“Dealing with retail leases not covered
by the Retail Leases Act.” By Geoff Farland Director Landerer & Company Seminar presentation 30 March 2011
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Dealing with retail leases not covered by the Retail Leases Act (RLA).
1. Introduction
This paper considers various factors relevant to entering into a lease of retail premises which are not covered by the Retail Leases Act (RLA). It does so generally from the perspective of the landlord and particularly, the smaller landlord. No apology is made for doing so. Much has been written about retail tenancy law and practice throughout Australia. However, not nearly as much has been written about larger retail. The 2008 Productivity Commission Retail Inquiry Report1 describes the interaction of business in the retail tenancy market and the fact that “most retail tenancy legislation has been introduced to deal with (large well resourced landlords and small low resourced tenants)”2. Most retail space is located outside of shopping centres. According to the Commission, the percentage was over 62% in 2005‐ 2006. Most retail is in fact in retail strips or, increasingly, in stand‐alone premises such as ‘bulky goods’ sites and ‘direct factory outlets’.3 Many of those retailers exist in space over 1,000 sqm. Therefore, they do not have the protection of, or coverage by, the RLA.
1 The Productivity Commission Inquiry Report No. 43, 31 March 2008 “The Market for Retail Tenancy Leases in Australia” [PC Retail Inquiry 2008]. 2 PC Retail Inquiry 2008 at 16. 3 PC Retail Inquiry 2008 at 18.
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Such retailers attract the interest of government in different ways. Large retail premises give rise to town planning issues, due to size alone. They may impact on competition, and can be seen to dominate a particular market place. The ACCC may become involved. Larger tenants are very often familiar with the issues involved, which are very much central to their business. However, to the landlord, the parcel of land concerned may be its only asset and the only time any of these issues have arisen. Consequently, this paper is directed to practitioners acting for such landlords. You will often be dealing with stand‐alone premises or a smaller centre and a larger tenant. The tenant has usually drafted its lease document in advance, and the letter of offer which precedes it. Your client is about to embark on an extended relationship with a very well informed tenant. That union will, hopefully, be very rewarding to both parties and one in which you do not want to be the cause of the break‐up. 2. General Structure of the Paper
The paper addresses three principal areas. Like any long term relationship, it goes through stages. In this case, they comprise‐
1. The courtship ‐ pre lease negotiations and letters of offer; 2. The engagement ‐ town planning issues and other approvals; and 3. During the relationship ‐ dealing with issues.
There are many issues to consider, and the paper deals briefly with some notable ones. Many of the issues could be the subject of individual seminars themselves, so if this material helps you to identify areas to explore further, you might consider sharing the results of your exploration.
But first, a definition is necessary.
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3. Definition
To frame our subject matter, let us turn to the RLA. Reproduced below are Sections 5 and 6. These sections demonstrate what shops are excluded from its operation.
a) RLA 1994 - Section 5
Certain retail shops excluded from the operation of this Act
5 Certain retail shops excluded from the operation of this Act
This Act does not apply to any of the following retail shops:
(a) shops that have a lettable area of 1,000 square metres or more, (b) shops that are used wholly or predominantly for the carrying on of a business by
the lessee on behalf of the lessor, (c) any shop within premises where the principal business carried out on those
premises is the operation of a cinema, bowling alley or skating rink and the shop is operated by the person who operates the cinema, bowling alley or skating rink,
(d) any premises in an office tower that forms part of a retail shopping centre, (e) premises of a class or description prescribed by the regulations as exempt from
this Act.
b) RLA 1994 – Section 6
Leases to which Act does not apply
6 Leases to which Act does not apply
(1) This Act does not apply to any of the following leases of retail shops:
(a) leases for a term of 25 years or more (with the term of a lease taken to include any term for which the lease may be extended or renewed at the option of the lessee),
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(b) leases entered into before the commencement of this section, (c) leases entered into under an option granted or agreement made before
the commencement of this section, (d) any other lease of a class or description prescribed by the regulations as
exempt from this Act.
(2) This Act does not apply to any lease referred to in this section that is assigned to another person after the commencement of this section.
There are three main exclusions:
1. shops that have a lettable area of 1,000 sqm. or more; 2. shops where the operation is a cinema, bowling alley or skating rink; and 3. the RLA also states that it does not apply to certain leases. The main one
which will concern you is leases for a term of 25 years or more.
Under Part 9A of the RLA, certain retail leases at Sydney Airport are also exempt from that Act, but are outside the ambit of this paper. Further, this paper will not be dealing with short term leases, that is, leases with a term of less than six months, although these are not covered by the RLA either.4
So, we will confine our consideration to leases of retail uses over 1000 sqm.
