Significant amendments to the Retail and Commercial Leases Act (RCLA) that will impact on the leasing and licencing practices of Councils are still in the pipeline.
In 2014 the Small Business Commissioner (SBC) released an issues paper outlining a number of areas regarding the Retail and Commercial Leases Act 1995 which were in need of amendment. Following this paper retired District Court Judge Alan Moss was engaged to complete a thorough review (Moss Review).
The Moss Review was completed in April 2016 and made 20 recommendations across a broad range of issues regarding the Act. Submissions on these recommendations were accepted from the public until August 2016. All submissions were reviewed by the SBC who consequently produced a report for the Minister for Small Business.
The resulting Retail and Commercial Lease (Miscellaneous) Amendment Bill 2017 (Bill) was awaiting consideration before the Legislative Council prior to the conclusion of Parliament sitting on 30 November 2017. Despite the Bill having now lapsed, the SBC is continuing to advocate for these changes to be passed by the new Liberal Government. Below we take a look at what the proposed changes are and what they mean for Councils.
Changes relating to Local Government
Classes of Tenants are to be exempt from the RCLA
Amendments to Section 4 dealing with the application of the RCLA mean that lessees and licensees (Tenants) of many Council leases and licenses will most likely come within a new exemption that is linked to ‘a class specified by the regulations’. This will make life easier for Council staff involved in the administration of leases and licences of Council property to sporting clubs and community groups.
In its current form, the RCLA applies to most of the leases and licences entered into by Councils due to the broad definition of a ‘retail shop’. There has been ongoing debate about whether leases to community groups and sporting clubs (often for a peppercorn rent) should come within the ambit of the RCLA. The application of the RCLA to the majority of these occupancy arrangements places significant costly, and arguably unnecessary, administrative burden on Council administrations.
The regulations will provide for new classes of Tenants that are exempt from the application of the RCLA where the lessor is a government entity but as yet there are no proposed variations.
The Moss Review recognised that the key reason for this change came from the trouble and expense caused in the Local Government and Government sectors and suggested that compliance with the RCLA discourages community friendly activities. Given that the changes to the RCLA have derived primarily from this report it is reasonable to assume that some, if not all, of the recommended exempt classes mentioned by the Moss Review will be incorporated into the regulations at some point. The Moss Review suggests the following types of activities should be eligible for exemption:
- Rental of pools and hydrotherapy services within the health system by a private physiotherapist, or swimming instructor;
- Lease of Local Government facilities for Men’s sheds and other volunteer organisations;
- Volunteer operations by sporting clubs of small shops at Council owned sporting facilities.
The amendment will insert a new subsection in Section 4 that will exclude the RCLA from applying to a lessor if they are:
- the Crown or an agency or instrumentality of the Crown in right of the State, another State or Territory, or the Commonwealth; or
- a municipal or district council or other authority with powers and functions of local government; and
- the Tenant is of a class specified by the regulations for the purposes of this paragraph.
This means that the RCLA will not apply to a Council as lessor if the Tenant is a person specified in the regulations as being excluded from the RCLA applying.
Application to the SBC for exemption from the RCLA
A Council as lessor will be able to apply to the SBC for an exemption to the RCLA where necessary. This provides a third option to the current applications available to either the Magistrates Court or the Minister for Small Business.
In recent years a number of Councils have successfully sought exemptions from parts or the whole of the RCLA under section 77. This has often involved commercial leases and licences of tourist parks due to the restrictions in the RCLA relating to obligations to carry out capital improvements by a Tenant. Given the review of the RCLA was linked to a red tape reduction strategy by the previous Labour Government it is hoped the alternative option of applying to the SBC will make the process more efficient.
Changes to the provision to provide a copy of the lease
Section 11 of the RCLA currently requires that a copy of the lease is made available for inspection by the prospective Tenant. This section will be amended to make it mandatory to provide a prospective Tenant with a copy of the lease as soon as it enters into negotiations with the lessor. This preliminary copy does not need to include the particulars of the Tenant, the rent or the term of the lease.
