Gary Newton on Retail and Commercial Leasing Matters

Friday November 10, 2017

Gary Newton is a partner in the Property Team at Tresscox Lawyers. Gary has been practising in the area of property law for over 30 years, providing advice on a wide range of property related matters to business, government and individuals. Gary holds a Bachelor of Laws degree from the University of Sydney and is an accredited specialist in property law, since 1994. Gary is the co-author of a new book Real Property Law Case Summaries Australian wide 4th Edition written by Gary Newton and Jackie Cheung 2015 edition. Several of the cases in this paper are from that resource. He is co-author and co-editor of the LexisNexis Butterworths NSW Conveyancing Service (loose-leaf). He is also co-author and co-editor of the 2014-2015 edition of the "Annotated Conveyancing and Real Property Legislation in NSW" book. He has authored articles and published articles in national journals such as the Australian Property Law Bulletin and Law Council of Australia Journal. His commentary has been cited in judgments of the Supreme Court of NSW. Gary is a member of the Law Society Property Law Committee and is the current National Chairman of the Australia Property Law Group of the Law Council of Australia General Practice Section. Gary is an experienced speaker at conferences, seminars and property law master classes. He is also the Honorary Secretary and a Freeman of NSW Rostrum and a member of the organising Committee for the "Voice of Youth" NSW High School public speaking competition. He is the Vice President of the Darling Point Society.

Gary Newton

Gary recently joined Christopher Sanchez of Legalwise Seminars to discuss retail leasing reforms in practice and the changing shape of the industry.

You can find the full Q&A below.

What are some of the key trends and developments in the retail and commercial leasing space?

In retail and commercial leasing space there is a bigger trend towards light warehousing and showroom use rather than the traditional straight retail.  This is partly due to the ever increasing role of the internet in retail sales.  The shops and the warehouses offer a facility for buyers to come and inspect goods before they buy or even for the goods to be delivered and so you find that they will be buying online.  What this does is it creates an atmosphere where success is measured in shops that are able to adapt to the internet and at the same time retailers who have more light warehousing and showroom uses will probably succeed in the future and therefore the demand for showrooms and light warehousing will probably dramatically increase while your standard classic retail may not.

What’s one mistake you see people make in retail or commercial leasing matters?

The Retail Leases Act will only apply to a retail shop.  One of the big mistakes which I’ve seen people make over the years is assuming either that the Retail Leases Act does not apply or the Retail Leases Act does apply when the opposite is the reality.  A retail shop can be one of the uses in the back of the Retail Leases Act in schedule 1.  It can also be excluded as one of the uses by the new schedule 1A.  There are also other rules about when you have or have not got a retail shop for example in NSW where the premises are over 1,000 square metres.  That brings issues of course when a retail tenant leases 2 adjacent shops of about 600 square metres for one use, what is the outcome?  There is also a problem where a landlord leases to a real estate agent’s office or a lawyer’s office but it happens to be in what is deemed to be a retail shopping centre by virtue of the fact that there’s 5 or more other retail uses.  Immediately that shop, if it’s less than 1,000 square metres, may have the full benefit of the Retail Leases Act even though it’s not being used for a retail shop use.  There’s also been several cases for example a caterer’s licence was held to be a retail shop lease under certain facts.  As you can see, that is one important mistake that people can make and it can lead to very disastrous consequences.

Is there a key takeaway you can highlight from the retail leasing reforms and their impact so far?

Probably the biggest reform in NSW from 1 July 2017 has been the repeal of the minimum 5 year lease term.  Whilst most states in Australia recognise a minimum 5 year lease term, NSW has turned its back on this and no longer deems automatically a 5 year minimum term for retail shop leases.  Lessors no longer need to obtain a section 16 certificate if a lease is to have a term of less than 5 years.  One of the problems that came out of many of the cases on short term leasing was that when a landlord or a tenant had not realised that they had a retail lease and it might have only been for 1 year for example the caterer’s licence that I just spoke of in the last question, there is automatically deemed to be a 5 year minimum term.  The tenant had not given a section 16 certificate within 6 months of the licence being entered into therefore both the landlord and the tenant were bound by a 5 year minimum term which of course they could walk away from if they agreed but if one party wanted to enforce it, this had quite a disastrous outcome.  I see this abolition of the minimum 5 year lease term as one of the major reforms in the recent changes.