4 Refer s6A of the RLA
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4. Pre‐Lease Negotiations
The whole issue of pre‐lease negotiations is fraught with considerable difficulty. Whilst the issues apply to small and large leases alike, it is important that you are aware of the issues surrounding letters of offer, particularly dealing with one of the major supermarket operators. You might be approached by a client with instructions to act on a large lease, often for a supermarket or bulky goods tenancy, only to discover the landlord had already signed a letter of offer which was binding on him. It could contain the following statements‐
1. “This letter of offer constitutes an agreement between the parties to enter
into a lease on the terms set out in the attached lease and on the commercial terms set out in this letter of offer.”; and
2. “The tenant is not bound to do so until it receives the approval of its board
of directors.”
These provisions are common inclusions in tenant generated letters of offer. Beware. This is a classic one‐sided letter of offer binding the landlord but giving a board approval escape clause to the tenant. If you are lucky enough to have a client who seeks your advice in the early stage of negotiations, you should always insist on the ability to review the documentation before the letter of offer has been signed. Hopefully, the benefits of doing so are self evident. You should consider insisting on introducing time limits into the approval process.
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Larger tenants operate using property committees or sub‐committees of boards that meet regularly for the purpose of approving new projects. The key for any landlord is certainty. Imposing a time limit on obtaining these approvals is one way of achieving that certainty. However, time can also work against the landlord. The perils of non‐binding letters of offer and/or taking too long to finalise a lease are evident in the following three cases, all decided in the Supreme Court of NSW:‐
1. The decision in EK Nominees Pty Limited v Woolworths Limited5:
In this case, the developer/proposed landlord, EK Nominees, sought equitable damages against Woolworths for failing to proceed with an agreement for lease. Woolworths was found liable for two representations, namely, that it intended to enter into an agreement for lease and that the likelihood of that intention would not change materially. Woolworths failed to disclose to EK Nominees that it was also considering another site which was, from its perspective, much better but in the same area. Woolworths only disclosed its true intentions that it was not going to proceed, upon receiving an invitation to the ground‐breaking ceremony. As a result EK Nominees received substantial damages having already expended significant amounts on site works.
2. The next case, Fabcot Pty Ltd v Port Macquarie Hastings Council 6 deals with the issues of misleading and deceptive conduct under the then relevant provisions of the Fair Trading Act. The case was principally concerned with a quite protracted sale negotiation but the principles have equal application to a letter of offer. Justice Hammerschlag provided a useful summary which is reproduced below.
“The following precepts have been established by authorities which bind me:
5 [2006] NSWSC 1172 6 [2010] NSWSC 726
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a conduct is misleading or deceptive within s 42(1) of the Act if it induces or is capable of inducing error;
b whether conduct is misleading or deceptive is a question of fact;
c intention to mislead is not necessary;
d silence can be misleading or deceptive even if there is no duty to reveal relevant facts. Unless the circumstances are such as to give rise to the reasonable expectation that if some relevant fact exists it would be disclosed, mere silence does not support the inference that that fact does exist;
e if the circumstances are such that a person is entitled to believe that a relevant matter affecting him, her or it would, if it existed, be communicated, then the failure to communicate it may constitute conduct which is misleading or deceptive because the person who ultimately may act to his, her or its detriment is entitled to infer from the silence that no danger or detriment existed;
f in order to be “knowingly concerned” in a contravention a person must have knowledge of the essential facts constituting the contravention;
g “knowingly” means actual and not constructive knowledge. A person may have knowledge where he shuts his eyes to the obvious or deliberately refrains from making enquiries where a reasonably sensible person would do so;
h the knowledge of a company is the aggregate of the knowledge of the person or persons so closely and relevantly connected with the company that the state of mind of those persons can be treated as being identified with the company;
i in order to recover damage the plaintiff must prove that loss or damage suffered was “by” conduct in breach of the Act. This means that the loss must be caused by the conduct complained of. Whether that is the case is to be determined by approaching the matter in a common sense and practical way;
j a plaintiff bears the onus of proving its loss;
k damages for deprivation of a commercial opportunity arising by virtue of a breach of s 42 are ascertained by an assessment of the probability of success of that opportunity had it been pursued;
l where future or hypothetical events must be taken account of in assessing damages and proof of them is necessarily unattainable, the Court assesses the degree of probability that an event would have occurred, or might occur, and adjusts its award of damages to reflect that degree of probability.
