Leases: Preferential Rights

Where a lease falls under the application of the Retail and Commercial Leases Act 1995 (The Act) certain rules and restrictions governing the content of the lease will be applicable.

One such example concerns tenants who operate retail shops and are situated in retail shopping centres. Under Division 3 of the Act existing tenants hold a preferential right to remain in the premises in the event the landlord wishes to relet.

A landlord must presume that a tenant will renew or extend their lease unless that tenant provides notice in writing to the landlord within 12 months of the end of the term stating that they do not wish to renew or extend. This provision does not apply where, amongst other things, the tenant has committed a substantial breach of the lease or where the landlord requires vacant possession of the premises to conduct repairs. (A full list of circumstances where the preferential right will not apply is contained in section 20D(3) of the Act)

In order to exercise the preferential right a tenant must, between 12 and 6 months from the end of the lease, negotiate with the landlord to renew or extend the lease. Before the landlord may negotiate with another party they must first make an offer in writing to the current tenant on the same or better terms than they propose to offer any new tenant.  A tenant has 10 business days to accept the landlord’s offer after which, if the tenant has not responded to the offer, the offer will lapse and the landlord will be free to negotiate with other parties. Negotiations are to continue between the current tenant and the landlord until the tenant rejects an offer or indicates in writing that they do not wish to renew or extend the lease.

Negotiations between the parties must be conducted in good faith. This prevents a landlord from offering terms to a tenant that are likely to be rejected in order to then be able to negotiate with another party.

Where a tenant does not have a right of preference, then an obligation rests on the landlord to notify the tenant of the absence of the right and the reasons for why the right is absent.

If a landlord fails to comply with its obligations under Division 3 of the Act then the tenant may be entitled to a remedy. Where a tenant believes the landlord has failed to comply then the tenant may lodge a notice of dispute with the Commissioner for Consumer Affairs for mediation or may apply to the Magistrates Court. The Court has the power to make any order it deems appropriate including ordering the landlord to comply with its obligations to renew or extend the lease or ordering the landlord to pay compensation to the tenant.

Despite the above, a Court may not order that a landlord renew or extend a lease where a third party who acquired an interest in the property in good faith would be prejudiced.

If you have any queries regarding the above Clelands Lawyers Adelaide are able to assist.

Tim von Einem

31 August 2017