Renewing Victorian Retail Leases

Where a tenant has an option for a further term granted to it under the terms of a lease (or a subsequent deed varying the lease), in the majority of cases for standard commercial (non-retail) leases it is the tenant that takes the first step in exercising the option.  

For the exercise of the option to be valid, the option must be exercised within the option exercise period defined in the lease.  If the tenant exercises its option outside the option exercise period, the landlord is generally not obliged under the terms of most leases to renew the lease for the further term, and the lease will terminate at the end of the current term.

However, for leases of “retail premises” governed by the Retail Leases Act 2003 (VIC) (Act), the landlord is required to act first.

As mentioned in our earlier blog on 13 October 2016, Section 28 of the Act provides:

• If a lease contains an option exercisable by the tenant to renew the lease for a further term, the landlord must notify the tenant in writing of the date after which the option is no longer exercisable (Last Date for Exercising the Option).  That notice (Notice) is to be given at least 6 months and no more than 12 months before the Last Date for Exercising the Option. 


• However, the landlord is not required to provide the Notice if the tenant exercises or purports to exercise the option before receiving the landlord’s Notice;


• If the landlord fails to provide the Notice to the tenant within the required timeframe, the lease is taken to provide that the Last Date for the Exercising Option is extended to a date which is 6 months after the date landlord provides the Notice to the tenant (Extended Last Date);


• If the Extended Last Date occurs after the expiry date of the current term set out in the lease, the lease continues until the Extended Last Date; 


• If the tenant exercises the option prior to the Extended Last Date, the new lease commences at the expiry date of the old lease, rather than the total term of the lease being extended.

Consequently, an unplanned extension of the option exercise period may occur where a landlord fails to provide, or is late in providing, the Notice to the tenant.

For tenants, however, it would be prudent to formally exercise their option for a further term within the option exercise period, rather than wait for the landlord to serve the Notice.  Section 28 does not prevent tenants from the exercising their options prior to receiving the Notice.

In circumstances where:

1. a retail leasing tenant has failed to exercise its option for a further term within the option exercise period recorded in the lease; and


2. the landlord has indicated that it is not willing to accept the tenant’s exercise of its option outside that option exercise period, and has required the tenant to vacate the premises at the end of the current term.

Section 28 may provide a solution (by extending the Last Date for Exercising the Option) if the landlord has not served the Notice on the tenant.

If you require assistance regarding exercising an option under a retail premises lease in Victoria, please contact Andrew Bini, Senior Commercial Lawyer, Nevett Ford Melbourne. 

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Retail Leasing

Landlords should avoid delays in providing executed Lease document to tenants

Section 22 of the Retail Leases Act 2003 (Vic) (RLA) provides:

1. Within 28 days (or such other period as is agreed in writing between the landlord and the tenant) after being given a copy of the retail premises lease signed by the tenant, the landlord must give the tenant a copy (which may be a photocopy) of the lease signed by the landlord and the tenant.


2. If the landlord fails to provide the executed lease to the tenant within that period, the tenant may give the landlord a written notice of termination of the lease at any time within 28 days after:


1. the tenant is given a copy of the lease signed by the landlord and the tenant; or


2. entering into the lease, 

whichever happens last.

1. If the tenant gives the landlord a notice of termination in accordance with the above, the lease terminates 14 days after the notice is given.

Accordingly, Section 22 requires a landlord to give to the tenant a copy of the lease document signed by both the landlord and the tenant within 28 days of receiving a copy of the lease document signed by the tenant.

A failure by a landlord to provide the fully executed lease document to the tenant within that 28 day period, places the tenant in a position where the tenant obtains a window of opportunity to terminate the lease.

In an effort to avoid the situation where the tenant is empowered to terminate the lease under Section 22, we suggest that if, prior to the execution of the lease documents, a landlord anticipates a delay in returning the fully executed lease document to the tenant, then the landlord should ensure the lease contains a provision which allows the landlord to return the executed lease document to the tenant outside of the 28 day period. This is allowable because Section 22 clearly states “within 28 days, or such other period as is agreed in writing between the landlord and the tenant”.

