The ongoing saga of Retail Lease Legislation has a new milestone. The newly amended Retail Leases Act (NSW) commences on 1 July this year. There are positive as well as negative connotations. Angus Nardi looks at the new amendments and gives his view on the state of play; his conclusion says it all!
In late April 2017, NSW Deputy Premier and Minister for Small Business, John Barilaro, announced that the newly amended Retail Leases Act will commence on 1 July 2017. Passing in late February without Parliamentary amendment, the 24-page Bill was introduced to Parliament in November 2016 and debated across February.
In his media release, the Deputy Premier characterised the Act’s changes as “the most progressive, wide-ranging and balanced in Australia”.
Before critiquing the changes, it’s worth noting that Barilaro, the Queanbeyan-based Nationals MP and former businessman, did a great job of taking hold of the Act review and steering it to conclusion, including his stakeholder engagement and finessing through the Parliament.
At one stage, the Act review was, in my view, in disarray following the release of a lopsided review discussion paper in 2013. A line from our submission to that paper noted it had “an obvious partisan tone, giving us little faith that landlord issues will be acknowledged, or treated fairly or seriously”.
Substantial time has also passed since then. Labor’s Shadow Minister for Small Business, Jenny Aitchison, noted this in Parliament, as it was raised with her by various stakeholders.
But is Barilaro’s characterisation of the changes fair and reasonable?
Judgement is obviously in the eye of the beholder, but it is a simple fact that a landlord will have to do more to abide by some new ‘wider-ranging’ statutory leasing practices, and will carry more risk via avenues for compensation and penalties.
It’s highly arguable whether some amendments to the Act are balanced.
Either way, it still stands under the Act that a retailer does not get fined for failing to pay rent. Yet a landlord will be penalised for not, for instance, lodging a lease for registration on time.
While the Act is structurally the same, there are some key changes which landlords should note given their impact on leasing and investment.
Firstly, as a positive, is the abolition of the minimum 5-year lease term.
There was common ground to remove the current provision amongst ourselves and the key retailer groups of the National Retail Association (NRA), Australian Retailers Association (ARA) and Pharmacy Guild.
Secondly, there are excluded uses which the Act won’t apply to. This includes ATMs, children’s rides and vending machines.
Red-tape removal is as scarce as a Tasmanian Tiger so, in isolation, these two changes are welcome. However, these changes can seem trivial when compared with other amendments.
As an example, landlords will now need to return a tenant’s bank guarantee within two months of a tenant fulfilling their lease obligations (and, if not, there’s a penalty). We saw no substantial evidence, but it was suggested landlords were ‘sitting’ on bank guarantees long after a tenant had fulfilled their obligations. In the spirit of compromise, we accepted this change.
A critical change relates to the recovery of outgoings, which provides that a landlord carries a risk when there is a difference between estimated and actual outgoings. There is a safeguard whereby a ‘reasonable basis’ test will apply to the difference. The untested nature of this provision makes us nervous.
This change is also a little hard to take, particularly when landlords are ‘price takers’ from government on taxes and rates. There’s sometimes very little that a landlord can do to influence these external factors.
A key immediate concern with this provision is the new property-based Fire and Emergency Services Levy, which also commences on 1 July this year. It could be the case that some landlords have provided estimates to tenants (e.g. based on the current ‘insurance-based’ levy), however the NSW Government only published the new levy rates recently.
On face value our members will see a four-fold increase against their current levy contributions, so it’s pretty clear there may be a difference between some ‘estimates’ and ‘actuals’. For some centres, this amounts to an increase of a few hundred thousand dollars.
Time will tell how this works out. Jenny Aitchison raised this specific issue in Parliament and, in reply, the Deputy Premier noted that “the purpose of this amendment is to prevent the burden of inaccurate disclosure by landlords being put onto the tenant.”
Another change is a new right for tenants to terminate their lease within 6-months and receive compensation if a disclosure statement isn’t issued or is defective. Again, this comes with substantial uncertainty.
Landlords will also now need to register leases of 3-year terms or more, and signed copies of leases will need to be provided to tenants within 3-months of it being provided to the landlord.
The jurisdiction for the NSW Civil and Administrative Tribunal (NCAT) has also been increased from $400,000 to $750,000. This basically means that a wider range of leases and cases can potentially be heard by the Tribunal. We didn’t oppose this change.
A further change relates to demolition clauses for redevelopment purposes, which clarifies that it can only be invoked when part of a building is proposed to be demolished, and demolition requires vacant possession.
