Does retail need a leasing code?
The Franchise Council of Australia is watching with interest as the Western Australian Government moves ahead with a review of retail tenancy regulations, focused particularly on the disclosure imbalance that sees many franchisees forced to provide a lot of economic data to landlords but who are not the recipients of reciprocal disclosure about rents.
This information disclosure imbalance is an historical anomaly and it is time it was removed. In the franchising sector the FCA goes to great lengths to ensure franchisees have all the information they need to make sound commercial judgments. When they enter into a lease, particularly in shopping centres, they often do so in the face of long, complicated legal documents forcing them to disclose store turnover, when they get no such disclosure about current rents.
At present the information imbalance distorts the market, and places tenants at a substantial disadvantage in lease negotiations.
About one in three franchise systems are involved in retailing, with many franchisors and franchisees occupying tenancies in major shopping centres.
On March 31, 2008, after conducting a detailed inquiry, the Productivity Commission delivered its report to the Federal Government concerning the market for retail leases in Australia. The Productivity Commission recommended that a code of conduct be drafted to provide minimum, industry-wide standards in matters such as:
- transparency in dealings between landlords and tenants
- rent increases and disturbances
- end of term arrangements
- lease terms
- dispute resolution procedures
The nature of these problems has been well articulated in submissions to the inquiry, and is summarised in the Consultation Regulatory Impact Statement. It is worth reflecting on some key points in the context of the franchising relationship:
- The information imbalance is not an accident, nor a natural incident of the operation of the free market. It occurs because landlords require tenants to disclose turnover as part of the lease, and without there being a reciprocal obligation on landlords to disclose other information concerning rental, outgoings and other matters.
- Landlords still frequently require the turnover information even where rent is not set by reference to the turnover information.
- Landlords often make it difficult for tenants to obtain market information. Some tactics include deliberately delaying the lodgment of lease information in states where leases are registered, and using various techniques to inflate the rental figure, including rebates, rent free periods and incentives.
- Technology makes it very easy these days for landlords to collate and share information. In a franchise network tenants are particularly disadvantaged. Landlords can develop an understanding of the franchise model from one location and leverage that information across their property portfolio. When it comes to end of term lease negotiations the landlords knows how far they can push the rental. The franchisee has little or no bargaining power; if the tenancy ends the franchisee loses everything.
The FCA strongly supports the Productivity Commission recommendations, and in consultation with other industry participants has taken the lead in implementing the recommendations. This has led to the FCA commissioning the first draft of a Retail Leasing Code of Conduct (the Code) and it is now seeking endorsement by industry bodies and other stakeholders.
The Code is intended to take effect as a voluntary code pursuant to the Competition and Consumer Act 2010, with parties subscribing to the Code and thereby agreeing to be bound by it. It is therefore important that the Code obtains broad support from Australian retailers, as it will then have sufficient momentum to enable the FCA and others to persuade landlords to become signatories.
The Code has been developed based on the guidelines for industry codes, which were developed by the Federal Government, with input from the ACCC.
The conduct of the proprietors of major shopping centres is a major concern. The FCA still hears far too many stories which fair-minded people would regard as unacceptable. Part of the problem is the substantial information imbalance and inequality of bargaining power between landlords and tenants. The FCA is concerned this information imbalance and inequality of bargaining power is distorting the free and fair operation of the market to the detriment of franchisors and franchisees in particular.
This voluntary code for landlords, tenants and representative organisations has been compiled to address member concerns over the extreme behaviour that occurs far too frequently within the franchising sector.
Some member concerns include:
- Excessive and unjustified rental increases in major shopping centres
- Unreasonable behaviour in relation to end-of-term arrangements for sitting tenants
- Unreasonable and costly requirements in relation to shop fit-out and signage
- The substantial information imbalance between landlords and tenants
- Abuse of market power where landlords offer contracts on a take it or leave it basis.
The market mostly operates fairly, but there have been enough instances of inappropriate circumstances that something needed to be done.
Looking back to WA, its Government’s Commercial Tenancy (Retail Shops) Agreements Amendment Bill 2011 is currently being debated by parliament.
The FCA supports any initiative that will improve the efficient operation of the market. Of the alternatives proposed by the Government in its consultation paper, the FCA believes the first option of extending valuer access to be the most appealing. The FCA does not support maintaining the status quo, and does not wish to see disagreement as to the method of resolving the problem stand in the way of reform.
The FCA notes the background paper comments regarding a previously proposed requirement for landlords to maintain a register of leases for each shopping centre. The FCA supports this option, and indeed considers it to be a superior solution to any of the options outlined in the Consultation Paper. The FCA is unsure why there was not broader support for this proposal, and would welcome a decision to revisit the issue. In this context we would happily survey our members, so that the Government had detailed information from a representative sample of tenants.
As a method of levelling the balance of information availability, the FCA would support the banning of turnover-based rental and information collection by landlords. However the FCA considers the options in the Consultation Paper to be a better solution.
These are important aspects that the FCA believes warrant attention in addition to the issue of access to information.