If you require assistance with retail leasing please contract Andrew Bini. 

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Entrepreneur visa

The Australian Department of Immigration & Border Protection (DIBP) is making changes to the visa system as part of the National Innovation and Science Agenda.

 

It is intended that these changes will help Australia attract and retain the best and brightest entrepreneurial talent and the skilled, talented people Australia needs to drive ideas from research to commercial reality.

 

On 10 September 2016, DIBP launched a new Entrepreneur visa’ stream and amended the ‘points test’ for the skilled migration programme.

 

The Entrepreneur visa is part of the Business Innovation and Investment visa programme. Entrepreneurs interested in applying for the Entrepreneur visa will need to submit an Expression of Interest (EOI) in SkillSelect and be nominated by a State or Territory government.

 

Key eligibility criteria includes:

• Applicants must be undertaking, or proposing to undertake, an entrepreneurial venture in Australia.
• The entrepreneurial venture must not be related to residential real estate or labour hire or involve purchasing an existing business or franchise.
• Applicants must also be under 55 years of age, have a competent level of English, and have at least 30 per cent interest in their entrepreneurial venture.
• There must be one or more funding agreements in place for at least $200,000 between the entrepreneur or venture and a third party funding body or bodies.
• Sources of third party funding are limited to state and territory governments, Commonwealth agencies, Publicly Funded Research Organisations, and investors registered as a Venture Capital Limited
• Partnerships (VCLP) or Early Stage Venture Capital Limited Partnerships (ESVCLP). Agreements outlining funds from a combination of these sources are also acceptable.
• Applicants must have a business plan outlining their plans for their venture in Australia.

An Entrepreneur visa holder can progress to permanent residency after four years if they can meet a measure of success, which includes factors such as business turnover, employment of Australians and ability to obtain significant financial backing.

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Victorian retail landlords – remember your notice obligations

Landlords of premises regulated by the Retail Leases Act 2003 (Vic) (RLA) should diarise the various dates needed for them to comply with their notice obligations under Sections 28 and 64 of the RLA, especially if they wish to avoid unintentionally extending the term of the lease.  In this regard, even though the relevant lease document may clearly record the last day of the lease, that date may be extended by Sections 28 and 64, which may have consequences for a landlord who requires the premises to be vacated by a particular date.

Section 28 provides:

• If a lease contains an option exercisable by the tenant to renew the lease for a further term, the landlord must notify the tenant in writing of the date after which the option is no longer exercisable.  That notice is to be given at least 6 months and no more than twelve months before the date the option is no longer exercisable (Last Date);
• However, the landlord is not required to provide that notice if the tenant exercises or purports to exercise the option before being notified of that Last Date;
• If the landlord fails to provide the notice to the tenant within the required timeframe, the lease is taken to provide that the Last Date is extended to a date which is 6 months after the date landlord notifies the tenant;
• If that extended date is after the term of the lease ends, the lease continues until the extended date;
• However, if the tenant exercises the option prior to the extended date, the new lease commences at the expiry of the old lease, rather than the total term of the lease being extended.

Consequently, an unplanned extension of the term of the lease may occur where a landlord fails to provide, or is late in providing, a Section 28 notice to the tenant and where the tenant does not eventually exercise its option.

Section 64 provides:

• If the tenant under a lease does not have an option to renew the lease for a further term, the landlord must at least 6 months but no more than twelve months before the lease term ends, give written notice to the tenant:
  • offering the tenant a renewal of the lease on the terms specified in the notice; or
  • informing the tenant that the landlord does not propose to offer the tenant a renewal of the lease;
• An offer to renew the lease cannot be revoked without the tenant’s consent for sixty days after it is made;
• If the landlord fails to give the notice within the required time frame:
  • the landlord must give the tenant a notice containing that information; and
  • the lease continues on the same terms and conditions until the day being 6 months after the notice was actually given to the tenant.

Accordingly, a failure by a landlord to give a Section 64 notice to a tenant may have the effect of extending the term of the lease (and, accordingly, the date upon which the premises may be vacated) to a date which is 6 months after receipt of the notice.