Previously the penalty for non-compliance with Section 11 was $500. The Bill significantly increases this maximum penalty to $8,000.
This section now includes an additional obligation to provide a prospective Tenant with an ‘information brochure’ about retail leases published by the SBC (where such a document is available). Non-compliance incurs a maximum $800 penalty and a further $120 expiation fee.
There are stricter rules regarding disclosure statements in the Bill.
Under the new Bill, a disclosure statement will be required to be signed by the lessor (not a requirement at present but often done) and it must be served on the Tenant personally; or
- by leaving at the last known place of residence, business or registered business office;
- by post - the service date is to be taken to have occurred when it would be delivered in the ordinary course of post; and
- by facsimile or email.
The Tenant is then required to provide the lessor with a signed acknowledgment of receipt within 14 days of service.
The Moss Review suggested that without service of the disclosure statement no binding agreement could be made. It is unclear whether this is the intention behind this amendment.
It is important to note that the Bill also creates a new offence for failure to comply with this section with the maximum penalty for non-compliance set at $8,000.
One positive amendment is that the need for a disclosure statement to be provided to a Tenant prior to a renewal of a lease has been scrapped.
Registration of leases not compulsory
The Moss Review considered the compulsory registration of leases. Fortunately for Councils (who rarely register leases), this recommendation was not taken up.
Five year minimum term on holding over
Section 20B (minimum five year terms) has deleted the words ‘with the consent of the lessor and the period of holding over does not exceed six months’ in s20B(3)(b). This is intended to mean that there is no new five year term when the Tenant has been holding over.
This is a positive change as many Councils in the past have found themselves in holding over scenarios that risk the implication of new five year lease terms. Leases which enter into a holding over scenario also have additional implications for Councils relating to a possible failure to comply with public consultation requirements in relation to any new term, pursuant to Section 202 of the Local Government Act 1999 (SA), amongst other things.
As suggested in the Moss Review, s20K Certified Exclusionary Clause certificates will now be able to be signed by the SBC as an alternative to lawyers. This section allows a Tenant to waive its statutory rights of security of tenure after receiving independent legal advice.
The amendment is important for Councils and means that non-commercial Tenants without a lawyer will be able to approach the SBC instead of obtaining one-off legal advice when seeking to enter into a lease or licence that is for a term less than five years.
For the purpose of this article, we have focused on the impact of the changes to the RCLA on Councils in their capacity as lessors and licensors of community and sporting facilities. There are a number of other changes that will have a significant impact on commercial leases and a brief snapshot of these is provided below.
There is a new obligation on a lessor to return a bank guarantee within two months of completing its obligations under a lease. The period does not commence until after the Tenant completes performance of the obligations under the lease. This is relevant to those situations where a Tenant has delayed its make good obligations at the end of a lease.
Outside of the circumstances noted above, failure by a lessor to return a bank guarantee within time could result in compensation being owed to a Tenant for loss or damage suffered as a result of the delay.
Fluctuation of application
The Bill clarifies the position in respect of the ability to move in and out of the RCLA. For example, where the status of a Tenant changes from proprietary company to public company and vice versa, often resulting from a lease assignment, the RCLA can commence or cease application depending on the scenario. This has been a contentious issue, especially where the obligation to pay land tax is involved.
GST exclusive amendments
The rent threshold of $400,000 and other sums under the RCLA are all confirmed to be GST exclusive. This was previously unclear.
The $400,000 rent threshold which determines whether the RCLA applies or not is to be reviewed by the Valuer General within two years of the Bill passing and from then on, every five years.
Watch this space
We will keep you advised as to the status of the Bill as it progresses and any significant changes. In the meantime, it is important that Councils understand their obligations as lessors and licensors under the RCLA.
If you have any questions regarding this or any other property issue, please contact one of the members of our Local Government property team listed below.