It is hoped that this change doesn’t adversely affect development projects whether they be largescale, or reconfigurations to improve tenancy mix.
This is one of those issues where governments would be wise to remember that development activity, particularly the construction phase, is a large employer of small-businesses through suppliers, professional services and tradespeople.
One outcome (which isn’t in the new Act itself) relates to the issue of retailers providing turnover data to landlords, which has long been contentious, and reviewed to death. Think the Reid Inquiry in the 1990s, the 2008 Productivity Commission inquiry and a Senate Inquiry in 2015.
The Deputy Premier didn’t add any regulation around this issue and instead supported the negotiation of an industry-led, voluntary Code of Conduct.
This Code – currently in a stage that I’d call ‘final draft’ – was negotiated between ourselves, the ARA, NRA, Franchise Council and the Pharmacy Guild.
It will be finalised soon, hopefully, along with a strategy for implementation.
It’s particularly pleasing because, one year ago in these pages, I noted that it’s still “early days, but we have been looking at a prospect of negotiating and finalising a code of practice with major retailer associations on the provision and use of turnover information.”
One year later, this has progressed to the point of formal recognition by the Deputy Premier (in the context of a legislative review, no less) and has proven that industry stakeholders can work together on a difficult issue.
And as I also said a year ago, an industry-led approach can hopefully avoid the “ever-looming threat of counter-productive scrutiny, wasteful inquiries and unnecessary regulation.”
The Code, modelled on the joint-industry Casual Mall Licensing Code which is authorised by the Australian Competition and Consumer Commission (ACCC), essentially seeks to ensure that data provided to landlords is returned in the form of useful benchmarking data.
There were accusations that not all landlords were providing any (or any useful) data back to retailers even though a retailer had provided their data to the landlord.
While the Code itself remains in ‘final draft’, the wider industry response has also been positive.
In Pharmacy News, in the context of a generally positive article, Phil Chapman from Lease 1 noted that “in the past it’s all been one-way traffic with landlords handed all of this beautiful data on a silver platter and the poor old retailer left behind.”
Russell Zimmerman from the ARA, said, “the Code will address information asymmetry and encourage the reporting of sales and occupancy costs by category, giving retailers a better understanding of how a shopping centre is performing.”
Even Senator Nick Xenophon noted in the 2015 Senate Inquiry into retail leasing that a “code of practice that incorporates the broad reporting of sales and occupancy costs in Australian shopping centres be finalised and implemented as soon as practicable.” The Government’s response to the Senate Inquiry, at the time, supported a code of practice ‘led by industry’.
From my perspective, this is the most positive aspect of the review and will likely prove to be Barilaro’s positive legacy.
This is why words in his reply speech in Parliament are both refreshing and significant. He noted that “this issue has been around for a long time, but we ended up with an industry-led solution rather than the heavy hand of Government.”
In relation to the issues enshrined in the new law, we are hoping that the reassurances Barilaro made are carried through.
There’s a couple of issues at play here, which make us nervous.
The first issue is the familiar narrative from some quarters about the Act protecting ‘small’ business from ‘big’ businesses.
Barilaro himself noted that “the intention of the bill has always been to empower and to protect small businesses in this state – at times against large landlords who have the power to inflict pain on businesses and retailers that do not have the ability, resources or capacity to respond, and who sometimes simply tire them out until they walk away from the fight.”
A Government fact sheet suggests that “retailers create new jobs and make a big contribution to their communities”, as if to suggest that landlords don’t.
As a person reasonably astute with public policy and politics, I get the need for narrative and rhetoric, and the power of political story-telling. But sometimes this commentary gets to a point of being ridiculous, and can be interpreted as being divisive, particularly where it can translate into expectations that the Government will be on the prowl for any landlord falling foul of the Act, or seeking to induce complaints.
This raises the second issue: what happens with this narrative when we shift into the implementation and ‘enforcement’ phase?
Will the post-1 July environment help landlords and retailers build good relationships, promote good practice and let all parties get on with it?
The jury is out, but the evidence is troubling.
On the day that the Deputy Premier announced the new Act’s commencement date, he participated in what looked to be a set piece to broadcast metropolitan news, which, in its entirety, squarely positioned landlords as the ‘bad, big end of town’ which are trampling over tenants and leaving them ‘high and dry’.
This isn’t encouraging. Put simply, we are now preparing for the worst, but hoping for the best.
