Am I protected by the Retail & Commercial Leases Act (1995) (SA)?

Gouger Street Pty Ltd v Diakou Nominees Pty Ltd [2017] SASC 72 – a case study

The Retail & Commercial Leases Act (1995) (SA) (“the Act”) is an act of the South Australian Parliament designed to regulate the lease relationship between landlords and tenants by implying additional terms and conditions as set out in the Act to all retail and commercial leases within South Australia to which the Act applies. Many of these additional terms and conditions are favourable to tenants.

As an example, the additional terms and conditions within the Act include a prohibition on:-

  1. the tenant being required to pay land tax; and
  2. “ratchet” clauses that have the effect of preventing rent from decreasing on a rent review.

When the Act commenced in 1995, the rent “threshold” per annum under section 4(2)(a) of the Act above which the Act would not apply was $250,000.00 (GST exc).  If the rent amount per annum exceeded $250,000 then the Act would not apply to the lease, so the additional terms and conditions set out in the Act would therefore not apply.

However, on 4 April 2011 the rent “threshold” was increased by regulation to $400,000.00 (GST exc). 

The question then arose for landlords, tenants and lawyers alike in South Australia – does the Act now apply to all leases where rent is less than $400,000.00, or only to those leases entered into after 4 April 2011 with annual rent of less than $400,000.00?

The answer was particularly important to landlord and tenants with leases as at 4 April 2011 with rent per annum above $250,000.00, but below $400,000.00.  Did the rent threshold increase mean that the Act now applied, even though it had not applied at the commencement of the lease because the rent was above $250,000 but below $400,000 when it was entered into?

In December 2012 the Full Court of the South Australian Supreme Court delivered its decision in WST Pty Ltd v GRE Pty Ltd (2012) 115 SASR 218. This decision (which has become known as the Buffalo Motor Inn case) concerned a retail shop lease that was entered into on 18 May 2006 with a commencing rent of $210,000.00 per year.  Under the lease the tenant was required to pay land tax as an outgoing, but not if the Act applied to the lease.  Because the rent was less than $250,000.00 at the commencement of the lease, the Act applied to the lease and so the tenant did not have to pay land tax. 

On 4 April 2011 the rent threshold under the Act was increased to $400,000.00.  However, on 21 May 2011 there was a rent review, and the rent for the Buffalo Motor Inn increased to $250,415.39, thereby potentially triggering the tenant’s obligation to pay land tax.  The question then was whether the Act applied to the lease, because at the time of entry into the lease the rent “threshold” under the Act was $250,000.00. The landlord argued that the lease had been agreed on the basis that the tenant would pay land tax if the rent increased above $250,000, as this was the rent threshold under the Act at the time the lease was entered into. 

In the Buffalo Motor Inn case the Full Court held that the Act still applied to the lease, with the result that the tenant was not required to pay land tax.  However, the Buffalo Motor Inn case did not decide the issue of whether the Act applied to a lease that had rent of more than $250,000.00 when the lease commenced, but less than $400,000 as at 4 April 2011 when the rent threshold increased to $400,000. 

The critical issue still to be determined was whether the increase in the rent threshold had retrospective effect.

Gouger Street Pty Ltd v Diakou Nominees Pty Ltd [2017] SASC 72

This issue as to the retrospective effect of the Act was resolved by the decision of his Honour Justice Stanley in Gouger Street Pty Ltd v Diakou Nominees Pty Ltd [2017] SASC 72.

The facts of Gouger Street were as follows:

  1. Diakou Nominees was the owner and landlord of the Talbot Hotel located on Gouger Street in the Adelaide CBD.  As from 2 July 2013 Gouger Street was the tenant.
  2. On 1 September 2006 Diakou Nominees entered into a lease for the Talbot Hotel with the original tenant at a commencing rent of $250,500.00 (GST exc).  The rent review clause within the lease provided that on each fifth anniversary of the commencement date of the lease a market rent review would be carried out to determine rent.  The lease was subsequently assigned to a second tenant in 2007.
  3. The lease of the Talbot Hotel included a common rent review clause known as a “ratchet” clause that specified that rent could not decrease following a market rent review.  The lease also required the tenant to pay land tax as an outgoing. 
  4. As at 4 April 2011 when the rent threshold increased to $400,000, the amount of rent payable for the Talbot Hotel was greater than $250,000.00 but less than $400,000.00. 
  5. The lease was renewed for a further five year term on 1 September 2011.  At that renewal the landlord and tenant agreed to a rent increase, but both reserved their rights to enact a market rent review in the future for the 1 September 2011 rent review date. 
  6. Gouger Street subsequently purchased the business and leasehold of the Talbot Hotel, and commenced occupation in July 2013.  Shortly after this a market rent review for the 1 September 2011 rent review date was initiated by Gouger Street. 
  7. The market rent review was issued in August 2014, and provided for an annual rent from 1 September 2011 of $215,000.00 (GST exc).  This was a significant reduction from the passing rent as at August 2014. 

