the shop unless disclosed in a disclosure statement given to the lessee in accordance with the Act.
A lessee is not required to pay outgoings unless disclosed in a lessor’s disclosure statement. If an estimate of outgoings was provided and the estimate is less than the actual amount payable, if there was no reasonable basis for the estimate, then the lessee’s liability is to be reduced to the estimated amount.
The New South Wales Civil & Administrative Tribunal (NCAT) (Tribunal) now has powers to make decisions about rectification of leases and disclosure statements, formerly only a Supreme Court remedy where the parties to a retail shop lease sought rectification.
Furthermore, the monetary limit on the Tribunal’s jurisdiction to make an order in respect of a particular retail tenancy claim or unconscionable conduct has been increased to $750,000.
You’ll find that the team at Conditsis Lawyers is here to demystify the leasing process.
The Franchising Code of Conduct is set out in Schedule 1 of the Competition and Consumer (Industry Codes – Franchising) Regulation 2014 (Code).
The Code regulates the conduct of parties (or prospective parties) to a franchise agreement.
Obligation to Act in Good Faith
The Code introduces a positive obligation on each party to the franchise agreement (or prospective party to a franchise agreement) to act in good faith. A failure to discharge one’s obligation to act in good faith attracts a financial penalty. In determining whether a party has acted contrary to this obligation, the Court may have regard to whether the party acted honestly and not arbitrarily and whether the party cooperated to achieve the purposes of the agreement.
Importantly, a franchise agreement must not limit or exclude the obligation to act in good faith and if it does, the clause is of no effect.
The obligation to act in good faith does not prevent a party from acting in his, her or its legitimate commercial interests. For example, if a franchise agreement does not give the franchisee an option to extend the agreement or allow the franchisee to extend the agreement, this does not mean that the franchisor has not acted in good faith in negotiating or giving effect to the agreement.
A franchisor must give a copy of the Code, a disclosure document in the form prescribed in Annexure 1 of the Code and a copy of the franchise agreement to a prospective franchisee at least 14 days before the prospective franchisee enters into the franchise agreement or makes a non-refundable payment to the franchisor in connection with the proposed franchise agreement.
A franchisor must not enter into a franchise agreement, renew or transfer or extend the term of a franchise agreement or receive a non-refundable payment under a franchise agreement unless the franchisee (or prospective franchisee) has received, read and had a reasonable opportunity to understand the disclosure statement and the Code.
This will be evidenced by a signed statement from the prospective franchisee to the franchisor to the effect that the franchisee has received independent legal or business or accounting advice about the franchise agreement or franchise business or has been told about the kind of advice that should be sought but has decided not to seek it.
You’ll find that the team at Conditsis Lawyers is here to assist with your franchising needs.
We will shortly bring you Part 2 of the Franchising Code of Conduct that will discuss the prescribed information that must be included in the Disclosure Statement.
In ACN 116 746 859 (formerly Palermo Seafoods Pty Ltd) (Palermo) v Lunapas Pty Ltd & Anor (Lunapas) 1, Lunapas leased to Palermo certain retail premises in Tweed Heads from which Palermo operated a seafood shop and restaurant. The tenancy was a tenancy at will. Lunapas gave a notice to Palermo giving it 14 days’ notice of termination in contravention of section 127 of the Conveyancing Act 1919 (NSW). Lunapas wrongfully terminated the lease and re-entered the premises.
Palermo sought damages against Lunapas and the sole director of Lunapas for the alleged wrongful conversion of the stock, plant and equipment which remained on the premises.
After the lockout, Lunapas re-opened the premises as a new seafood restaurant and used the tenant’s plant left in the shop (including the EFTPOS machine, refrigerators and kitchen fittings) for their own use to run the business.
Lunapas argued that Palermo had either abandoned its stock, plant and equipment left in the shop or that it disclaimed the right to immediate possession of its stock, plant and equipment.
The Court did not allow an inference of abandonment to be drawn. The Court accepted in substance that Palermo had never been given the opportunity to collect their goods, plant and equipment from the premises. This is despite a written offer to Palermo to collect its stock, plant and equipment within 24 hours of receiving the said offer and despite Palermo’s refusal to accept delivery of the goods packed up by Lunapas in a hired truck and driven to Palermo’s house the Sunday morning after lock-out. The Court accepted Palermo’s position that Palermo’s company director’s refusal to accept the goods was reasonable: he thought the goods being delivered included perishable stock, he thought the truck was not refrigerated, he had nowhere to store perishable stock that was required to be refrigerated and the terms of the delivery were not agreed in advance.
The Court held that conversion was made out at the time of the lockout and in the period thereafter in respect of all of the goods: the stock, plant and equipment. The Court awarded Palermo $200,000 (plus interest up to judgment) representing the market value of the plant and equipment and the stock was assessed separately at $50,000.
This case serves as a reminder to commercial and retail landlords that there is a procedure that must be followed when terminating a lease including giving a tenant the opportunity to collect their goods, even when there has been a breach of the covenant to pay rent.
You’ll find that the team at Conditsis Lawyers have the experience you need to obtain the best possible outcome for your leasing needs.
1 NSWSC 1583
On 1 July 2017, amendments made to the Retail Leases Act 1994 (NSW) came into effect that will impact landlords and tenants of retail premises.
