Retail Leases Act Review 2013

My name is Lesli Berger and I am the General Manager of Fivex Commercial Property. Fivex is a boutique family owned investor in office and retail properties predominantly in Melbourne and Sydney.

The majority of Fivex’s retail assets in Sydney are located in neighbourhood shopping precincts or are part of strip shops.

1. Is there an imbalance in market power between landlords and tenants in neighbourhood shopping precincts and strip shopping areas (particularly outside the CBD)?  

Notwithstanding the fact that Fivex greater financial resources than the majority of our retail tenants due to the size of Fivex’s combined property portfolio, we find that the retail market has significantly turned since the Global Financial Crisis (the “ GFC “) and the power in the relationship between retailers and landlords has significantly shifted since 2008 until the present day and for the foreseeable future.

The majority of Fivex’s retail properties are located in some very poorly trading areas, where vacancies are high, nearby shopping centres have significantly impacted on local trading conditions and the rise of online shopping has had a very significant impact.

Given prevailing market conditions and likely future market conditions, the need for the protections afforded in the Retail Leases Act is significantly diminished, because the power imbalance the Act was meant to rectify no longer exists as a market reality and has not existed since the onset of the GFC.

In actual fact, the Retail Leases Act gives tenants enormous power and given current market conditions, actually creates significant potential for a retail tenant to use their rights and powers under the Act to the significant financial detriment of Landlords, without a reasonable justification for retailers retaining those rights.

In real economic terms, the rise of online and app based shopping means that there is a significant ability for retailers to trade without the requirement to have physical premises and that means that many retailers now have a significantly increased ability to retain their client base and goodwill even if the retailer is forced to change the location of their physical premises. This means that the power of landlords has been structurally diminished as a result of changes in technology and the ability of retailers of all persuasions to build strong connections with their customers directly, without having to rely solely on passing trade.

I will not comment on every question in the paper apart from pointing out that the majority of the commentary in the review is based on the false assumption that all Landlords have more power than most (if not all) Retail Tenants.

Given the reality that the power imbalance for the most part no longer exists between significant classes of landlords and retail tenants that means there is a strong case for a substantial reduction in the scope of the Retail Leases Act and substantially limiting the operation of the Act to only the largest retail landlords that own and operate substantial shopping centres. 

2. Should tenants be given the right of first or last refusal when their lease comes to an end?  

The answer is clearly no. If this suggestion were followed it would amount to a transfer of value in the premises from the owner of the property to the tenant, without any form of financial compensation being paid for this right and amounts to a quasi transfer of ownership rights to the tenant.

If the proposal were to go ahead, it would have a substantial effect on competition for retail space because it will lessen the ability for new traders to compete for retail space.

If the goal of our State is to maximise the employment and job-making opportunities afforded by the retail sector, then this proposal should be rejected out of hand. Statutory guaranteed first and last rights of refusal are anathema to a free market.

If the proposal were implemented, the bad old days of ‘key money’ being paid to tenants will occur as a matter of commercial reality, because new tenants who are interested in premises will have no choice but to pay sitting tenants a fee to move out. The fact that ‘key money’ is formally outlawed in the Act has no impact on the commercial reality. 

The proposal also falsely assumes that all lease relationships come to an end due to financial considerations alone. Often it is the case a Landlord does not wish to renew a lease with an existing retailer because the Landlord wishes to improve the retail mix of their property or the Landlord has been approached by an interested third party who is a much stronger financial covenant than the existing retailer, which equates to greater financial security for the Landlord.

In a real practical sense, we once brought to an end a retail lease with a two-dollar shop operator and replaced them with a name-brand pharmacy without achieving any increase in rental, because we knew that the value of that asset would substantially increase as a result of the improvement of the retail covenant. Why should a Landlord be prevented from dealing with their property as they see fit when the lease to an existing retailer comes to an end? Why should Fivex have been prevented from doing this particular deal? 

3. Are disclosure statements working effectively?

In Fivex’s experience, disclosure statements are long and convoluted documents that no longer serve any purpose. Disclosure statements have improperly morphed from a simple statement outlining the basic financial terms a retailer will need to pay, to a de facto lease that no one apart from the Lawyers actually read or understand. 

4. Are there retail shops that are currently covered under the Act which should not be?

As discussed in point 1 above, there is no longer an imbalance in power between retail tenants and landlords for retail property that is located in strip shops and neighbourhood shopping precincts due to the onset of the GFC and changes in technology relating to online and app based shopping.

Substantial retail vacancy outside of the CBD and large shopping centres means that landlords no longer enjoy substantial power over retail tenants and the scope of the Act should be substantially reduced in order to properly reflect the change in economic circumstances.

In particular the rise of online and app based shopping as well as the prevalence of social-networking sites such as Twitter and Facebook have weakened the link between a retailer’s physical location and their customer base. While inevitably there is disruption if a retailer is forced to move premises, thanks to modern technology, innovative retailers can now attach the majority of the goodwill associated with their business to their online presence as opposed to the precise location of their physical store.

As a result of these changed circumstances, the scope of the Retail Leases Act should be reduced to only protect retail shops that are in large retail shopping centres greater than 5,000sqm in size. Such a change would have an enormous regulatory saving on the entire retail sector and substantially remove red-tape in circumstances where regulation is no longer warranted.

The Commissioner needs to understand that the vast majority of Landlords who own property in neighbourhood shopping precincts and strip shops are themselves small operators and often the property amounts to the Landlord’s superannuation savings. It is expensive, time consuming and administratively complex to properly administer a retail lease in accordance with the Retail Leases Act and given the power imbalance the Retail Leases Act was enacted to address no longer exists, the NSW Government needs to enact changes that properly reflect the economic reality.