Are there an particular considerations you think people should keep their eye on in relation to changes with the Law Society Lease?

I am on the Property Law Committee of the Law Society of NSW and on a sub-committee dealing with the Law Society lease.  We’ve had many meetings and we’re still finalising a lease which will be compliant with the recent changes to the Retail Leases Act.  We expect that new lease to be available in 2018.  At this stage because most of the discussions are in committee it’s difficult for me to foreshadow what might be in the final Law Society lease.  Some of the issues and considerations that you will need to keep your eye on might be the issuing of 2 separate leases – one for retail leasing and one for non-retail leasing for example commercial office leasing.  This will prevent the risk that was apparent in the previous edition when the Law Society lease might have been used for a commercial office and the parties had assumed that the rent review provisions had a ratchet clause in them on a current market rent review.  Annexure B of the previous edition of the Law Society lease did not have a ratchet clause and therefore the rent could have easily fallen below the previous year’s rent on a market rent review even for commercial offices.  This was one of the considerations that the Committee looked at and I will report shortly when the new lease has been issued on whether that has been resolved.

Is there a key recent leasing case people should be aware of?

A case handed down in the Supreme Court of NSW in the last month or so reported in the recent case of Yandgdo and Equity Group the landlord had argued that the tenant had incorrectly relied on a letter which allegedly documented a new lease agreement.  The Court ultimately heard that the document was in fact an agreement for a new lease and in the alternative the conduct of both parties subsequent to that signing of that letter indicated a full intention to rely on the terms within the letter thus judgment was awarded in favour of the tenant.  In this interesting case the landlord’s real estate consultant sent a letter to the tenant containing terms of a proposed new sublease of 3 suites.  The letter was signed by the tenant, the letter contained several provisions including the lease term, the rent, the outgoings, the rent free period and many other details so all terms seemed to be agreed.  The tenant would be entitled to a 9 month rent free period whilst he terminated its existing leases and entered into new subleases.  The 9 months’ rent free period the landlord tried to back out of when negotiations didn’t conclude in any signed lease.  There was no term of the letter which said that the letter was binding of non-binding however the subsequent conduct of both parties was to adopt the lease and in fact the landlord had started accepting the new rent on the part of the tenant which highlighted the existence of the new agreement.  The letter had been signed in April 2009 and the existing subleases were due to expire on 1 May 2009 so the Court agreed that the subsequent conduct can be considered when determining whether the prior dealings of the parties would give rise to a binding contract.  Whilst there is always a presumption that a commercial lease document will need to be formally signed to be binding, that is always not the case.  This case highlighted in the Supreme Court of NSW that subsequent conduct on behalf of the landlord and the tenant can be taken into account in determining whether an agreement for lease and the fact that the 9 months were rent free and other terms existed between the parties.

Do you have any insights into where the retail and commercial leasing market may be headed in NSW in the short term?

In the short term it’s always hard for me as a lawyer to advise on whether there might be any particular insights to where the retail and commercial leasing market might be headed in NSW but given that in Sydney there are buildings being demolished everywhere as part of the transport roll-out there are also older buildings being demolished and turned into new residential towers that would indicate there might be a shortage of commercial office space in the short term.  As far as retail, given the rejuvenation of George Street with the tramways it might be that there might be a wonderful resurgence of tourism, outdoor cafes and shops and shopping in that precinct.  In the short term I expect the impact of Amazon and other large internet based companies to be of concern to the existing retail model and that may in fact reward those shops that have a mixture of an internet and retail shop presence in NSW.

You can hear more from Gary at the Retail and Leasing Masterclass seminar, being held on Wednesday 15 November at the Primus Hotel Sydney.

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