Landlords beware! Unfair contract terms protections extend to leases

From 12 November 2016 new legislation will extend the legal protections from unfair contract terms to include small business contracts.

The Australian Competition and Consumer Commission (ACCC) has indicated that one of the areas it will focus on when the new law comes into effect will be retail leasing. It is important that landlords consider now the implications of the new law and how it will affect them.

What is a ‘small business contract’?

The new legislation will apply to small business contracts entered into or varied on or after 12 November 2016. A contract is a small business contract if, at the time the contract is entered into, at least one party to the contract is a business that employs fewer than 20 persons and:

  • the upfront price payable under the contract does not exceed $300,000 or
  • the contract has a duration of more than 12 months and the upfront price payable under the contract does not exceed $1,000,000.

For example, a lease to a tenant with less than 20 employees for 3 years with a commencing rent of $150,000 per annum plus GST is likely to be a small business contract. This means that the laws regarding unfair contract terms will apply to the lease and the tenant may be able to apply to the court to have a clause in the lease declared void if the lease is a standard form contract and the clause could be considered unfair.

How do I know if I am dealing with a small business?

One way that landlords can find out if they are dealing with a small business is to ask the tenant how many employees it employs at the time. In counting the persons employed by the tenant, a casual employee is not counted unless he or she is employed by the tenant on a regular and systematic basis. Importantly, it is an objective test whether the tenant is a small business or not, and so it is not relevant whether the landlord knew or even considered how many employees the tenant has.

What if the number of employees changes during the term of the lease?

The number of employees is counted at the time the lease is entered into. If the tenant’s business expands during the term of the lease and the tenant employs more than 20 employees, the tenant may still be entitled to the protections of the unfair contract term legislation if it applied when the lease was entered into.

What if the tenant is a subsidiary of a bigger company?

A parent company of the tenant is not taken into consideration when calculating the number of employees. This means that even when the tenant has the support and backing of a larger company, the tenant can still be considered a ‘small business’ for the purposes of the new legislation. For example, some larger companies have a policy of creating a new company for each outlet they open and the lease is taken in the name of new company. It is possible that the tenant will employ less than 20 persons and therefore be protected by the new legislation.

What should you do?

Come along to our Landlord Information Seminar on Tuesday 23 August 2016 from 8:45am to 10am and hear more about the changes and how this may impact you. This seminar will cover questions such as:

  • What leases will the law apply to?
  • What should a landlord do to protect itself?

You can also contact us if you would like to arrange a review of your leases, incentive deeds and other standard contracts. We can advise you on the potential impact of the legislative changes on those documents.

For more information contact the Property, Commercial and Finance Team:

Christine Murray — Managing Partner — Property, Commercial and Finance Team
(02) 6279 4402

Jennifer Jaeschke — Associate — Property, Commercial and Finance Team
(02) 6279 4361