BUSINESS TENANCIES (FAIR DEALINGS ) BILL 2003 Second Reading Speech

Northern Territory Second Reading Speeches

BUSINESS TENANCIES (FAIR DEALINGS ) BILL 2003

(This an uncorrected proof of the daily report. It is made available under the condition that it is recognised as such.)

Bill read and presented a first time.

Dr TOYNE (Justice and Attorney-General): Madam Speaker, I move that the bill be now read a second time.

The prime purpose of the bill is to establish a regulatory framework that promotes greater certainty, fairness and clarity in the commercial relationship between landlords and tenants, for certain small business tenancies. In the main, the regulatory provisions of the act will apply to shops and premises of a like nature. A secondary purpose of the bill is that of consolidation into this act the provisions dealing with evictions currently contained within the Commercial Tenancies Act.

For many years, concerns have been expressed throughout Australia about market problems that affect the trading viability or contribute to the failure of small to medium sized business tenancies, with the main problem area being that of retail shops. These problems may arise out of inadequate knowledge by shopkeepers of key information and an imbalance in the relative bargaining strength of landlords and tenants. These concerns have led to the introduction, in every Australian jurisdiction other than the Northern Territory, of comprehensive retail tenancy legislation. The development of this legislation in the Northern Territory has quite a history.
Members may recall that the Tenancy Working Group was established by the previous government in the early 1990s, to review tenancy law in the Northern Territory. The Tenancy Working Group made a number of recommendations for reform to the law, relating to commercial tenancies. However, no action was taken to implement these recommendations. In 1997, the House of Representatives Standing Committee on Industry, Science and Technology heard submissions from many representatives of the retail sector and in May 1997, produced a report entitled Finding a Balance Towards Fair Trading in Australia. This report, known as the Reed Report, set out a number of principles to provide minimum standards for retail tenancy laws. Following the release of that report, the Commonwealth, state and territory ministers with responsibility for retail tenancies met in December 1997 and endorsed the objective of establishing consistent legislative or regulatory retail tenancy standards, implementing the recommendations arising from the report.

Although the then Northern Territory minister responsible for retail tenancy legislation agreed in 1997 to establish such legislation, nothing further was done. As I said earlier, the Northern Territory is now the only jurisdiction without retail tenancy legislation. In March 2000, the then Labor opposition, introduced the Retail Tenancies Bill 2000. This bill was defeated. In 2000, the then Department of Industries and Business released a discussion paper relating to possible retail and commercial tenancy legislation. The then Minister for Industries and Business formed a further working party to consider submissions, and to present a report and recommendations.

The report of the working party was tabled in the Legislative Assembly on 6 June 2001. The then minister advised the Assembly that the report would form the basis of a bill to be prepared and introduced in the Assembly. No bill had been introduced by the time the Martin Labor government was elected in August 2001.

The Martin Labor government came to office in 2001 with a firm commitment to introduce retail tenancy legislation to address the issues that had been raised over the previous decade. Today, we are delivering on this promise.

In February 2003, I released a discussion paper and draft legislation for public consultation. Approximately 200 copies of the draft bill and discussion paper were distributed to interested members of the public, and the documents were also available from the Internet. Seminars on the draft legislation were held in Darwin and each regional centre in the Northern Territory.
May I take this opportunity to thank those people who contributed to the development of the bill by making submissions or attending meetings. The feedback from these consultations has been critical in ensuring the government has developed legislation that represents a fair balance between the interests of tenants and landlords, and is legally sound.

The Business Tenancies (Fair Dealings) Bill has been developed following extensive consultation with industry and other stakeholders, taking into account best practice in legislation in other jurisdictions, as well as local conditions.

I shall now outline the main points made in the submissions, and the government’s responses to them. First, a number of submissions contained suggestions that the coverage of the legislation be extended to all commercial premises. However, at this stage, the government is not convinced there would be a nett benefit in providing for such an extension. This is said, noting that the majority of the problems sought to be remedied by the legislation occur in the retail sector, thus the draft bill covers, in the main, only small retail premises.

However, the provisions dealing with repossession of the premises and freedom of association, which were formerly in the Commercial Tenancies Act, have been included in this bill. For this reason, and to better reflect the objectives of the act, the name of the bill has been altered to Business Tenancies (Fair Dealings) Bill.

Additionally, it can be noted that the schedule in the discussion draft of the bill, containing a long list of the types of premises covered by the main parts of the bill, has been deleted. It has been replaced by a definition of ‘retail shop’, which will permit other types of premises to be added or deleted on an as-need basis.

Second, a number of submissions argued in favour of ratchet clauses remaining lawful in the Northern Territory. Ratchet clauses in leases provide that rent can increase in line with market trends, but cannot decrease in the event of an economic decline. This means that where rental is based on market rent, the tenant assumes the risk, should there be an economic decline. The prohibition on ratchet clauses leases is one of the key issues agreed to by all jurisdictions in 1997, and ratchet clauses appear to be prohibited in every other Australian jurisdiction.

