Risk Watch: Reform of the Retail and Commercial Leases Act – By John Doyle

Reform of the Retail and Commercial Leases Act 1995

JOHN DOYLE, SENIOR SOLICITOR, LAW CLAIMS

Application of the Retail and Commercial Leases (Miscellaneous) Amendment Act 2019 (the Act) came into operation 1 July 2020. The Act significantly amends the existing legislation governing retail shop leases and commercial tenancies in South Australia.

Lawyers need to be aware that retail leases may move in and out of the scope of the Retail and Commercial Leases Act 1995 (RCLA) and that the reforms contain new exemptions for Leases from the operation of the RCLA which are subject to certain conditions being met.

Diakou Nomineees Pty Ltd v Gouger Street Pty Ltd & Ors [2017] SASC 72

The Lease subject to Stanley J’s decision was entered on 1 September 2006. It is referred to in the pleadings and Stanley’s decision as the “New Lease”. The Lease had an initial term of 5 years, with 6 rights of renewal each for a further 5-year term (hence reference in the judgment to a lease with a potential 35 years’ duration).

The starting rent for the Lease was $250,500, deliberately to take it outside of the RCLA, which (at that time) had a prescribed rent threshold of $250,000. Diakou (the Landlord) wanted the Lease to be exempt of the RCLA. An exempt lease would allow for provisions including a ratchet clause to stop reduction of rent in any future rent review and to provide that the tenant pay land tax as assessed on the property.

On 4 April 2011 the Retail and Commercial Leases Variation Regulations 2010 commenced with the effect that prescribed rent threshold subject to the RCLA was increased from $250,000 up to $400,000.

In litigation between Diakou and the tenant in respect to the proper construction of the Lease a preliminary question arose as to whether the RLCA applied to the Lease on and from 4 April 2011 or as renewed from 1 September 2011.

Stanley J determined that the Lease was subject to the operation of RCLA as and from 4 April 2011 (paragraph 67).

The effect of Stanley J’s decision is that leases can move in and out of the operation of the RCLA (paragraphs 49-52).

Prescribed Rent Threshold to be calculated exclusive of GST

The prescribed threshold, in relation to rent payable under a retail shop lease under the Act has been clarified in that the amount of the prescribed rent threshold (currently $400,000) is to be calculated exclusive of GST: s.3(1a) (a) RCLA.

The Act also provides that the prescribed rent threshold will be regularly reviewed by the Valuer-General, with the first review by 30 October 2022 and thereafter every 5 years: s. 6A RCLA.

New Exemption – Registered leases with rent over the rent threshold: s.4(3) (a) RCLA

The Act has created a new exemption from the operation of RCLA for registered leases. Where the rent at the time of registration of a lease exceeds the prescribed threshold, the lease will not be subject to the RCLA for the life of the lease even if: • The rent threshold is later increased, such that the rent payable under the lease falls under the rent threshold; or • The rent decreases to under the threshold (e.g. after a negative rent review).

However this exemption applies to registered leases only, and only if each of the following criteria are met: • The lease must be lodged for registration by the Landlord and within 3 months of signing; • The landlord must provide written notification of lodgment within one month of lodgment to the tenant; • The lease must remain registered for the life of the Lease; and • The rent exceeds the prescribed threshold when the lease is lodged for registration.

New exemption – Renewal of an exempt lease: s.4(3)(b) RCLA

If the exemption applies, then the exemption also applies to a renewal of the exempt lease, provided that: • The renewal is lodged for registration by the landlord and within 2 months of the previous term expiring; • The landlord provides written notification of lodgment of the renewal within one month of lodgment to the tenant; and • The renewal remains registered for the life of the renewal.

Existing leases prior to 1 July 2020: s.4(4) RCLA

The new exemption applies to new leases only, that is, leases entered into after commencement of the Act. The exemption does not apply to: • Leases entered into before 1 July 2020; or • Renewals pursuant to a right of renewal granted before 1 July 2020.

However the exemption can apply to a new lease between an existing landlord/ tenant, whether on the same or different terms: s.4(4)(b) RCLA.

It is good risk management for lawyers to regularly review their commercial lease files and to remain current on legislative and case law developments. It puts them in the best position to advise their clients (whether Landlord or Tenant) in respect to commercial leasing matters.

Lawyers are reminded that the Society earlier this year launched its Commercial Leasing Risk Management Package for SA Practitioners. Access to the Commercial Leasing document package is available only to practitioners insured with the SA PII Scheme (i.e. through Law Claims) at https://www.lawsocietysa.asn.au/Public/ Publications/Commercial_Law_Package/ Leasing/leasing_landing.aspx (requires login).