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See:
Kimberley NZI Finance Ltd v Torero Pty Ltd (1989) ATPR (Digest) 46‐054 at 53,195; Demagogue Pty Ltd v Ramensky [1992] FCA 557; (1992) 39 FCR 31 at 32; Commonwealth Bank of Australia v Mehta (1991) 23 NSWLR 84 at 88; Parkdale Custom Built Furniture Pty Ltd v Puxu Pty Ltd [1982] HCA 44; (1982) 149 CLR 191; Winterton Constructions Pty Ltd v Hambros Australia Ltd [1992] FCA 582; (1992) 39 FCR 97; Taco Co of Australia Inc v Taco Bell Pty Ltd (1982) 2 TPR 48; Yorke v Lucas [1985] HCA 65; (1985) 158 CLR 661; Giorgianni v R [1985] HCA 29; (1985) 156 CLR 473 at 483; Krakowski v Eurolynx Properties Ltd (1995) 183 CLR 563 at 582‐3; I & L Securities Pty Ltd v HTW Valuers (Brisbane) Pty Ltd [2002] HCA 41; (2002) 210 CLR 109; Anema E Core Pty Ltd v Aromas Pty Ltd [1999] FCA 904; Wardley Australia Ltd v State of Western Australia [1992] HCA 55; (1992) 175 CLR 514; Commonwealth v Amann Aviation Pty Ltd [1991] HCA 54; (1991) 174 CLR 64; Malec v JC Hutton Pty Ltd [1990] HCA 20; (1990) 169 CLR 638 at 643; Poseidon Ltd & Sellars v Adelaide Petroleum NL & Ors [1994] HCA 4; (1994) 179 CLR 332 at 350.7
The summary is repeated in full, as the Council was lucky to have avoided a substantial damages claim. Its silence, by failing to reveal that it was dealing with another party simultaneously, would have resulted in an award of damages against it, had not the Court found that the other party was itself not prepared to proceed. Whilst the Australian Consumer Law and particularly, Section 18, governs these matters now, the statement of principles and cases cited are expected to remain useful.
3. The final case is BVB Construction v Aldi Foods, a decision of Justice
MacDougal which was decided in December last year8. The case provides a useful analysis of the principles and remedies relevant
when a tenant decided it was not going to proceed with an agreement for lease.
The developer failed in its attempt to claim damages, it being found that the developer always understood the approval of the tenant’s board would
7 [2010] NSWSC 726, at 105 8 [2010] NSWSC 1352
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be required. That approval was never obtained, so the tenant could walk away.
Suggestions and comments:
1. Once a retail lease is outside of the RLA, parties do not have the benefit of Section 8 of the RLA and the Bong Bong line of cases 9 where the semblance of an agreement can be enough to achieve a binding obligation.
2. Regardless, the lawyer’s task is to achieve certainty for the client. 3. Early stage advice is critical to that end. 4. Be particularly aware of silence, and the finding of an obligation to act in
good faith. 5. In each of the cases cited, delay meant that one party was disadvantaged. 6. Time limits and sunset dates are particularly important. 7. The lack of certainty meant that one party had to resort to the courts for a
remedy, usually limited to damages. That remedy was often not available due to conduct attributed to that party.
We will now consider issues where an agreement for lease is made, whether or not a binding letter of offer exists. 5. Agreements for lease and other Approval Issues
a) Agreements for Lease
When dealing with a prospective tenant of retail space for the first time, an agreement for lease is often required. If the premises for lease already exist, then a pre‐condition (such as development consent) can be dealt with in the lease itself. However, if the premises do not exist, then different considerations arise and an agreement for lease will usually be necessary. It can part of the lease itself, but is usually a separate document. Sometimes the client landlord may approach you with a letter of offer but without any adequate definition of the premises. It is critical at this point to
9 Helou & Others v Bong Bong Pty Limited [2006] NSWADT 128
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ensure you get as detailed instructions as possible about what the landlord is promising to do. As securing the anchor tenant in any development is critical to its financial success, the landlord will want to achieve a binding commitment as early as possible. That desire has its obvious limitations, not least of which is the lack of certainty implicit in establishing a binding arrangement without development consent. That is dealt with below, but the actual definition of the premises also needs attention. Suggestions and comments:
1. You will be dealing with a document drawn by the tenants or their solicitors and consequently, may have little opportunity to negotiate amendments. As your client is only too pleased to secure its anchor tenant, it also may not care.
2. In reviewing such an agreement for lease, the best advice is to treat it as a building contract. Think about the time limits involved and the responsibilities.
3. Usually there will be a builder already involved. Make sure the builder is aware of the obligations in the agreement for lease, can deliver and is bound to do so in a separate building contract.
4. Invariably there will be a concept plan. If the plan is a very early stage one, then the tenant will usually reserve to itself discretion about the development of the final construction plan. The agreement may start to look like an option to proceed at the discretion of the tenant. Preconditions that operate in this manner usually have this effect, so it is most important to make the one sided nature of the conditions very clear to the landlord.
5. One device is to use another completed premises as a benchmark site to avoid disputes about level of finish. This can work for or against either party depending upon one’s expectations.
6. It is important to be very clear about what are the landlord works and what are tenant works. Although this may be seen as trite advice, it is important to tell landlords that their obligations will generally be to do everything else apart from the internal fitout works for the tenant, as that is how major tenants generally draft their leases.
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7. Another thing to be conscious of is the fact that the tenant will often reserve to itself the ability to upgrade or change the briefing kit or similar document, particularly if a significant period of time passes between the signing of the agreement for lease and the construction of the premises
8. There are likely to be extensive insurance obligations. Make sure, before committing, you have referred the insurance obligations to the client’s insurer and its broker and make sure that they can deliver on the insurance requirements. Also make sure, that the builder can carry out the insurance obligations, and that this is permissible under the relevant clause.
