Legal Alert | Retail leasing and unfair contract terms

In September, the Australian Competition and Consumer Commission (ACCC) commenced its first enforcement action for unfair contract terms.  Proceedings were instituted in the Federal Court against JJ Richards & Sons Pty Ltd (JJ Richards) - one of the largest privately-owned waste management companies in Australia.  The ACCC alleges that JJ Richards’ standard form of small business contract contains 8 unfair terms.

This case is the first of its kind and serves as a reminder to be aware of the laws introduced to protect small businesses from unfair terms in business-to-business contracts.

When does the unfair contracts regime apply?

In summary, the unfair contracts regime applies where:

• there is a standard form contract: (this is not defined but a number of factors are taken into account) for example, a contract that has been prepared by one party to the contract and where the other party has little or no opportunity to negotiate the terms; and

• the contract is a “small business contract” entered into, renewed or varied after 12 November 2016: this includes contracts for sale or the grant of an interest in land (leases) and applies where:

• at least one of the parties is a “small business” (i.e. employs less than 20 people); and

• the upfront price payable under the contact is no more than $300,000, or $1 million if the contract is for more than 12 months (e.g. leases); and

• the term is unfair: an “unfair” term must satisfy 3 elements – cause a significant imbalance between rights and obligations under the contract; not be reasonably necessary to protect legitimate interests of the party advantaged by the term; and cause detriment (financial or otherwise) if relied on.

How is the unfair contracts regime relevant to retail leases?

The retail lease legislation across Australia mainly addresses behaviours between landlords and tenants. The retail lease legislation does not expressly exclude the inclusion of unfair terms in retail leases.

The ACCC’s consultation and review uncovered some customary clauses in retail leases which the ACCC considers fall into the category of an “unfair term”.

1. Termination clauses

   Many retail leases include a right for a landlord to terminate the lease for any breach, regardless of how minor the breach.  A term which allows a landlord to terminate without giving a tenant any possibility to remedy the issue raises some concerns under the unfair terms regime.

   ACCC’s advice: A landlord should only be entitled to terminate the lease after first notifying the tenant of its intention to terminate and then providing the tenant with a reasonable period to remedy the breach.

2. Right to recover costs from a tenant

   It is common to see retail leases with a right for a landlord to recover costs from a tenant in certain situations – for example, in relation to remedying a breach or fixing damage.  A term which requires a tenant to reimburse a landlord where no limitation is placed on the amount, may be an issue under the unfair terms regime.

   ACCC’s advice: The costs which the landlord can recover should be limited to reasonable costs or include a cap on costs.

3. Rights to property at the end of the lease

   Retail leases often include a provision allowing a landlord the right to take possession of and deal with a tenant’s property left behind at the end of the lease. In some cases, the landlord has a right to deal with the tenant’s property without the need to give further notice to the tenant.

   ACCC’s advice: A landlord should be required to the give the tenant reasonable notice of its intention to exercise these rights. Further, a landlord should be limited in the costs it can pass on to the tenant in dealing with the property (for example, limiting the costs to reasonable costs).

4. A right for a landlord to unilaterally amend the shopping centre rules

   Almost all retail leases include centre rules or regulations which are incorporated into the terms of the lease. It is usual for a landlord to reserve the right to amend those rules and regulations as it wishes.  It is also not uncommon for a tenant to be in breach of the lease if it violates a term of the rules and regulations.

   The ACCC appreciates the need for landlords to vary centre rules and regulations to ensure good management and efficient running of the centre. However, where there is no limitation placed on the landlord’s ability to amend the rules and regulations, this raises some concern under the unfair terms regime.

   ACCC’s advice:  A landlord can only make reasonable rules and regulations (and reasonable variations) that are not inconsistent with, and do not detract from, a tenant’s rights under the lease.  A landlord should be required to give tenants notice of any variations to the centre rules and regulation

5. Wide indemnities

   A landlord may require a tenant to indemnity it for any loss or damage that a tenant might cause and which is outside the control of the landlord.  Many leases include an indemnity provision of this nature. Where an indemnity provision is unreasonably broad and/or indemnifies a landlord in circumstances where a landlord had caused or contributed to the loss, this may raise an issue under the unfair terms regime.

   ACCC’s advice: A tenant can indemnify a landlord, except to the extent that any liability is caused or contributed to be a landlord’s negligence or breach of the relevant lease.

Take home message

These examples are only some terms which may fall into the category of an “unfair term” and, until enforcement action is taken by the ACCC, we cannot determine with certainty which terms may fall into this category. That being said, these examples are common terms seen in many shopping centre leases.  Landlords should be reminded to take particular care to review the terms of their standard form lease (in a business-to-business context) and assess whether the terms can be justified as reasonable before imposing those terms on small business.  Likewise, relevant tenants should approach lease negotiations confidently to ensure terms of this nature are removed from leases and a more balanced position is achieved.

All information contained in this Legal Alert has been obtained from the document titled “Unfair terms in small business contracts: A review of selected industries” prepared by the ACCC dated November 2016.

For further information about this Legal Alert or Retail Leasing in Australia generally, please contact Tom Young on (07) 3414 2845 or Sarah Philipson on (07) 3414 2921.