Following a lengthy consultation and review process, the much anticipated Retail and Commercial Leases (Miscellaneous) Amendment Bill 2017 has passed the Lower House of State Parliament. Landlords and their leasing agents set to be affected by the changes now eagerly await the outcome of its debate in the Upper House.

The Bill seeks to amend the Retail and Commercial Leases Act 1995 by giving effect to the recommendations made by retired District Court Judge, Mr Alan Moss in his recent review of the legislation governing retail and commercial leases in South Australia.

Although the Bill presents some pragmatic changes which will provide much-needed clarity to the Act, it is not without issue.

Review of the Act

In December 2013, the State Government committed to undertake a review of its retail leases legislation. The formal review process was initiated by the Small Business Commissioner (SBC) with an Issues Paper, published in December 2014, followed by the release of Mr Moss’ review in May 2016. Submissions were received from a broad range of organisations, industry groups and individuals as part of the public consultation process.

The Moss Review

The Moss Review made 20 recommendations on a number of issues pertaining to the Act. Most of the recommendations put forward were well overdue and are a practical response to key issues raised. As Mr Moss noted, 'the Act is well understood in the industry and works satisfactorily'. It is not surprising therefore that the Bill is devoid of any wholesale reform.

Mr Moss also made some more controversial recommendations, including the mandatory registration of leases, a requirement that bank guarantees provided as security were to be held by the SBC, and, most controversially, a proposal that there should be a legislative pathway for an orderly exit from a lease by a failing business.

To the relief of many in the industry, these more controversial recommendations did not find their way into the draft Bill that was tabled in Parliament in July 2017.

Key changes – in practice

Landlords and their agents will need to take heed of the offences (and the penalties) under the Act relating to the requirement:

• to serve a disclosure statement on a tenant;
• to provide a written copy of the proposed lease (and information brochure) to the tenant; and
• to return a bank guarantee within two months of a tenant completing its obligations under a lease.

Bank guarantees

Arguably the most significant reform in the Bill is the introduction of a requirement on a landlord to return a bank guarantee to a tenant within two months of a tenant completing its obligations under a lease. This carries with it a maximum penalty for non-compliance of $8,000.

The Moss Review noted that 'most complaints from lessees were about lessors being slow to return bank guarantees, thereby prejudicing their chances of financing any new venture'.

Importantly from a landlord's perspective, clause 15 of the Bill has the effect that the maximum return period (two months) does not commence until 'after the lessee completes performance of the obligations under the lease for which the bank guarantee is provided as security'. This will avoid a situation of a landlord having to return a bank guarantee, if for example, a tenant has delayed completion of its make good obligations required at the end of the lease.

The Bill also provides the tenant with an ability to obtain compensation from the landlord for any loss or damage suffered as a result of the landlord failing to return a bank guarantee within the maximum return period.

Disclosure statements

The Bill amends section 12 of the Act to provide that the landlord or the landlord's agent must, before a retail shop lease is entered into, give to the tenant a disclosure statement for the lease (in duplicate) signed by or on behalf of the lessor in accordance with the requirements set out in subsection (4) of section 12 of the Act. The Bill also creates a new offence with a maximum penalty for non-compliance of $8,000.

The disclosure statement must now be served on the tenant in the manner prescribed in subsection (4) (which includes by email), with the tenant or its agent to return a signed acknowledgement of receipt of the disclosure statement within 14 days of service.

On a more positive note for landlords and their agents, the need for a disclosure statement to be provided to a tenant prior to a renewal of a lease has been dispensed with.

Provision of copy of lease

Clause 8 of the Bill requires that the landlord (or its agent) must as soon as it enters into negotiations with a prospective tenant, provide a written copy of the proposed lease (but not necessarily including the particulars of the tenant, the rent or the term of the lease) to the prospective tenant. The maximum penalty for non-compliance under the Act was previously $500. The Bill increases this maximum penalty to $8,000.

Unfortunately, the proposed new section 11(1) overlooks that many commercial terms of the lease (rent reviews, outgoings, promotion levies, security, etc.) will still be open for negotiation at the time when negotiations with a prospective tenant first begin.