This is far from an exhaustive list, but gives an indication of the issues with agreements for lease generally. One issue needing special attention is the issue of development consents generally, which is addressed below.
b) Issues with obtaining Development Consent
The regulatory framework for approval, particularly of an out of centre development, can become critical for the success of any development. With a state election now behind us, the fate of Part 3A of the Environmental Planning and Assessment Act (“EPAA”) may well change the development approval landscape. However, as many leases will require development consent before they can operate, the paper outlines some relevant issues to consider. Individual Environmental Planning instruments will usually determine where uses may occur. However there are a raft of strategic documents which deal with the location of retail and other activities in Centres. This is loosely termed “Centres Policy”. The Metropolitan Strategy 2036 provides general guidance about this topic also. You will need to address terms such as retail hierarchy, and new urbanism, as you familiarise yourself with the field of retail town planning. Of recent interest is a draft policy on competition.
Last July, the Department of Planning published a consultation draft of the State Environmental Planning Policy (Competition) 2010 (“Competition SEPP’). It deals
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with commercial development which, by Section 7, is defined to include retail premises. It has three principal parts:
1. Section 8 which prevents the commercial viability of a proposed
development being taken into account by the consent authority when it is considering an application.
2. Section 9 further states that the likely impact of that commercial
development on the commercial availability of other developments is also not to be taken into account.
However, if that impact “is likely to have an overall adverse impact on the extent and adequacy of facilities and services available to the community” then it does have relevance.
3. The final requirement is contained in Section 10 which provides that
restrictions on particular types of retail premises in planning instruments do not have effect.
The draft Competition SEPP does not refer to the Draft Centres Policy published in April 200910. In the light of the change of government the fate of the policy must be in question. You should also be aware of an uncommenced section of the EPAA11 which rejects submissions by objectors “made primarily to secure or maintain a direct or indirect commercial advantage”. It is unclear whether this section, or the Competition SEPP, will be made law.
One of the last publications from the Department of Planning before the election was the Draft Centre Design Guidelines Policy which is on exhibition until 31May 2011. This document also deals with the role and hierarchy of centres and sets out a series of design principles which encourages active street frontages, among
10 Draft Centres Policy Planning for Retail and Commercial Development Consultation Draft – Not Government Policy, April 2009, NSW Government Department of Planning 11 Section 79C (1A) Environmental Planning and Assessment Amendment Act 2008 No. 36, Schedule 2[19]
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other things. Again, the fate of this policy, in the light of the change of government, is yet to be seen. These comments will give you some ideas of what issues your client will confront, and what you should bear in mind, when considering clauses which provide that an agreement for lease is subject to the grant of a necessary development consent. This becomes particularly relevant where the proposal is a contentious one. In that event, you should address the prospect of a third party challenge. In those circumstances, advice needs to be given to the client about this issue. Further, any pre‐condition should be drafted to provide that the agreement does not become operative till the expiry of a period of three months from the date public notice of the consent is given. While this delay may not appear in the landlord’s interest, a successful third party challenge to a consent may lead to unforeseen and expensive delays. That suggestion is made in the light of Section 101 of the EPAA. The section deals with the issue in these terms:
“101 Validity of development consents and complying development certificates
If public notice of the granting of a consent or a complying development certificate is given in accordance with the regulations by a consent authority or an accredited certifier, the validity of the consent or certificate cannot be questioned in any legal proceedings except those commenced in the Court by any person at any time before the expiration of 3 months from the date on which public notice was so given.”
Suggestions and comments:
1) Obtain instructions regarding permissibility of a use (like any property acquisition or lease, this is extremely important).
2) Advise the client to obtain expert advice about the approval process.
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3) In contentious matters (or prudently, with any development consent), the local council or other consent authority should be directed to publish the fact the consent has been granted.
4) Consider drafting a clause to delay satisfaction with a consent pre‐condition until the consent advertising period has passed.
6. During the Relationship – some issues This section deals with the following lease matters, as a sample of those which will be encountered:
a) the use; b) assignment; c) repair obligations; d) signage; e) registration and plans.
The paper addresses each issue in turn.
a) Usage
Tenants, large and small, are very protective of what they can sell and what they can do. Inside the premises, tenants regard their usage as an inner sanctum where the landlord has no role. In a shopping centre scenario, the landlord is usually vitally concerned with what business is carried on, for several reasons including:
1) cutting across other tenant usage may lead to claims by those other tenants;
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2) usage drives turnover and if rent is at all based on turnover, the landlord is expecting a particular return from the particular use;
3) sometimes the development consent will allow a particular retail use
only. The landlord will not want the tenant to go outside that use without further approval; and
4) the usage is often necessary to reflect a precinct or centre type. This in
turn may impact on the centre’s value and attractiveness to shoppers and other tenants.