Court proceedings were commenced by Gouger Street against Diakou Nominees in 2015, with Gouger Street claiming the repayment of land tax and rent overpaid since 4 April 2011. Land tax was claimed because of the prohibition in the Act against a tenant being required to pay land tax, and the rent overpayment was claimed because of the prohibition on “ratchet” clauses in a lease. 

The key issue in dispute in the Court action was whether or not the Act applied to the lease.  Accordingly Gouger Street sought, and obtained, an order that there be a preliminary hearing on the issue of whether the Act applied to the Talbot Hotel lease. 

Justice Stanley found in favour of Gouger Street that the Act applied to the lease of the Talbot Hotel from 4 April 2011. 

On the issue of the retrospective operation of the Act, Justice Stanley held that the Parliament had shown an intention that the Act was to operate retrospectively. This has the practical result that all retail and commercial leases (as defined by the Act) within South Australia entered into after 1995 (except as exempted by the Act) can move in and out of the operation of the Act if the amount of rent payable per annum increases or decreases below or above the relevant rent threshold at any time, i.e. the Act has a “fluctuating” operation. 

Diakou Nominees appealed Justice Stanley’s decision, however the appeal was withdrawn without being determined.  Therefore Justice Stanley’s decision, when read with the decision of the Full Court in the Buffalo Motor Inn case, now represents the law on the issue of the applicability of the Act by reference to the rental amount per annum. 

 What does this mean for my lease?

The fact that the Act now applies to all retail and commercial leases in South Australia with rent of $400,000.00 or below - irrespective of when they were entered into - has significant consequences for both landlords and tenants.  This is because the additional terms and conditions implied into a lease by the Act can have a significant financial impact for both the landlord and the tenant.

In addition to prohibiting “ratchet” clauses (section 22(4)), and prohibiting the payment or recovery of land tax as an outgoing by a tenant (section 30), the Act also contains the following implied terms and conditions:

  1. Section 12 – Disclosure Statement.  The Act requires a landlord to issue a Disclosure Statement prior to the renewal of a lease.  Accordingly, if the Act now applies to the lease by virtue of Gouger Street, a Disclosure Statement needs to be provided upon the renewal of that lease. 
  2. Section 18 – Warranty of fitness for purpose.  Under this section if a tenant lets the landlord know of the purpose and business to be operated from the leased premises, then there is an implied warranty given by the landlord that the premises will be fit for that purpose.  This warranty can be excluded by notice, and almost always is in leases to which the Act applies.  The vexed question is whether that warranty now applies to leases that, when entered into were not subject to the Act, but following the increase in the rent threshold to $400,000.00, to which the Act now applies. 
  3. Sections 29L and 29M – Prohibition upon demanding a premium for renewal and prohibition of threats to dissuade a renewal.  Under this section a landlord cannot demand a “premium” from a tenant for renewing a lease. This prohibition will now apply to leases to which the Act applies by virtue of Justice Stanley’s decision in Gouger Street. 
  4. Part 6 – Alterations and other interference.  These sections require a landlord to compensate a tenant for disturbance and interference with their leased premises, and this protection will now apply to all leases to which the Act applies by virtue of Justice Stanley’s decision.
  5. Section 23 – Reviews to current market rent.  This is an especially important provision of the Act.  To put this section into context, many retail and commercial leases allow for a market rent review, but only at the instigation of the landlord.  However, the combined effect of section 22(3) and section 36 of the Act arguably implies a term into all leases to which the Act applies that a retail shop lease that provides an option to renew or extend the lease at current market rent is taken to include a provision entitling the tenant to request a determination of the current market rent within the period that begins six months before and ends two months before the renewal date.  In the situation of a lease where the right to enact a market rent review is reserved to only the landlord, arguably these sections now allow a tenant to enact a market rent review whereas previously it could not. 
  6. Finally, and importantly, the provisions of section 68 of the Act will now apply. Section 68 of the Act grants the Magistrates Court of South Australia very broad discretionary powers to relieve or excuse a landlord or tenant from a breach of the lease. These discretionary powers go well beyond the powers available to a Court at “common law” to relieve or excuse a breach of the lease, and in essence allow the Court to order a “fair and reasonable” outcome to a lease dispute in light of the facts.

There are many other sections of the Act that impact on a retail or commercial lease to which the Act applies.

Clelands Lawyers acted for the tenant Gouger Street in the Gouger Street case, with counsel Mr Jonathan Wells QC and Mr Arturo Dal Cin. 

Clelands Lawyers also acted for Gouger Street in the September 2011 market rent review.

The knowledge and experience we acquired before and during the Court action means that our advice on the issue of the applicability of the Act will be precise and accurate. 

If you have any queries as to whether the Retail & Commercial Leases Act applies to your lease, and the potential outcomes if it does, please contact either Rinaldo D’Aloia, Tom Walker or Patrick Connelly

August 2018