When leasing commercial property, it is important for tenants and landlords to understand the relationship they are entering and the rights and obligations they have.
In Victoria, retail leases are regulated by the Retail Leases Act 2003 (Vic) (the ‘Act’). Generally, the Act applies to premises used solely or predominantly for the supply of goods or services where the lease if for a period of 12 months or more.
The Act was introduced to promote certainty and fairness between tenants and landlords during retail leasing transactions and to provide methods for resolving disputes.
A landlord leasing or offering to lease retail premises has specific disclosure obligations. This article outlines the information a landlord must provide during a leasing transaction and the consequences if the disclosure requirements under the Act are not met.
Disclosure obligations at a glance
A landlord is required to provide the prescribed information relevant to a prospective tenant’s decision about whether to enter or renew a retail lease. The following documents must be available before the landlord or agent offers a new retail lease:
- a draft copy of the proposed lease;
- a lessor’s disclosure statement;
- a prescribed information brochure which provides an overview of retail leasing transactions and the rights and obligations of the parties.
The proposed lease and information brochure must be provided to the tenant once the lease negotiations commence.
What is a disclosure statement?
The purpose of a disclosure statement is to provide a snapshot of the key commercial terms of the proposed lease. It includes details of:
- the premises to be leased, amenities, shared facilities and services such as air conditioning, cleaning, maintenance;
- the term of the lease and renewal options;
- the rent payable including turnover rent;
- rent reviews and the method for calculating rent increases;
- the tenant’s estimated liability for outgoings;
- tenant’s fitout requirements;
- relocation or demolition clauses and information regarding planned future works;
- specific information for shopping centre leases such as trading hours, annual sales for the centre, turnover for speciality shops per square metre, traffic count, and lease termination dates for anchor tenants.
The landlord must include known information that may affect the leased premises such as planned demolition or alteration works to the building or shopping complex, and adjoining or surrounding land and infrastructure.
If a lease is to be assigned, disclosure by the tenant is required of any known matter (not necessarily connected with the lease) which may have a material impact on the ongoing viability of the business, as well as any notices issued to the tenant by the landlord.
The Retail Leases Regulation 2013 (Vic) prescribes four different disclosure forms to be used for non-shopping centre retail premises, shopping centre retail premises, lease renewals and lease assignments with an ongoing business.
When must the disclosure documents be provided?
The landlord’s disclosure statement must be provided to the tenant at least 7 days before a new retail lease is entered.
If a tenant renews a lease pursuant to an option clause, then the landlord must provide the disclosure statement 21 days before the end of the current term.
If a lease (not containing an option clause) is renewed by agreement between the parties then the disclosure statement must be provided within 14 days of entering the agreement for renewal.
Consequences of not conforming with disclosure obligations
Failure by the landlord to provide a disclosure statement entitles the tenant to withhold rent until the disclosure statement is provided.
The tenant must, after 7 days and before 90 days after the lease commences, give the landlord written notice that the disclosure statement has not been provided. The tenant will then have a right to terminate the lease if the disclosure statement is not received within 28 days, or within 7 days after receiving a disclosure statement.
A tenant may also terminate the lease within 28 days of commencement if the information provided in the disclosure statement is false or misleading or materially incomplete, or if a signed copy of the lease is not provided.
A copy of the fully executed lease should be provided within 28 days after being signed by the tenant.
Landlords must itemise all outgoings in the disclosure statement and provide accurate estimates of the tenant’s liability for these items. A landlord cannot require a tenant to pay for an outgoing that has not been included in a disclosure statement.
The Act prohibits or limits the landlord requesting contributions for certain expenses such as owners’ corporation fees and common area expenses. The landlord must follow specific accounting requirements with respect to calculating certain contributions which must be specifically referable to the tenant’s leased premises.
Many lease disputes arise from misunderstandings or unclear communications. The disclosure obligations prescribed by the Act aim to reduce the opportunity for dispute by requiring transparency during the negotiation phase.
Parties to a retail leasing arrangement should be conversant with their rights and obligations and landlords should ensure that leasing and disclosure documents are carefully prepared. Failing to follow the correct processes or providing incomplete or inaccurate documents can have costly results.