For all of these reasons, both landlord and tenant are interested in what can be carried on at the premises. Larger retailers are usually very reluctant to limit their uses in any way. Although a supermarket is the actual usage, the tenant may not want to limit the usage so that more diverse retail uses are available as the years progress. Every case is different but it is important to consider the impact of a very wide use and the fact that whether during the course of the lease or on assignment, the nature of that use has changed which may well impact on percentage rent and the other matters referred to above.
b) Assignment
The tenant is usually very reluctant to accept any change to its standard assignment clause. The landlord however is very keen to ensure it is not disadvantaged by a change of identity of the tenant. However, a nationally represented tenant is unlikely to allow a RLA style assignment clause to prevail, as it allows the landlord to object to a tenant with “financial resources or retailing skills that are inferior to those of the proposed assignor”12 As well, often the tenant will leave out a change of control provision, so remember to address that issue, if the tenant will consider it.
12 RLA Section 39(1)(b)
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In this post RLA world, what is sometimes forgotten is that the Conveyancing Act deals with assignment itself. Gary Newton has already dealt with assignment when dealing with the RLA, in the previous paper. This paper needs to address one aspect of that provision.
At the risk of repetition, Section 133B of the RLA provides that:
“133B Covenants against assigning etc
(1) In all leases whether made before or after the commencement of the Conveyancing (Amendment) Act 1930 containing a covenant, condition, or agreement against assigning, underletting, charging, or parting with the possession of demised premises or any part thereof without licence or consent, such covenant, condition, or agreement shall, notwithstanding any express provision to the contrary, be deemed to be subject:
(a) to a proviso to the effect that such licence or consent is not to be
unreasonably withheld, but this proviso does not preclude the right of the lessor to require payment of a reasonable sum in respect of any legal or other expenses incurred in connection with such licence or consent, and
(b) (if the lease is for more than forty years and is made in
consideration wholly or partially of the erection, or the substantial improvement, addition, or alteration of buildings) to a proviso to the effect that in the case of any assignment, under‐letting, charging, or parting with the possession (whether by the holders of the lease or any under‐lessee whether immediate or not) effected more than seven years before the end of the term no consent or licence shall be required, if notice in writing of the transaction is given to the lessor within six months after the transaction is effected.”
Suggestions and comments: 1) These provisions operate notwithstanding anything to the contrary.
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2) In long leases (ie. more than 40 years), and made in consideration for the
erection of some improvements, no consent is required at all. 3) For this reason, in many leases where tenant identity is critical, assignment
clauses are drafted with absolute prohibitions. Whether this device would overcome the effect of Section 133B will depend upon the wording used.
4) This issue is often relevant for ground leases where the tenant is erecting
the premises and must do so as part of the lease or agreement for lease. Be on guard for this possibility, and the prospect that the landlord has therefore no control about the identity of the tenant.
c) Repair Obligations
In large leases, the obligation of the landlord to carry out repairs is often quite extensive. As with any clause, these matters need to be drawn to the attention of the landlord. Some tenants have gone to very significant lengths to limit their repair obligations and often, the extent of the landlord’s covenants will have a significant financial impact on outgoings (which are often not recoverable from the tenant).
d) Signage Issues
The provision of signage is a common cause for conflict in centres and stand
alone premises alike. When acting in such matters, the following at least need to be considered:
(a) the potential for conflict with other tenants’ signage;
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(b) the fact that the signage itself will often require separate development consent and issues such as size and light spill, often give rise to significant problems which must be resolved;
(c) current state policies including SEPP 64 – Advertising, also need to be
considered when looking for approval for signage which fronts main roads.
(d) Location issues, such as the requirement for pylon signs and conflict
between multiple users, need also to be considered and resolved.
e) Registration and the need for Plans
The last matter to deal with relates to plans, particularly as they concern long term leases. Section 23F of the Conveyancing Act requires certain dealings, including transfers and leases, to occur only by reference to current plans. For present purposes, “current plan” means a plan registered at the Office of the Registrar‐General, usually as a deposited plan. There are certain exceptions. For our purposes, Section 23G provides two of interest here: 1) “lease of part of an existing lot for a period that, including the period of any
option to renew, does not exceed five years” or 2) “lease of the whole or part of a building”. Despite the latter exception, leases for a period exceeding 25 years require a plan to accompany them even though that plan may not be relevant to defining the premises themselves. The Directions website is a very useful place to get guidance about any registration issue. The R‐G’s directions 13 deal with the issue of description of premises, and an extract of the Lease Direction is annexed to the paper.
13 http://rgdirections.lands.nsw.gov.au/
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7. Rights of Pre‐Emption, Restrictive Covenants and similar issues
a) The Problem
Large supermarket operators such as Woolworths and Coles are major/anchor tenants in High Street and retail shopping centres. They attract traffic, custom and smaller retail tenants to the area. Such leases represent a large investment on the part of both the landlord and the tenant. Accordingly, it became common practice for such leases to contain various restrictive covenants, including clauses that:
• prevented the landlord from leasing premises in the shopping centre (or
premises that were over a certain floor area) to other supermarket operators (sometimes limited to a period of 10 years), and in some cases imposed penalties/disincentives on the landlord in the form of rental reductions;
• prevented the landlord from allowing another supermarket operator in
the centre to expand its existing premises, or expanding its premises over a certain floor area;
• granted the tenant a right of first or last refusal to lease other premises
within the centre, without surrendering its existing premises; and/or • required the landlord to make a submission or objection in relation to
any development applications made by other supermarket operators in relation to the use of land at or near the shopping centre.