The Property Council and others representing property owners have suggested that the prohibition of ratchet clauses may result in financiers viewing development or funding proposals less favourably as there will be no guaranteed rental stream. The Department of Business, Industry and Resource Development has approached various financial institutions for their views on ratchet clauses. The resulting advice is to the effect that ratchet clauses are largely irrelevant to funding decisions. Additionally, ratchet clauses are prohibited in every other jurisdiction without apparent detriment to property development in those jurisdictions.

The government has also noted the contrary view, namely that ratchet clauses are merely a mechanism for establishing a minimum rent over a period of a lease. If such clauses are prohibited in future leases, landlords will seek alternative mechanisms for maintaining base rent whilst achieving rent increases that may operate to artificially maintain high rents. For example, rent increases linked to CPI.

Notwithstanding this consideration, the prohibition on ratchet clauses has been retained in the bill on the basis that it is inherently misleading and unfair to link rent review to the market, but only where the market will produce a higher rent.

Third, some submissions raised the issue of increasing the bureaucracy with the associated costs of administration. Whilst the bill creates a statutory position of Commissioner of Business Tenancies, the legislation will be administered by the Department of Justice, through the Office of Consumer and Business Affairs, with the existing Commissioner of Consumer Affairs assuming the role of Commissioner of Business Tenancies. Current staff of the Department at the Department of Justice will be responsible for day-to-day administration of the act. The main expenditure is expected to arise because of the educational programs that we will need to run in the period leading up to the commencement. These are expected to cost approximately $25 000. Once the act is operational, it is expected that it will be largely self-regulatory.

The act will provide a prescriptive set of rules and, as such, will not require a bureaucracy. The Commissioner of Business Tenancies has limited jurisdiction to hear and determine disputes, with the main function in dispute resolution being the conduct of mediation or conciliation. The parties will be required to meet the costs of such mediation and conciliation.

Three commentators raised the question of compliance costs for landlords and tenants. It is quite true that the legislation will require more structured relationships between landlords and tenants. Thus, for tenancy relationships that are currently ad hoc, or one-sided, there will be additional costs of compliance. For example, in providing draft leases and disclosure statements. However, the point has been made by both proponents and opponents of the proposed legislation that most of these requirements represent best practice in terms of the core aim of the legislation, which is that of ensuring that landlords and tenants enter into tenancy arrangements that are fair and, in terms of rights and responsibilities, fair.

In summary, the legislation is likely to impose some initial cost burdens on small scale landlords of shopping centres. For larger shopping centre owners, there should not be a significant cost. I also note that the Department of Justice is to complete a National Competition Policy review of the bill, by the time of the passage of the bill. Having regard to the objectives of the bill, this review will test whether the benefits of the legislative proposals in the bill justify the costs imposed on the community by the bill. The retail sector of the Territory is the largest single sector in terms of employment.

Providing a framework that outlines the accepted rules of conduct of tenants and landlords, protecting them from unfair practices and, at the same time, enhancing the job security of some 15 000 Territorians, the bill is designed to cover leased retail premises, both in shopping centres and main street, or strip shopping precincts. This legislation is intended to encourage an environment of fairness, to the benefit of both landlords and tenants.

I now turn to the key elements of the bill. Part 1 of the bill deals with preliminary matters. In line with legislation in other jurisdictions, the legislation, other than Part 13, covers only retail tenancies, or tenancies of a like nature. This includes any premises that used wholly or predominantly for the sale or hire of goods by retail, or the retail provision of services, and any business that is carried out in a retail shopping centre. A retail shopping centre is defined, and may include, not only the shopping centres such as Casuarina, but also more traditional street front or strip shops.

Again, consistent with legislation in other jurisdictions, there are certain exemptions. These include the large tenancies, where the tenant is most likely to have at least equal bargaining power as the landlord, such as leases for shops with a lettable area of 1000m2 or more, or leases to publicly listed corporations. Recognising the need for flexibility, the regulations may prescribe other classes of premises which may be exempted from the operation of the act should this become necessary.

Part 2 of the bill establishes a statutory position of Commissioner of Business Tenancies, and sets out the functions of this position. The Commissioner of Business Tenancies is to be the existing Commissioner of Consumer Affairs under the Consumer Affairs and Fair Trading Act. It should be noted that the Commissioner of Consumer Affairs also administers the Residential Tenancies Act. This act will be administered by the Department of Justice staff in the existing tenancy area of the Office of Consumer and Business Affairs.

Part 3 of the bill sets out the rights and duties of each party before they enter into a retail shop lease. The objective of these provisions is to ensure that each party is as informed as possible before committing to a lease. Tenants should not face unexpected charges and bills for outgoings after a lease is signed. Similarly, landlords can be comforted that their tenants understand all the requirements that are placed on them, increasing the likelihood of having a stable, long-term tenant, capable of meeting their liabilities to the landlord.