The leasing of retail premises is governed and affected by numerous legislative and regulatory requirements. The Retail Leases Act 1994 (NSW) (the Act) overrides any provision of a lease that is inconsistent with the Act. Accordingly, it will be in the interests of landlords and tenants alike to be aware of them. This is particularly so, when either:
- negotiating and entering into a lease; or
- renewing a lease on exercise of a lease option.
A summary of the changes to the Act that are of particular relevance when either entering or renewing a lease are set out below.
1. Five year minimum term no longer applies
A tenant’s statutory entitlement to a five year term is one of the most significant aspects of retail leases, intended to improve a tenant’s security of tenure allowing a tenant to realise its investment in its fitout costs. A tenant could waive it by providing a certificate under the Act.
As from 1 July 2017, the minimum five year term is now no longer required.
The reason for this change is to provide greater flexibility in lease negotiations where parties find that a shorter term is better suited to their business needs.
Quite often landlords and tenants will enter into a lease for a term of less than five years not being aware that the five year statutory entitlement was required to be waived. If not waived at the commencement of the lease, a tenant was later entitled to rely on the Act to extend its lease term to five years. As a result, situations have arisen whereby tenants have sought significant sums from landlords to surrender its lease.
Removing the five year term requirement is aimed at addressing these types of situations.
2. Some retail premises are now no longer covered by the Act
The Act now specifically excludes certain usages from being retail shop premises. These include ATMS, vending machines, internet booths, storage of goods for use or sale in a retail shop and in some instances, car parking.
3. Provision by landlord of its disclosure statement
Seven days before entering into a lease, a landlord is required to provide a disclosure statement to a tenant. The information contained in the disclosure statement includes important information for a tenant such as the rent, lease term, options, relevant dates, premises details, fit out requirements and estimates of outgoings.
If the landlord fails to do so, or the disclosure statement is materially false, misleading or incomplete, a tenant can terminate the lease within the first six months.
In addition to this right of termination, a tenant will also have a right to compensation. This right also extends to a tenant’s cost in connection with the fit out of the retail premises.
Landlords should be aware that the requirement to provide a lessor’s disclosure statement also extends to when an “agreement for lease” is entered into. An agreement for lease is an agreement to grant a lease in the future. This can occur in situations where the premises are not ready for occupation or have not been fully erected, or if the former tenant is still in occupation or when a lease is inteneded to commence at a future date and the parties do not want to execute a lease until then.
4. Disclosure of outgoings before entering into a lease
Many leases allow a landlord to recover outgoings from a tenant for various expenses it incurs in the operation, maintenance and repair of retail premises. A retail landlord is required to disclose details of the various outgoings and contributions a tenant is required to meet. This disclosure is intended to help tenants make informed decisions about the costs of a lease.
Noncompliance with this requirement will result in the tenant not being liable for anything not disclosed or accurately disclosed by the landlord.
This also extends to estimates of outgoings. If an estimate of a particular outgoing provided in the disclosure statement is less than the actual amount required to be paid, a tenant will only be required to pay the estimate, unless there was a reasonable basis for that estimate.
In addition, any term of a retail shop lease that requires the tenant to pay or contribute towards the cost of providing any finishes, fixtures, equipment or services will not be enforceable if not disclosed in lessor’s disclosure statement.
5. Leases with terms of three years are now required to be registered and a copy given to the tenant within three months
It is now a requirement that when a retail shop lease has a term of more than three years (including any option term), or the parties agree that the lease is to be registered on the title to the premises, the landlord must lodge the lease for registration and an executed copy provided to the tenant within three months of it being returned to the landlord.
However, this period can be extended when a landlord is required to seek the consent of its mortgagee in order for the title deed (CT) to the premises to be produced for registration to occur. Obtaining a mortgagee’s consent and production of a CT can take a few months.
This amendment will provide greater protection to tenants. There are several risks to a tenant in not having a lease registered. In the event a landlord’s mortgagee takes possession, the mortgagee is not required to recognise a lease that is not registered. A purchaser of the landlord’s building may also not recognise a lease if unaware of its terms.
6. Lease preparation expenses that a landlord can recover from a tenant
Under the Act, a landlord is prohibited from passing on lease preparation costs to a retail tenant. Lease preparation costs are the legal fees a landlord incurs in issuing a lease. Other costs a landlord incurs are registration fees and mortgagee consent fees. Consent of the mortgagee is required for a lease to be registered.
When the original provision in the Act was drafted, it was intended that a landlord could not pass on mortgagee consent fees. However, the intention not to pass on mortgagee consent fees was not made sufficiently clear in the Act. As it was not specifically prohibited, mortgagee consent expenses have been passed on.
Seeking to provide greater clarity to prevent disputes, the Act now specifically prohibits a landlord from passing this expense onto a tenant.
However, a landlord can still request a tenant to pay the fee to register the lease on the title to the premises.
7. Bank Guarantee
A tenant is usually required to provide some form of surety to a landlord so as to guarantee it can meet its obligations under the lease.
The most common forms of surety under retail leases are security bonds and bank guarantees.
The Act did not make provision for the handling and return of a bank guarantee. In order to encourage transparency and greater certainty in dealings between a landlord and a tenant, a landlord is now required to return a bank guarantee within two months after a tenant has completed performance of its obligations under the lease.
A landlord may be required to compensate a tenant for any loss or damage suffered by the tenant as a result of any failure by the landlord to return it, including any reasonable costs incurred by a tenant in cancelling a bank guarantee as a result of the landlord not returning the original bank guarantee.
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