b) The ACCC’s Response
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The ACCC conducted an industry‐wide investigation into the competitiveness of retail prices for standard groceries, and the ‘Grocery Inquiry’ report was released in July 2008. 14 The ACCC found the most significant underlying factor explaining the nature of competition in the grocery sector is the high barrier to entry, and that access to suitable sites was a critical barrier to entry or expansion. Smaller and/or expanding operators such as Aldi, Franklins and IGA experienced difficulties in securing suitable premises on acceptable terms, which in turn impeded their entry into or progression in the retail grocery market. Concerns about the inclusion of restrictive covenants in leases were not raised with the ACCC until during the inquiry. The inquiry heard evidence that Coles and Woolworths required the inclusion of restrictive covenants in their leases to maintain exclusive access to prime sites, with financial penalties rendering it commercially unviable for the centre owner to introduce a competing supermarket. The ACCC took the view that restrictive covenants in lease agreements could have the purpose and/or effect of substantially lessening competition, and may have prevented and/or hindered some supermarket operators from entering and competing in markets for the acquisition of supermarket premises and/or in retail grocery markets. Leases that contain such restrictive covenants are likely to constitute anti‐competitive agreements under s.45 of the Competition and Consumer Act 2010 (Cth) (“the Act”) and offend Part IV of the Act.
Late in 2009, the ACCC accepted various undertakings from a range of supermarket retailers15 pursuant to s.87B of the Act. These supermarket operators have agreed that they and their subsidiaries will not:
14 Report of the ACCC inquiry into the competitiveness of retail prices for standard groceries, July 2008, obtained from the ACCC website. www.accc.gov.au 15 Undertakings from the following supermarket operators, obtained from the ACCC website:
o Woolworths Limited; o Coles Group Limited; o ALDI Foods Pty Ltd; o Franklins Pty Ltd; o Metcash Limited; o Australian United Retailers Limited; and o SPAR Australia Limited.
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• enter into a lease agreement that includes one or more restrictive
covenants; or • give effect to, or threaten to give effect to, any restrictive covenants
contained in a lease agreement that is in operation as at the commencement of the undertaking, after a period of 5 years from the date on which the tenant commenced trading (it is not clear how this 5 year period is to be calculated – ie. 5 years trade within the centre or at a particular premises, 5 years in total or since the last lease renewal, etc).
ACCC Chairman, Graeme Samuel, stated “over 700 supermarket leases were identified through the ACCC investigation as potentially restrictive” and that the phasing out of restrictive provisions in current leases “takes account of commercial arrangements and retail contracts already in place”. In its inquiry report, the ACCC accepted “there are circumstances where shopping centre developments are occurring, particularly in areas of projected future population growth, where a guarantee of a period of exclusivity is necessary to encourage a supermarket operator to enter. Accordingly, these restrictive provisions play a role in attracting an anchor tenant to a complex that may not otherwise be built without that anchor tenant. However, in the vast majority of leases in larger metropolitan centres, there appears to be little justification for these clauses other than to prevent competitive entry”.16 Pursuant to s.87B of the Act, the undertakings cannot be withdrawn or varied without the ACCC’s consent. The ACCC may enforce the undertakings by commencing proceedings in the Federal Court, where orders requiring compliance with the undertakings, repayment of any financial benefit obtained as a result of a breach, or the payment of compensation for loss or damage may be made.
16 Media releases, obtained from the ACCC website:
o ACCC focuses on lasting change in the supermarket sector, NR189/09, 11 August 2009. o Supermarket agreement opens way for more competition, NR226/09, 18 September 2009. o Further agreements address restrictive supermarket leases, NR017/10, 8 February 2010.
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c) What Happens Now?
The undertakings also still seem to allow lease clauses which grant a right of first or last refusal over other premises within a shopping centre, provided the tenant surrenders the lease of its existing premises. This allows a supermarket operator to relocate to other premises within the shopping centre, without limiting the opportunities for a competing operator to enter the centre.
Landlords’ solicitors should be mindful of the undertakings, and note that they effectively render the restrictive covenants void. However, the ACCC has acknowledged that there may in fact be a need for some form of restrictive covenant in certain situations. Existing leases should be reviewed and consideration should be given to amending clauses that may be in breach of the Act. A breach of Part IV of the Act (of which s.45 is a part) means landlords and tenants who are party to restrictive lease agreements could face legal proceedings and severe penalties under ss.76, 80 and 82 of the Act, including penalties of up to $10 million for corporations, injunctions and damages for loss or damage suffered by a competitor. Supermarket operators could be prosecuted under s.87B for breach of their undertaking, and landlords may be aiding and abetting a breach of the undertaking and/or the Act. Such consideration should also extend to lease agreements with tenants other than supermarket operators, if clauses are intended or are likely to substantially lessen competition.
