Expanded protections under the Retail Leases Act - understanding the impact on rent review clauses

Retail leasing in New South Wales underwent significant changes in January 2023, following amendments to the Retail Leases Act 1994 (NSW) . These changes, introduced through the Retail Leases Regulation 2022, aimed to modernise the retail leasing landscape and address gaps in tenant protections. For business owners, understanding these amendments is crucial to navigating their leasing obligations and rights effectively.

Expanded definition of "retail shop"

The new regulation broadened the scope of businesses classified as "retail shops" under the Act. The updated definition now includes:

1. • Gymnasiums and Fitness Centres: Yoga studios, barre classes, pilates, and dance studios are explicitly recognised as retail businesses.
   • Small Bars: Venues with a maximum patron capacity of 120, regardless of their location, are now considered retail shops.

Previously, these businesses were only covered if they operated within shopping centres or retail strips. Now, they benefit from tenant protections under the Act, regardless of their location.

Increased Scope of Tenant Protections

Businesses newly classified as "retail shops" now enjoy the full suite of protections under the Act. These include:

• Prohibition on landlords passing on lease preparation costs - this measure reduces the financial burden on tenants entering into retail leases and ensures a more equitable process. Tenants may still need to bear costs for their own legal advice when reviewing lease agreements
• Restrictions on rent review - landlords are unable to rely on a "ratchet clause" which ensures that the reviewed rent amount is higher than the previous period's, even if the rent review mechanism (such as a market review) would result in a lower rent (e.g. specifying that the rent will be reviewed in accordance with the Consumer Price Index (CPI) or a fixed increase of 4%, whichever is higher).  See section 18 of the Act. 
• Mandatory disclosure obligations requiring landlords to provide tenants with detailed lease information before execution - this is done via the Retail Lease Disclosure Statement, which contains key information such as:
  • Details of the leased premises, including fit-out standards.
  • Estimated outgoings, such as rates, taxes, and strata levies.
  • Planned alterations or refurbishments to the property.

Failure to provide an accurate disclosure statement can give tenants the right to terminate the lease or seek compensation.

• Access to low-cost dispute resolution mechanisms, such as mediation via the NSW Civil and Administrative Tribunal (NCAT).

Section 18 in action

In the 2016 case of Pozetu Pty Ltd v Alexander James Pty Ltd [2016] NSWCA 208, Pozetu , the landlord, entered into a lease with Alexander James Pty Ltd for a retail premises, with provisions for a five-year renewal. The lease contained a rent calculation clause stipulating that the rent for the renewal period would be the higher of the current market rent or 105% of the rent in the final year of the original term. The tenant exercised the renewal option in 2008, but the parties failed to agree on the rent for the renewed term. Pozetu insisted on a market rent of $175,000 per annum, but the tenant continued paying the previous rent of $156,000 while negotiations remained unresolved.

On 24 February 2009, the tenant gave notice to vacate and subsequently left the premises on 31 March 2009. Pozetu claimed damages for breach of lease, arguing that the tenant had repudiated its obligations under an equitable lease created by the exercise of the renewal option.

 The central legal issue was the validity of the rent-setting clause under Section 18(3)(c) of the Act. Both parties conceded that the clause was void, making it impossible to determine the rent under the original renewal terms.

The New South Wales Civil and Administrative Tribunal (NCAT) initially ruled in favour of Pozetu, finding that an equitable lease existed and the tenant had breached it by vacating. The Tribunal awarded damages of $400,000, the statutory limit under the Act. However, the NCAT Appeal Panel reversed this decision, holding that no valid lease existed due to the void rent-setting clause and the lack of agreement on the rent for the renewal term.

The Supreme Court reviewed the Appeal Panel's decision and upheld its conclusions for several reasons:

1. No Binding Lease Agreement:
   The exercise of the renewal option did not result in a valid lease agreement because the parties had not agreed on an essential term: the rent for the renewed term. Under contract law principles, a lease cannot be enforced without agreement on essential terms.

2. Effect of Section 18(3)(c):
   The rent-setting clause was void, leaving no mechanism to determine the rent for the renewed term. This voiding created uncertainty and prevented the formation of an enforceable agreement for a new lease.

3. Repudiation Claim Rejected:
   The court found that Pozetu's insistence on market rent did not constitute repudiation of its obligations. Similarly, the tenant’s decision to vacate did not amount to repudiation, as no valid lease existed.

4. Tenancy at Will:
   The court concluded that after the expiry of the original lease, the tenant's continued occupation created a tenancy at will, terminable on one month’s notice under section 127(1) of the Conveyancing Act 1919. The tenant validly terminated this arrangement by providing notice.

5. Guarantors’ Liability:
   Since no enforceable lease existed, the guarantors named in the original lease were not liable for any breach.

The court dismissed Pozetu’s claims, affirming that the invalid rent-setting clause and lack of agreement on rent precluded the formation of a renewed lease. The decision highlights the critical importance of compliance with section 18(3)(c) of the Act and ensuring clarity in lease terms to avoid similar disputes. It also underscores the need for tenants and landlords to carefully negotiate and document all essential terms when exercising lease renewal options.