Significant changes to the Victorian retail leasing framework: considerations for landlords

The Retail Leases Amendment Act 2020 (Vic) (Amendment Act) makes a number of key changes to the retail leasing framework in Victoria. The majority of these changes impose additional obligations on landlords. Accordingly, leasing processes and documentation must be updated immediately to ensure compliance. 

The Amendment Act makes six key changes to Building Act 1993 (Vic) (Building Act) and the Retail Leases Act 2003 (Vic) (RLA):

1. Landlords can recover costs of essential safety measures from tenants 

In a reversal of the 2015 VCAT advisory opinion, the Amendment Act amends both the Building Act and the RLA to clarify that, provided the parties agree as such in the lease:

• landlords can recover from tenants:
  
  
  • ‘the cost of repairs or maintenance work in respect of an essential safety measure’; and
    
    
  • ‘in respect of an essential safety measure…the cost of carrying out an installation relating to fit out of the retail premises’; and
    
    
• tenants can be required to carry out ‘repairs or maintenance work in respect of an essential safety measure on behalf of the landlord’.

Landlords should note that the carrying out of repairs or maintenance work by a tenant does not affect the obligations of the landlord as a building owner under the Building Act (including regulations).[1] Accordingly, even with an appropriately drafted lease provision passing the repair and maintenance obligations to a tenant, landlords must regularly inspect the premises to ensure compliance with their statutory obligations.

2. Disclosure obligations

Landlords must provide tenants with a disclosure statement and a copy of the proposed lease at least 14 days (previously this period was 7 days) before entering into the lease.[2] If a landlord fails to do so, the term of the lease is taken to commence 14 days after the required documents are provided to the tenant.[3] Landlords should immediately update processes to ensure compliance with this new time requirement.

Tenants must also be notified if the proposed lease given to the tenant contains any changes to a previous copy of the lease that was provided to the tenant.[4] Similarly, the disclosure statement provided on renewal of a lease is now required to set out any changes to the previous disclosure statement given to the tenant.[5] These obligations should be easy to comply with if parties adopt the common practice of using mark ups and document compares.

Section 17(7) of the RLA has also been amended by removing the word ‘substantially’. While a subtle drafting change, the effect of this is that if a lease entered into pursuant to an agreement for lease is not strictly ‘in accordance with the earlier agreement for lease’ a further disclosure statement must be provided to the tenant. As stated in the explanatory memorandum to the Amendment Act, this amendment is intended to remove uncertainty regarding the extent to which the lease must be in accordance with the earlier agreement for lease.

3. Security deposits to be returned within 30 days

Landlords are now required to return security deposits to tenants within 30 days after the lease ends, provided that the tenant has performed all of its obligations under the lease.[6] Previously, the obligation was for security deposits to be returned ‘as soon as practicable after the lease ends’.

The RLA does not expressly deal with bank guarantees, other than prohibiting landlords from refusing a bank guarantee in lieu of a security deposit. In this regard, it is arguable that the requirement to return security deposits within 30 days of lease expiry does not apply to bank guarantees. However, in the absence of judicial guidance, landlords would be sensible to align their processes for the return of both security deposits and bank guarantees.

4. Landlord’s obligations regarding further terms 

Landlords are now required to provide substantial additional information to a tenant prior to the tenant exercising an option for a further term. This information must be provided at least three months before the last date on which the tenant is entitled to exercise the option to renew.

The following information must be provided (by way of written notice) to tenants:

• the last date by which the tenant must exercise its option to renew;
  
  
• the rent payable for the first 12 months of the further term;
  
  
• the availability of an early rent review (see comments at 5 below);
  
  
• the availability of a cooling off period (see comments at 6 below); and
  
  
• any changes to the most recent disclosure statement provided to the tenant, excluding rent-related changes (Renewal Notice).[7]

If a landlord fails to provide the Renewal Notice in the time required, the date by which the option to renew must be exercised is extended to the date three months (previously six months) after the tenant receives the required notice.[8]

5. Early rent reviews

If a lease provides for a market review of rent on commencement of a further term, tenants may now request an early rent review following receipt of a Renewal Notice.[9] Tenants must make this request in writing within 28 days after receiving the Renewal Notice.[10]

If a valuer is appointed to determine the market rent (and this determination is not provided before the last date on which the option can be exercised) the last date by which the option can be exercised is extended to the date 14 days after the tenant is notified of the valuer’s determination of the rent. This automatic extension provides significant incentive for landlords to provide a Renewal Notice as early as possible and will increase the importance of selecting an appropriate valuer who can provide the determination within the time required.

The cost of the valuation must be shared equally between the landlord and tenant.[11]

6. Cooling off period

Tenants now have the benefit of a 14 day cooling off period where:

• an option to renew a lease has been exercised; and
  
  
• no request for an early rent review has been made.[12]

Tenants may provide written notice to the landlord that they no longer wish to exercise the option to renew in the cooling off period.[13] If the tenant provides such notice:

• the term is extended by 14 days;
  
  
• the lease is not renewed; and
  
  
• the tenant is unable to exercise the option to renew.[14]

This creates a period of uncertainty for landlords and will require proactive engagement with tenants.

Key takeaways

Aside from the changes to the essential safety measures regime, which should be welcomed by landlords, the amendments are largely tenant-protection measures and impose additional obligations on landlords. Landlords should ensure that their internal processes, particularly regarding the issuing of disclosure statements and notices regarding further terms, are updated as a priority. Lease documentation should also be reviewed to ensure that the amendments are reflected in both new leases and renewals of existing leases.

An issue of increasing importance not addressed in the Amendment Act is the ever increasing scope of the RLA and the leases which, although not “retail” in a traditional sense of the word, are technically subject to the RLA. The additional obligations now imposed on landlords as a result of the Amendment Act only increases the importance of this issue for landlords.

The amendments regarding essential safety measures took effect from 23 September 2020. The balance of the amendments take effect from 1 October 2020.