8. Section 50 of the Competition and Consumer Act
Before leaving the subject of the ACCC, consider this situation. Your client enters into an agreement for lease with a supermarket for premises in a new neighbourhood shopping centre. The lease is entered into following expressions of interest in a competitive tender process. If the transaction occurs without considering Section 50 of the Competition and Consumer Act then the parties may have a problem.
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Section 50 of the Act prohibits acquisitions that would have the effect, or likely effect, of substantially lessening competition in a substantial market in an Australian state or territory. The ACCC may possibly come to the conclusion that the entry into the lease may have the effect of substantially lessening competition. This is a very contentious area, and you may need to seek expert advice. As an appendix to the paper you will see a commentary on Section 50 of the now Competition and Consumer Act. While these occurrences may be rare, they cannot be ignored, as there have been instances of the ACCC objecting to individual supermarket acquisitions. 9. Conclusion
A lease for any large retail tenancy governs a long term relationship, usually expressed in years. That relationship is necessarily complex, particularly without the umbrella of the RLA. These comments are really only examples of the myriad of issues which confront each party as they embark on their economic lives together. Further questions, comments and suggestions are very welcome.17
17 My thanks to Kristy Arundale, Meri Pajmakoska and Melinda Luong for their invaluable research assistance in the preparation of this paper.
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ANNEXURE 1
Extract of RG’s directions – leases FORM dl7
[note extract only]
A lease of:
� part of the land for 5 years or less, including any options to renew, must fully describe the affected part by reference to a registered plan, a plan attached to the lease, or to another registered dealing.
� part of the land for more than 5 years, including any options to renew, other than a lease lodged by the Commonwealth of Australia, must describe the affected part by reference to a registered plan of subdivision that has been approved by the Local Council, see s23F and s23G Conveyancing Act 1919 (formerly s327AA Local Government Act 1919).
� premises must be fully defined by either:
� a unique description such as a shop name or number together with a full postal address, or
� a plan annexed to the lease.
Vague or ambiguous descriptions such as "including rear office" are not acceptable. For leases of adjoining air space see Registrar General's Directions for Deposited Plans.
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� premises for a term exceeding 25 years, including any options to renew, must be accompanied by a plan defining the premises. The plan does not require local council's approval. An extra fee is payable for the plan.
� Land excluding premises must be considered as a lease of land. A lease of land excluding premises being for a term of 5 years or more, including any option of renewal, is a subdivision of land and requires a plan of survey with Local Council approval. The only exception would be in the case where a lease of a building was already registered and a new lease is lodged for the residue of the parcel. Submit all cases to SM 99.
� car spaces intended to be included in the leased premises must be clearly numbered. Where car spaces are not clearly identified, e.g. "together with 1 car space" rather than "car space No. 1", a requisition will be raised. Reference to car spaces elsewhere in the lease will be regarded as rights and will not be included in the lease notification. Where the car spaces are also shown in an annexed plan, dimensions of the car spaces must be included in the plan.
� public reserve by a Local Council must not exceed 21 years, including any options to renew.”18
� creating an easement, enter the reference to title for the servient tenement in ITS. See s56(4) Real Property Act 1900; Baalman And Wells, Land Titles Office Practice, Lawbook Co. 2001 [385.300].
18 Refer also to Schedule 5 of the RPA Regulations 2008
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ANNEXURE 2
Section 50 of the Competition and Consumer Act
Background Section 50 of the Act prohibits acquisitions that would have the effect, or likely effect, of substantially lessening competition in a substantial market in an Australian state or territory. Section 50 regulates, amongst other things, the acquisition of assets such as freehold or leasehold land for development as a supermarket and licences to sell takeaway packaged liquor. The name “Creeping Acquisitions” has been adopted to describe a situation where a large retailer, such as Woolworths or Coles, acquires or leases a site where an independent supermarket previously operated. Evidence suggests that these Creeping Acquisitions have decreased over recent times and it is thought that this is largely attributable to the increased power granted to the ACCC to reject acquisitions that would substantially lessen competition in any local, regional or national market. Merger Review Process Guidelines (“Guidelines”) The ACCC’s Guidelines were introduced to provide “greater predictability, transparency and certainty to the merger parties, the business community, their advisers and the public”. This was achieved by:
a) Setting out the nature of the information that parties, eg landlords, seeking merger clearance are required to disclose; and
b) Compelling the ACCC to provide reasons to the parties where it makes a
decision to accept or reject a merger.