If you require assistance with regards to drafting and serving Section 28 and Section 64 notices (in accordance with the provision of notices clause in your lease) please contact Andrew Bini, Senior Commercial Lawyer, at Nevett Ford Melbourne.

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Retail leasing Ministerial determination

It is not uncommon for a commercial  landlord to desire to have a lease fall outside the operation of the Retail Leases Act 2003 (Vic) (RLA), thereby enabling the landlord to claim land tax and lease preparation legal costs as an outgoing from the tenant. 

What constitutes a “retail lease” (being a lease which is regulated by the RLA) is set out in Section 4 of the RLA.  One of the exceptions to a lease being a “retail lease” is where the tenant is a body corporate or a subsidiary of body corporate whose securities are listed on a stock exchange located outside of Australia that is a member of the World Federation of Exchanges (WFE) (see Section 4 (2)(d) of the RLA).

However, much confusion has arisen in trying to determine whether the relevant overseas stock exchange is a member of the WFE.

In an effort to reduce the confusion, the Victorian Minister for Small Business, Innovation and Trade has made a determination dated 12 August 2016, pursuant to the Minister’s powers under clauses 4(2)(g) and 5 of the RLA, which has the effect of excluding the following tenants from the definition “retail premises”:

            “bodies corporate or companies or corporations whose securities are listed on a stock exchange outside Australia or the subsidiaries (including subsidiaries as defined in Section 9 of the Corporations Act 2001) of such bodies corporate, companies or corporations”.

It is expected that the determination will make it easier for landlords and their advisors to determine if the RLA will apply to leases to tenants or their subsidiaries who are corporations listed on overseas exchanges.

If you require assistance with retail leasing, please contact Andrew Bini, Senior Commercial Lawyer, Nevett Ford Melbourne Pty Ltd.

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Why do we need terms and conditions of trade?

Many of our clients who are suppliers of goods and services operate under formal written terms and conditions of trade.

Prudent clients usually have their terms and conditions periodically reviewed to ensure they provide the best available protection.

For example, in recent years many suppliers of goods have amended their terms and conditions to include new provisions under which the customer grants a security interest over the goods supplied in favour of the supplier, to support the customer’s payment obligations. The grant of the security interest enables the supplier to register that security interest on the register created under the Personal Properties Security Act 2009 (Cth) (PPSR).  Without registration of a security interest, a supplier might not have the ability to recover the goods, or amounts owed with respect to the goods, if the customer goes into liquidation or declares bankruptcy.

However, it is evident to us that there are many suppliers who trade without proper terms and conditions or with outdated terms and conditions which do not entitle the supplier to register security interests on the PPSR.

The simple answer to the question as to why terms and conditions of trade are necessary is twofold:

• to clearly set out the terms of the sale of goods and/or services arrangement (ie the contractual relationship) between the supplier and the customer; and
• to provide the some protection a supplier of goods may need in the event of non-payment.

Typically, when a supplier is dealing with a new customer the supplier will provide the new customer a credit application, usually accompanied by a director’s guarantee.  At this point we recommend the supplier also provide its terms and conditions of trade to the new customer and arrange to have the credit application, the director’s guarantee  and the terms and conditions of trade signed by the new customer.

Apart from the usual mechanical provisions regarding ordering of goods and/or services, price, delivery, price variation and variation and cancellation of orders, terms and conditions should clearly set out:

• the terms of payment;
• an obligation on the customer to pay interest on outstanding amounts at a specified rate if payment is not received on the relevant due date;
• a right in the supplier to charge the customer all costs (including legal costs) incurred by the supplier in pursuing and recovering unpaid amounts;
• retention of title (whereby title to the goods is not provided to the customer until such time as payment for the goods delivered have been received by the supplier) and the right for the supplier  to access the customer’s premises to recover the goods; and
• PPSR provisions enabling the supplier to register a security interest on the PPSR.

Of course, there may be other specific or unique provisions depending upon the nature of the goods and services to be provided.

We have experience in preparing and amending terms and conditions of trade for suppliers of goods and services of various types.