The bill includes provisions that require the landlord and tenant to give each other a disclosure statement before entering into a lease. Tough penalties will apply where a party fails to give a disclosure statement, or provides one that is misleading, false or incomplete. The content of disclosure statements is to be prescribed by regulation but, for the landlord, will include such things as the details of the tenancy, costs and expenses the tenant will be responsible for, rent calculation and reviews, outgoings to be paid by the tenant and, if applicable, the shopping centre details. The bill provides that tenants have the right to a five-year term. This brings the Territory into line with interstate legislation, and it is an important improvement in the tenant’s security of tenure. However, this provision does not apply where a tenant seeks a shorter term and has obtained legal advice about the implications of waiving their right to a five-year term.

Part IV deals with rent and outgoings under a retail shop lease. The bill contains important provisions in regards to rent, particularly rent reviews. The basis or formula on which a rent review is to be conducted must be set out in a lease. Importantly, ratchet clauses which allow rent to increase with market forces, but never decrease, are prohibited. The prohibition of ratchet clauses was one key issue arising from the Reed Report, and ratchet clauses are prohibited in every other jurisdiction. Under the provisions dealing with sinking funds and outgoings, the landlord will be accountable to the tenants for monies received and will be limited in what fees and charges can be passed on to tenants under these categories. The landlord’s capital cost, depreciation and interest on borrowing cannot be passed on to the tenants as outgoings.

Part V contains provisions dealing with the relocation and other disturbances to the premises. These provisions recognise that certain actions by the landlord in managing the building can have a significant adverse effect on the tenant’s business. The bill contains provisions related to the relocation of the tenant’s business, and which deal with alterations, refurbishments, demolition and damaged premises. Depending on the circumstances, the tenant may be entitled to reasonable compensation, a right to terminate the lease, or an entitlement to be offered a new lease on the same terms and conditions. These reforms provide significant improvement in security to tenants during the term of the lease.

Part VI deals with the assignment of leases and provides that consent to assignment of a lease should not be unreasonably withheld by the landlord, provided the proposed assignee has appropriate financial resources and business skills to fulfil the obligations of the lease.

Part VII deals with the renewal and extension of leases with the key provision being that landlord is to give the tenant an indication, at least six months before the end of the lease, whether or not a further lease or an extension to the lease will be granted.

Part IX deals with matters specific to shopping centres. A landlord in a shopping centre is not to disclose turnover information related to an individual tenant’s business without the consent of the tenant, other than in certain defined circumstances. The landlord is to be accountable to the tenant for funds received for such expenses such as costs of gathering statistical information about the shopping centre, and marketing and promotion. The landlord is not permitted to terminate a lease for inadequate sales by the tenant, and is not permitted to prevent a tenant from trading in premises other than the shopping centre. Trading hours cannot be changed, except with the consent of the majority of the tenants.

Part X deals with the unconscionable conduct in relation to retail shop leases. This is a major initiative involving the drawing down of unconscionable conduct provisions of section 51A(c) of Trade Practices Act 1974, and setting out a non-exhausted list of matters which may be taken into account in determining whether a party has acted unconscionably. The unconscionable conduct provision should encourage a cultural change and adoption of good business practices. It gives tenants greater security without imposing prescriptive requirements on landlords.

Part XI of the bill deals with dispute resolution. The provisions of Part XI are designed to provide a speedy, low-cost procedure for resolving disputes. In the first instance, a dispute must, other than in certain limited circumstances, be referred to the Commissioner of Business Tenancies. The Commissioner will generally refer the matter for mediation or conciliation, where the parties will attempt to resolve the matter between themselves. Interstate experience suggests that this model will be effective in resolving disputes and therefore avoid the need for formal court proceedings. No court action can be taken without the Commissioner providing a certificate stating that conciliation has failed or that the Commissioner is of the view that conciliation would not resolve the dispute.

The Commissioner will have a relatively small jurisdiction for the hearing and determination of disputes at inquiry up the value of $10 000. Above this amount proceedings may be taken in the Local Court or in the Supreme Court, in line with those courts usual jurisdictions. The Commissioner is to ensure that, where possible, a matter is resolved within 28 days. Appeals against decisions of the Commissioner at the inquiry may be made to the Local Court.

Part 13 applies to business tenancies generally. These provisions have been taken from the Commercial Tenancies Act and relate, in the main, to the process of regaining possession of business premises. These provisions are included in this bill and the Commercial Tenancies Act is to be repealed in response to industry calls to rationalise the number of acts applying to such tenancies. However, I foreshadow that there will be further legislation dealing with consequential amendments to the other legislation. In developing that legislation I will ensure that the Department of Justice consults with the Law Society and the land-based professions in respect of the inter-relationship between the provisions in the bill and the provisions in part 8 of the Law of Property Act. Part 14 deals with various miscellaneous matters, including transitional matters.

Madam Speaker, in conclusion, this bill is a major reform package that delivers on the government’s commitment to introduce contemporary retail tenancy legislation, enhancing the regulatory framework to enable business to operate in a fair trading environment. This legislation brings the Territory into line with other jurisdictions. It is not about imposing a burdensome regulatory regime on business but rather establishing the parameters of sound business conduct in an open and transparent way, with disputes able to be resolved in ways that contain costs for both parties. As such, it is likely to promote further investment by property developers and retailers in the Territory, thus, boosting employment and the level of economic activity generally.

Madam Speaker, I commend the bill to the House.
Debate adjourned.

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