Business & Property

Should you still serve a disclosure statement on a lessee on renewal of a commercial lease?

Think carefully before you decide not to serve a disclosure statement on renewal of a commercial lease.

One of the changes made to the Retail & Commercial Leases Act last year may have unintentionally created a trap for lessors of “commercial” premises.

The Act was amended to remove the requirement that a disclosure statement be served on the lessee on renewal of a commercial lease.   Now the Act only requires a disclosure statement when a “new” lease is entered into.  The term “renewal” in the Act is defined to include “the lessor and the lessee entering into a new retail shop lease for the retail shop (whether on the same or different terms)”.  Therefore, if the parties to an existing lease come to a new agreement for leasing of the same premises, no disclosure statement is required.  That change seems sensible (and overdue) as the lessee should already know the premises and the expenses payable under the lease, having occupied the premises as lessee for some time.

There may however be a trap.

Section 18 of the Act says; ” If the lessor under a retail shop lease had, before entering into the lease, notice from the lessee that the premises were required for carrying on a particular business, the lease is taken to include a warranty that the premises will, for the duration of the lease, be structurally suitable for the purpose. … However, the warranty is excluded if the lessor gives notice of the exclusion, in the manner and form required by regulation, before execution of the retail shop lease by the lessee.”  It is almost universal practice for lessors to give that notice, taking the parties back to the original “buyer (ie. lessee) beware” position.

Section 18 has not been amended, and apparently still applies whenever the parties “enter into” a lease.  It is arguable that if the parties to an existing lease come to a new agreement for leasing of the same premises, they are “entering into” a new lease, and consequently the statutory “warranty of fitness for purpose” will apply if it is not excluded.  It can be excluded by the lessor, but in order to do so the lessor must serve a disclosure statement on the lessee, as the regulations say that that is when the notice must be given.

In the  majority of cases the lessor will have received “notice from the lessee that the premises were required for carrying on a particular business”.  It is rare that the lessor will not require that the “permitted use” of the premises be specified in the lease itself.  Therefore, if the warranty is not excluded, and the premises are not “structurally suitable” for the lessee’s business at the beginning of the term, or cease to be “structurally suitable” during the term, the lessor will be in breach of warranty and, at the least, will have to pay for works to make the premises “structurally suitable”.  If the problem is, for example, a floor which cannot bear the weight of vehicles or machines used by the lessee, or a roof which requires replacement, the cost could be substantial.

So, think carefully before you decide not to serve a disclosure statement, and you can contact me at gkahl@tgb.com.au if you need advice!