Hall and Wilcox and how retail leases impact franchises

According to Hall and Wilcox , the Retail Leases Amendment Act 2004 (NSW) (Amendment Act) amends the current Retail Leases Act 1994 (NSW) (the Act), which governs the relationship between retail landlords and tenants in New South Wales. Franchisors need to be aware of the various state-based retail leasing laws when determining the basis for a franchisee’s right to occupy its site, whether by way of direct lease, sub-lease or outlet licence.

It is important that all retail landlords and tenants in New South Wales understand what impact the changes to the Act will have on them as there are stringent penalties for failure to comply.

The changes to the Act are as follows:

• Landlords are prohibited from recovering certain lease preparation expenses from tenants; and

• Landlords are no longer required to make available for examination by the tenant a six monthly statement of actual expenditure on outgoings to which the tenant contributes.

Lease preparation expenses

Lease preparation expenses are legal or other expenses incurred by the landlord in connection with the preparation of a retail shop lease, except for registration fees under the Real Property Act 1900.

The landlord can charge for reasonable expenses incurred in respect of amendments to the proposed lease requested by the tenant (subject to the exceptions below).

The tenant must be provided with a copy of an account in respect of those amendments and is not required to attend to payment until the landlord has complied with this requirement.

A landlord cannot recover for expenses incurred in relation to:

1. Amending or varying the particulars of the tenant, rent or term;

2. Amendments made to the lease to remedy a failure by the landlord to include or omit certain terms that were agreed between the landlord and the tenant; or

3. An amendment requested before the landlord is given a tenant’s disclosure statement.

Grants of leases, renewals or extensions will only be affected if they are entered into after 1 July 2005. A lease by definition includes an agreement to lease.

If landlords wish to charge the full expenses of the preparation of a lease to a tenant, they should ensure that the lease is entered into before 1 July 2005.

If lease preparation expenses are charged to a tenant then any provision of the lease to which the expense relates is void and the landlord will be guilty of an offence and may be liable for a penalty of up to $11,000. The tenant may also recover any amount paid to the landlord in contravention of these provisions.

Expenditure statement

The Act previously required a landlord to make a written expenditure statement available for inspection by the tenant. The statement was required to have details of all the expenditure by the landlord of outgoings to which the tenant contributed. The expenditure statement had to be available every six months. The Amendment Act removes this requirement from 1 January 2005.

However, it is important to note that a landlord will still be required to provide a written estimate of the outgoings to which the tenant contributes under the lease. This estimate must be provided once every year.

Conclusion

It is imperative that landlords and tenants seek legal advice if they are unsure how the amendments will affect them, so as to avoid penalties for contravention.

Read about buying a franchise and running a franchise.