If you would like more information on terms and conditions of trade please contact Andrew Bini, senior commercial lawyer, Nevett Ford Melbourne.

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Buying a business? Do your due diligence first!

Whether you intend on purchasing a small retail business or the business operations of a listed public company, the same fundamental approach should be applied: do your due diligence first!

As advisors to purchasers of businesses of various types and sizes, we are regularly involved in conducting legal due diligence.

However, a purchaser’s pre-contractual due diligence should not be limited to a lawyer’s review of legal matters, but should extend to:

• Inspection of plant and equipment: being a physical investigation by the purchaser (or preferably by qualified contractors on behalf of the purchaser) into the state of plant and equipment and other hard assets sold with the business.  If there are any problems with those assets, then the purchaser’s lawyer should be in a position to negotiate amendments to draft sale contracts requiring the vendor to rectify those problems prior to settlement.  Physical due diligence should also indicate whether the sale price reflects the true value of the physical assets being sold;
• Inspection of the premises including the landlord’s fixtures, fittings and installations.  Again this should be done by a qualified person on behalf of the purchaser and a report provided.  Issues arising out of that report should be dealt with in the sale contract to ensure the vendor rectifies issues prior to the purchaser taking possession of the premises and potentially becoming liable for hidden problems.
• Financial due diligence into the business including a detailed review of the financial statements of the business for at least the last five years.  The purchaser’s accountant should report on the financial status of the business including whether the purchase price is reasonable based on the business’s financial performance in recent years.
• Enquires with the local council and with owners of adjoining businesses as to potential changes to the local environment, such as the construction of roads, the construction of multi-level buildings adjacent to the business premises and other matters which might lead to business disruption in the future. 

Ideally legal due diligence will involve at least the following:

• An investigation into the status of the vendor:  If the vendor is a company, what is its registration status with ASIC?  In this regard, the assets of a deregistered company are vested in ASIC and cannot be dealt with by that company until re-registration, which may be problematic;
• Determining whether the vendor a trustee: If it is, then the sale contract should record the vendor as being the trustee of a trust to ensure the purchaser will acquire both legal and equitable title to the business assets;
• Personal Property Security Register searches to determine the existence security interests which may be registered over the assets of the vendor.  This will identify the parties from which the vendor must obtain releases of those security interests prior to or at settlement;
• An examination of significant contracts held by the vendor including the extent to which plant and equipment is leased by the vendor.  Also, significant customer contracts should be reviewed to determine whether those incomes streams can be assigned to the purchaser at settlement.  If they are not capable of assignment then, the sale price may have to be reduced to reflect the loss of those income streams;
• A review of the premises lease documentation including a determination of the extent of time remaining under the lease and options and, consequently, the amount of time the purchaser will have to obtain a return on its investment.  If there is insufficient time remaining under the lease we suggest the sale contract be made conditional upon the vendor obtaining the landlord’s consent to extending the term of the Lease as part of the transfer of lease documentation;
• A review of the status of all licences and permits held by the vendor to conduct the business which are to be transferred to the purchaser at settlement – thereby enabling the purchaser to lawfully conduct the business at the premises on and from settlement; and.
• Review of employment agreements and liabilities.

Once each area of due diligence has been undertaken and the material issues have been identified, it becomes the purchaser’s lawyer’s role when negotiating the sale contract to have included in the contract specific obligations on the vendor to rectify those issues prior to or at settlement.  Of course, that depends on how willing the vendor is open to bearing the cost of rectifying those issues.

Quite often impatient purchasers pay the price for poorly conducted and/or limited scope due diligence.  Although sale contracts may offer some form of vendor warranties (covering things such as the operational condition of plant and equipment) they can be little comfort to a purchaser when after settlement the vendor has disappeared overseas on vacation or doesn’t have the finances to compensate the purchaser for breach of a vendor warranty.  On that basis, we firmly believe quality pre-contractual due diligence which extends beyond legal due diligence is prudent practice all purchasers should consider adopting.

At Nevett Ford Melbourne we have experienced commercial lawyers with extensive experience in assisting purchasers of all types of businesses.

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