Changes to Commercial Leasing Legislation and the Application of the Act – Part 1 of 3
From 1 July 2020, the Retail and Commercial Leases (Miscellaneous) Amendment Act 2019 (SA) (Amending Act) came into operation in South Australia. The Amending Act amends the Retail and Commercial Leases Act 1995 (SA) (Act) and provides further clarity on the regulation of the relationship between landlords and tenants.
The following article is Part 1 in a three part series produced by Eckermann Lawyers, which will outline the key changes introduced by the Amending Act. In particular:
- Part 1 will focus on key amendments and clarifications which affect the application of the Act;
- Part 2 will consider new landlord obligations and disclosure statement requirements; and
- Part 3 will outline the changes with respect to bank guarantees/security bonds and “holding over” considerations.
Part 1 – Application of the Act
Previously, there was much confusion as to the application of the Act, namely the application of the prescribed rent threshold
The Amending Act has clarified that the $400,000 per annum prescribed rent threshold is exclusive of GST. In addition, a new section now empowers the Valuer-General to review this prescribed threshold and recommend an increase to the prescribed rent threshold to reflect market conditions. The first review will be within two years of 1 July 2020 and subsequently every five years.
The Act will only apply to a lease if the yearly rent does not exceed the prescribed threshold of $400,000 exclusive of GST. If the rent exceeds the prescribed threshold, then the Act will not apply to a lease. However, this raises the following questions:
- if the Act applies at the commencement of the lease term, will it continue to apply even if the rent subsequently exceeds the threshold?
- if the Act does not apply at the commencement of the lease term, will it continue to not apply even if the rent is subsequently decreased below the threshold?
In other words, can the Act can come “in and out” of application upon changes in rent?
Example 1: Business A leases premises from Land Owner A. The value of the rent is $300,000 per annum exclusive of GST. In this situation, the Act applies to the lease because the rent is less than the prescribed threshold of $400,000. However, as a consequence of a market rent review, Land Owner A increases the rent to $500,000. The issue here is whether the Act still applies to the lease as the rent did not originally exceed the prescribed threshold, or the Act no longer applies because the rent now exceeds the prescribed threshold.
Example 2: Business B leases premises from Land Owner B. The value of the rent is $500,000 per annum exclusive of GST and so the Act does not apply to the lease. During the term of the lease, the Valuer-General reviews the prescribed threshold and increases it to $600,000. This poses a new issue: does the Act now apply to the lease or is the lease still subject to the old prescribed threshold?
The case of Diakou Nominees Pty Ltd v Gouger Street Pty Ltd & Ors (2017) SASC 72 was concerned with the issue posed in Example 2. The Supreme Court held that Parliament intended for the Act to operate retrospectively. In other words, any changes to the prescribed threshold would apply to all current leases irrelevant of whether the leases were executed at a prior date. However, the issue in Example 1 remained unanswered.
The result of the introduction of the Amending Act
In order to eliminate all ambiguity, the Amending Act answers the above questions. All leases are now subject to the $400,000 exclusive of GST prescribed rent threshold on an “in and out” basis. Put simply, the Act will apply to a lease if the rent is under the $400,000 prescribed threshold; however, in the case that the rent of a lease is increased above this prescribed threshold, then the Act will no longer apply. Any changes to the prescribed threshold will override previous thresholds retrospectively.
Example 3: On 1 July 2020, Business C leases premises from Land Owner C. The value of the rent is $450,000 per annum exclusive of GST. Here, the Act does not apply to the lease as the rent exceeds the prescribed threshold. As a result, Land Owner C may recover land tax from Business C. On 1 July 2021, the Valuer-General increases the prescribed rent threshold to $500,000 exclusive of GST. This means that the lease now falls within the application of the Act as the rent is less than the prescribed threshold. As such, Landlord C may no longer recover land tax from Business C.
The Act will however not apply to a lease entered into after 1 July 2020 if the rent exceeds the prescribed threshold and the lease has been lodged for registration by the landlord. Landlords must do so within 3 months after it is signed and they must notify the tenant of lodgement within 1 month of lodging. While this provides some security to landlords, the lodgement obligations are onerous and will be discussed in further detail in Part 2 of this series.
In addition, “public company” was not defined under the previous Act. The Amending Act defines a “public company” in accordance with section 9 of the Corporations Act 2001 (Cth); a company other than a proprietary company. Under the Amending Act, if the tenant is a public company, the Act will not apply to the lease. However, if the tenant is a public charitable company, the Act will apply to the lease.
Why is this important?
The Retail and Commercial Leases Act 1995 (SA) is legislation that regulates the landlord and tenant relationship. If the Act applies to a lease, the obligations on both landlord and tenant are more strictly governed, and as such, compliance can become contentious.
When a lease can “fall in and out” of the application of the Act, the following points warrant consideration:
- the recovery of land tax;
- ratchet clauses;
- preferential rights;
- ensuring a premises is fit for purpose;
- holding over provisions;
- negotiation of renewal terms; and
- disclosure obligations.
This list is not exhaustive and there are many other factors to consider. The recent changes to the legislation may impact the application of the Act to your lease, and as such, your security under the lease.
Part 1 of this series has discussed the principles behind the application of the Act to retail and commercial leases. Part 2 will discuss new landlord obligations prior to entering into a lease and upon registration, and changes to the disclosure statement procedures.
We encourage you to contact the team at Eckermann Lawyers should you require retail and commercial leasing advice, including advice in relation to the new changes.