There is also an obligation to provide a prospective tenant with an 'information brochure' about retail leases published by the SBC (if any). Again, there are penalties for non-compliance.

Key changes – legal

Operation of the Act

The Bill clarifies an important aspect of the Act making it express that a retail shop lease can 'move into' and 'out of' the jurisdiction of the Act during the term of that lease.

The Bill confirms that the Act can commence or cease application in the following situations:

• where a rent review causes the rent payable under the lease to fall under or over the prescribed threshold; or
• where a change in the prescribed threshold results in the rent payable under the lease being under the prescribed threshold; or
• where the tenant changes from being a public company to being a proprietary company and vice versa, including as a consequence of the lease being assigned.

The issue of whether or not the Act applies to a lease is of particular commercial importance to landlords and tenants in light of section 30(1) of the Act, which precludes the recovery of land tax from a tenant.

When the Retail and Commercial Leases Regulations 2010 came in operation on 4 April 2011, there were no transitional provisions which meant that the then new rent threshold (the increase from $250,000 to $400,000) was likely to apply to leases entered into before 4 April 2011. This was despite the fact that the Office for Consumer and Business Affairs had expressly stated that the new rent threshold would only apply to leases entered into after 4 April 2011 and would not apply retrospectively to leases entered into before that date.

The Supreme Court cases of WST Pty Ltd v GRE Pty Ltd & Ors and more recently, Diakou Nominees Pty Ltd v Gouger Nominees Pty Ltd have confirmed that this increased rent threshold applies to leases entered into before 4 April 2011.

Whilst the Bill clarifies the position moving forward, it falls short of providing statutory relief to those cases which have been described as 'trapped between 4 April 2011 and the passage of this Bill'. Unless further amendments are made before the Bill becomes law, the effect will be that during this intervening period (between 4 April 2011 and the passing of the Bill) the situation will be left to be determined by the courts, that is, governed by the outcome of the Diakou Nominees case, and its subsequent appeal to the Full Bench of the Supreme Court. This leaves many landlords and tenants still in dispute as to their obligations and entitlements under the Act.

Provided that the appropriate quarantining arrangements were made for transitioning leases, perhaps a more sensible approach would be to proceed in the manner proposed by The Shopping Centre Council of Australia in its submission to the Moss Review, namely to amend section 30 of the Act to enable full recovery of land tax from tenants, rather than simply allowing for land tax to be taken into account in the assessment of rents.

Not only would this create greater transparency for tenants, it would also overcome one of the primary commercial issues with respect to the fluctuating operation of the Act.

Threshold

The Bill clarifies that the current rent threshold of $400,000 and other sums under the Act (such as security bonds) are clearly understood to be exclusive of GST.

The Bill also provides a review mechanism for the rent threshold under the Act, namely that the Valuer-General must review the threshold within two years of the amendments coming into effect and thereafter every five years. Whilst this does mean that there will be a continual 'shifting of the goal posts', parties entering lease agreements are now acutely aware that the rent threshold will change and that it is not possible to 'anchor' a lease at a point in time, never to be impacted by changes to the threshold amount.

Public companies

The proposed amendments to section 3 of the Act to include definitions of 'public company' and 'subsidiary' have been long overdue. A failure to make these changes would have meant that the status quo continued, where large multinationals inadvertently obtain the protection of the legislation.

Five year minimum term and exclusionary clauses

The Bill provides clarification (again long overdue) that holding over for a period of greater than six months does not imply a new five year lease term, which will allow either party to terminate the holding over.

The Bill also allows for the SBC (in addition to lawyers) to certify exclusionary clauses under section 20K of the Act. This section effectively allows a tenant to waive its statutory rights of security of tenure, but only after receiving independent legal advice.

Conclusion

As mentioned at the outset, fundamental changes to the Act are not contemplated by the Bill and most in the retail and commercial leasing sector would agree with this approach. There are however still certain issues with the Bill, some of which have been highlighted in the course of this article, which are likely to cause uncertainty for landlords and tenants as well as those who advise them. Given the significant resources which have already been contributed to public consultation and the drafting of the Bill, these issues should be further considered and additional amendments made to the Bill before it becomes law.