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Prevention is better than Cure If there is any doubt as to whether a proposed acquisition is likely to raise competition concerns the party(s) should notify the ACCC in advance.19. Notifying the ACCC of impending acquisitions is voluntary in Australia. However, parties are encouraged to do so particularly in relation to possibly contentious matters. Failure to notify the ACCC in advance may result in the ACCC conducting a review of the acquisition subsequent to the parties, for example, entering into an agreement(s) for a lease for a new supermarket. The ACCC has the authority to demand that the transaction be put on hold while the ACCC is considering the clearance application (in a formal review)20. If the ACCC then decides that the proposed acquisition is likely to substantially lessen competition within the market the transaction is likely to be prevented from proceeding. The onus is on the interested parties to provide adequate written evidence for the ACCC to analyse a proposed transaction in response to a merger clearance request. Thus, a prudent landlord/tenant would ensure, as much as possible, that all relevant facts are disclosed to the ACCC and a decision is delivered prior to the commencement of a transaction. Non complying parties If the ACCC considers that an acquisition contravenes section 50 of the Act and the parties do not agree to modify or abandon the acquisition, the ACCC can apply to the Federal Court for an injunction, divestiture or penalties (at para 3.5, Guidelines) Information to be provided to the ACCC for consideration 19 There are three routes available to parties seeking merger clearance from the ACCC, namely, informal clearance procedure,
formal clearance procedure and authorisation. 20 The ACCC may request that undertakings be provided by the parties in accordance with s87B of the CCA
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The following list is an example of the type of information the ACCC requires to be disclosed for the purpose of assessing a proposed transaction. A complete list is contained in Appendix A of the Guidelines, which is in turn based on section 50(3) of the CCA.
∗ The relevant company details which is self explanatory. ∗ What is to be acquired including what assets are included, how the
transaction is to take place and which other party(s) it is likely to affect.
∗ Background information with respect to, for example, the company/individual that is involved in the proposed transaction, details surrounding past transactions (if any) of the company/individual and the industry in which the proposed transaction is to take place.
∗ Relevant Market definition. Defining markets is an integral part of the
ACCC’s assessment process. By reviewing the information provided, the ACCC will then define the relevant market in order to establish where competitive harm would occur. A critical point to note is that in the Guidelines, the ACCC notes that it considers it possible for a ‘small’ market to be ‘substantial’. In particular, it is noted that a market might be geographically small but nevertheless ‘substantial within a region in which it is located’. Accordingly, it is important that the parties provide information setting out details such as, but not limited to,
* potential competitors within the target market; * the goods and services that are to be provided when one or more of
the parties to the proposed transaction are either the supplier or customer;
* the goods and services that are to be provided and are considered to
be broadly substitutable; and
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* a description of the relevant chain(s) of production including a reference to the anticipated end users.
∗ Related Markets and available substitutes also need to be disclosed by the
interested parties as they will be considered by the ACCC. ∗ Market Share. The proportion of the market share that the proposed
transaction would award the party acquiring the asset in comparison to the identified competitors within the target market also needs to be disclosed. The ACCC will then consider whether the new distribution of market share is likely to result in a dominant player emerging within that market.
∗ Barriers to entry should also be defined as the relative ease for a business
to enter any particular market may influence the competitive constraint on a merged entity.
∗ Other factors as suggested by the Guidelines may include the extent to
which the market(s) is characterised by conditions conducive to coordinated conduct and the extent to which any efficiency enhancing aspect of a merger may impact on the competitiveness of the market(s).
An example of an ACCC decision Woolworths Limited – proposed acquisition of Karabar Supermarket
In reaching its decision, the ACCC considered the following issues.
a) With/Without Test
The “with/without test” which compares the likely competitive environment post‐merger if the transaction proceeds (the “with” position) to the likely competitive environment post‐merger if the transaction does not proceed (the “without” position). Under these circumstances the ACCC established that in the absence of the proposed merger the Karabar Supermarket would be acquired by an
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alternative competitor which would entail a higher level of competitive tension in the market, resulting in increased competition on pricing and promotions, range, quality of fresh produce, service levels.
b) Market Definition
As noted above, “market definition” is a critical component of the ACCC’s assessment in determining whether or not competition in the target market will be substantially lessened.
The ACCC considers market definition using a forward looking, purposive approach. Accordingly, in its assessment, the ACCC took into account all of the proposed developments in and around Karabar, all proposed extensions to local railway lines (public transport) and the potential road barriers that existed between Karabar and the Woolworths supermarket in the neighbouring suburb. The ACCC subsequently established that the market was a local retail supermarket market of a 3‐5km radius surrounding the Karabar supermarket.
c) Barriers to Entry
The ACCC also assessed the likelihood of a new entry, or the threat of new entry, in the local market and whether any such likely entry or expansion would act as a sufficient constraint on Woolworths to alleviate the ACCC’s competition concerns in relation to the proposed acquisition.
The ACCC considered development proposals and determined that while there is some prospect of the development of an additional supermarket in the region, the prospect is highly uncertain and this uncertainty was compounded by the lack of other suitably located and zoned sites. Accordingly, the ACCC concluded that access to suitable new sites constitutes a high barrier to entry and therefore the concern of the acquisition substantially lessening competition remained.
The ACCC therefore formed the view that the proposed acquisition would be likely to result in a substantial lessening of competition in the local retail
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supermarket market in contravention of section 50 of the TPA and therefore decided to oppose the proposed acquisition.