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Disclosure Exposure!
22/1/2018
Landlords and managing agents should remain aware of the nature and extent of the statutory obligation to provide a disclosure statement to prospective retail tenants. Failure to meet this obligation may expose landlords to an order to pay compensation for losses suffered by the tenant or risk termination of the commercial tenancy agreement by the tenant.

The Commercial Tenancy (Retail Shops) Agreements Act 1985 (WA) requires landlords to provide a disclosure statement to prospective retail tenants at least seven days before entering into a lease (s 6(1)).

This disclosure requirement applies to retail shops. Retail shop has two meanings:

  1. A retail shop is any premises which is not situated in a shopping centre, provided that it is used for the sale of goods, or for a specified business. This list is exhaustive and includes a hairdresser, video hire, dry cleaning, beauty therapy or shoe repair (Regulation 3A of the Commercial Tenancy (Retail Shops) Agreement Act 1985 (WA). Hence, a real estate agency for example would not constitute a retail shop under the Act.
  2. A retail shop requires that the premises be in a shopping centre. A retail shopping centre means a cluster of premises, where 5 or more are carrying on a retail business (or are a specified business) and have a common lessor, or comprise lots on a single strata plan. An exception is if the shop has a lettable area that exceeds 1,000 square metres or is a foreign registered company (s3).

Disclosure Statements

A disclosure statement must be in the prescribed form duly completed and signed by or on behalf of the landlord and the tenant and shall contain a statement notifying the tenant that he should seek independent legal advice (s 6(4)).

An unsigned electronic statement given 7 days before entering into the agreement is insufficient. This is because s6 is designed to protect the tenant, so an unsigned document is not necessarily a document on which a prospective tenant can rely. This conclusion was reached in Loveday v Arise Joondalup Pty Ltd [2015] WASAT 93 [41] & [45].

If the tenant is provided with the disclosure statement at the time of entering into the lease, this too is insufficient under section 6(1), which requires that the tenant be provided with the statement 7 days before entering into a lease.   

Key items to be disclosed in the disclosure statement include:

  • Annual base rent under the lease;

o Including any rent free period;

o How rent payments are to be made;

o Whether rent is based on turnover; and

o The relevant rent review period;

  • Contributions by the tenant towards landlord's outgoings and operating expenses;
  • Contribution by the tenant towards other costs, including advertising and promotional costs;
  • Terms of the lease;

o Date of commencement and expiration;

o Option to renew, and the method by which the tenant must exercise the option (e.g. in writing, orally); and

o Date of handover on which premises will be available for occupation or fit out (if different to the date of lease commencement);

  • Landlord's works to be carried out before the commencement of the lease;
  • Tenant's works to be carried out, including any contribution by the landlord;
  • A description of permitted use, including whether the tenant has exclusive use; and
  • Parking (including reserved parking and parking for customers).


Consequences of non-disclosure

The risk in failing to provide a disclosure statement is that the tenant has the right to (among others) (s 6(1)):

  • Terminate the lease by written notice within 6 months after it was entered into; and
  • Apply in writing to SAT for an order that the landlord pay compensation in respect of pecuniary loss suffered as a result of the omission.


Termination

The main exposure for landlords is the tenant's right to terminate. Where the tenant gives a valid notice of a termination under s 6(1) of the Act, the retail shop lease terminates automatically 14 days after the notice is given (s 6(2)). The right only subsists for six months after entry into the retail shop lease.

To terminate the tenancy, valid notice must be given. It is not sufficient for the tenant to simply state that they will cease trading from the premises. In this situation, the landlord would still be entitled to receive rent. This was discussed in Loveday v Arise Joondalup Pty Ltd [2015] WASAT 93 at [47].

Where the statement contains false and misleading information, the option to terminate may be lost where the landlord has acted reasonably and honestly. This would only apply if the tenant has not been substantially adversely affected: (s 6(3)). 

Parties should be aware of the distinction between entering into a new lease and renewing a previous lease. In Duong v Coventry Village Pty Ltd [2016] WASAT 32 [42] -[46], it was in dispute whether the parties had entered into a new lease or varied the existing one. The landlord argued that even if it was a new lease, a disclosure statement was not required as the new lease was in the same retail centre. The Court found that the parties had entered into a new lease and consequently rejected the landlord's argument that a disclosure statement was not needed. The Court held that the tenant was within their rights to void the second lease, pursuant to section 6(1)(a). 


Compensation

Unlike termination, compensation is available to the tenant within 6 months of the commencement of the lease. With respect to compensation, the landlord's exposure is expected to be less substantial than the risk of termination.

Under s 6(1)(b), the tenant must prove that they suffered a loss as a result of the landlord's failure to provide a disclosure statement. Alternatively, the tenant must show reliance on a false statement provided by the landlord in the disclosure statement. The reliance need not be direct; it is sufficient if a servant or agent of the tenant relies on it to advise the tenant to enter into the lease.

In assessing compensation, the Court may have regard to the wasted payment of rent which otherwise would not have been made, the costs of fitting out the premises, employing staff, returning stock, obtaining signage licences, telephone and EFTPOS contracts. However, recent cases show that the courts are reluctant to award compensation unless a high standard of proof is met.

In Loveday v Arise Joondalup, the Court rejected the applicant's claim for compensation for two reasons. Firstly, the applicant did not provide adequate proof of the expenditures that they claimed caused their pecuniary loss [50]. Secondly, the Court rejected that the losses claimed by the applicant were suffered as a result of the disclosure statement not being provided [51]. For example, the applicant argued that the respondent should have disclosed that the centre was opening at a later date, however Pt 11 of the prescribed form of a disclosure statement does not require this. It is clear that for the pecuniary losses to be proved, they must be shown to result from the tenant failing to receive information before entering into the lease.  

Avoid the consequences: Ensure that prospective tenants are provided with a signed disclosure statement at least 7 days before the commencement of the lease agreement. Failure to do so may result in the tenant's right to compensation or termination.

For advice on disclosure statements and any leasing matters, contact us.

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