Productivity Commission's review of market for retail tenancy leases in Australia

In June 2007, former Treasurer Peter Costello requested the Australian Government Productivity Commission undertake an inquiry into the market for retail tenancy leases in Australia.  The inquiry considers the effectiveness of the existing regulation of retail leases in Australia and whether changes would lead to improvements in the operation of the market and benefit the Australian community as a whole.
The Commission’s draft report was released on 13 December 2007. The full draft report can be viewed at www.pc.gov.au/inquiry/retailtenancies.

Current legislative framework

Each State and Territory has its own separate retail leases legislation. Prior to the legislation’s introduction from the mid-1980s, retail leases were treated as standard commercial leases, which are governed by the general law of property, contract and tort.

Retail tenancy legislation first came into operation Victoria in 1987. The primary purpose of the legislation was (and still is) to address the perceived imbalance in bargaining power between retail landlords and tenants.

The current legislation is the Retail Leases Act 2003 (Vic) (Act). The Act, subject to various exceptions, regulates premises that are used “wholly or predominantly for the sale or hire of goods by retail or the retail provision of services”. Premises covered by the Act are likely to include those used by traditional sole traders (milk bars, news agents, etc) as well as shops located in major shopping centres or suburban strips and offices from which professional and other service business are conducted.

The Act, which was amended in 2005 to address earlier difficulties with its operation, provides a range of statutory protections to retail tenants including:

• requirement for landlords to provide a copy of the proposed lease as well as disclosure statements (in prescribed form) prior to lease commencement and renewal.
  


• minimum 5 year term (including any options).
  


• provision for release of tenant’s guarantors on transfer of lease.
  


• prohibition on recovery by landlords of legal costs and land tax.
  


• accessible, low cost dispute resolution through the Office of the Small Business Commissioner and VCAT.
  

While there is a certain degree of commonality between legislation in the different States and Territories, it is by no means uniform which in turn increases compliance and administrative costs for landlords and tenants with retail space in different jurisdictions.

Draft findings and recommendations:  In its draft report, the Commission remarks that the retail leasing landscape is characterised by “increasingly complex and prescriptive legislation.”  The Commission’s preliminary view is that there “is not a strong case for greater prescriptiveness in tenancy legislation”.

Rather, the Commission advocates an approach whereby features of the existing system which are identified as working well – primarily, dispute resolution, information exchange and disclosure – are retained;  provisions in areas that have sought to govern market behaviour - for instance, minimum lease terms - are progressively unwound; and  the laws governing retail leases and those governing the wider market for commercial leases are aligned including, where practicable, by the adoption of nationally consistent legislation.

The draft report sets out a number of recommendations. These include:

• in the short term, governments should seek to improve the consistency of lease information across jurisdictions in order to lower compliance and administration costs. As a first step, the Commission suggests the adoption of national template disclosure statements and leases;
  


• in the medium term, key restrictions in retail tenancy legislation should be relaxed to “better align the regulation of the retail tenancy market with the broader market for commercial tenancies”;
  


• in the longer term, development of template uniform national legislation for commercial (including retail) leases; and
  


• finally, examination by State and Territory governments of potential to relax planning controls that limit competition and restrict retail space and its utilisation.

In relation to the final point, it is noted that the Victorian Government has separately commissioned a review of the policy and statutory framework currently set out in Victorian planning schemes which guides the planning of retail activity and development of retail space in Victoria. The reference group is due to publish its final position paper in June 2008. Further information in relation to the review is available from the Department of Planning and Community Development’s website at www.dse.vic.gov.au.

Where to from here:  Public hearings were being held by the Commission in the mainland capital cities throughout February 2008. After that, a final report will be prepared and submitted to the Commonwealth Government.

Previous attempts to achieve uniform national legislation in this area have foundered and it remains to be seen whether there will be sufficient political impetus to drive meaningful reform. 

Only time will tell whether the Commission’s draft recommendations translate into legislative reform. And quite how that reform – involving a closer alignment and even consolidation of the regulation of retail and commercial leases – would be implemented in practice is by no means clear.

Further enquiries