MS TIERNEY (Western Victoria—Minister for Training and Skills, Minister for Higher Education) (18:02): I move:
That the second-reading speech be incorporated into Hansard.
Motion agreed to.
Ms TIERNEY: I move:
That the bill be now read a second time.
Incorporated speech as follows:
I’d like to start by taking an opportunity to thank those people, ranging from individual small businesses through to industry associations and other organisations, who contributed to the development of this Bill by making submissions to the Small Business Regulation Review or attending consultation sessions and meetings.
The feedback from these consultations has been critical to ensuring the Government has developed legislation that represents a fair balance between the interests of tenants and landlords and is also legally sound.
This Bill has two key purposes.
Firstly, the Bill amends the Retail Leases Act 2003 and the Building Act 1993 to clarify that landlords can pass on the cost of repairs and maintenance of Essential Safety Measures (ESM) to retail tenants as outgoings where provided for in the lease. This amendment will maintain the status quo in retail leasing industry practices that existed before uncertainty created by a VCAT Advisory Opinion.
Secondly, the Bill amends the Retail Leases Act 2003 to implement reforms from the Small Business Regulation Review into the retail sector. The amendments make retail leases fairer and easier to understand by improving the information tenants receive to facilitate more informed decisions on retail leases, clarifying the timeframe for return of security deposits and introducing a cooling off period.
Importance of small businesses to Victorian economy
These amendments are necessary to bring fairness and certainty to Victorian small businesses, and it is important to reflect on their contribution. Ninety-eight per cent of businesses in Victoria are small businesses, contributing a third of Victoria’s output in goods and services. Small businesses employ Victorians, generating almost half of private sector jobs in Victoria.
The Government recognises the significant contribution that over 600,000 small businesses make to Victoria, particularly in providing jobs, growing the economy and building social cohesion.
In particular, retailing is a vital part of the Victorian economy, with over 33,000 small businesses in the retail trade industry. Ninety-six per cent of retail trade in Victoria is comprised of small businesses. In 2018 the retail trade industry generated $83.4 billion in gross revenue for Victoria according to the Australian Bureau of Statistics.
The Government came to office in 1999 with a commitment to overhaul Victoria’s retail tenancy legislation. The Government delivered on this promise in 2003 with the introduction of the Retail Leases Act 2003 establishing a new regulatory framework for retail tenancies promoting greater certainty, fairness and clarity in the commercial relationship between landlords and tenants of retail premises. In 2005 a range of amendments were made to the Retail Leases Act 2003 to streamline and improve its practical operation.
Before detailing the key elements of the bill, I wish to briefly outline the broader context within which the current legislation has been developed.
Regulatory burden faced by small business
The Government recognises the pressures that small business owners face in an evolving economy. Often small business owners lack the resources that larger businesses have to manage the challenges of operating and growing a business. The Government understands the burden of regulation is often higher on small businesses relative to their size. Lack of staff, time and resources make it harder for small businesses in understanding and fulfilling obligations.
Regulation is vital to keeping Victoria’s workplaces and services safe and secure, and shaping the welfare of the Victorian economy, but it is equally important that when we can improve it that we do so. Improving regulator practice and engagement with small business has many benefits for small business and Victoria. Reducing regulatory burden can decrease compliance costs on individual businesses and lessen regulator administration process. This can directly impact compliance rates and how effective the regulation is in achieving its intent. By designing and implementing regulations with small business needs in mind regulatory outcomes can be maintained or even improved.
Small Business Regulation Review
The Government launched the Small Business Regulation Review in 2016 as part of Government’s regulatory reform program. The Small Business Regulation Review is a key component of the Government’s commitment to reduce unnecessary burden from regulation. This first-of-its-kind government-wide review has already delivered reductions in burdensome red tape that was negatively impacting our small businesses and their day-to-day operations.
The Small Business Regulation Review comprised a series of three sector-based reviews over two years using rapid, co-design processes to bring stakeholders together. Over 1000 small businesses and dozens of regulators were engaged during the course of these reviews.
The reviews put small businesses at the centre, focusing on identifying regulatory burden from their perspective. The reviews identified opportunities to reduce regulatory burden and make compliance easier.
The majority of the Small Business Regulation Review reforms resulting from the reviews involve changes to regulatory practice and regulator engagement, responding to priority concerns raised by small businesses.
Through the Small Business Regulation Review Retail Action Statement released mid-2018 the Government publicly committed to reforms in four areas which address the key opportunities identified by small businesses to reduce regulatory burden. The key reforms aim to make it easier to discover what is needed to start and grow a business, reduce the time taken for approvals, make it easier to understand and comply with food safety regulation and make retail leases fairer and easier to understand.
The Government has already begun this work, for example, the review is delivering better coordination with the Commonwealth Government by jointly promoting the Australian Business Licence and Information Service and improved linkages with business.vic.gov.au.
The Better Approvals Project led by Small Business Victoria has already delivered significant reductions in average approval times in participating councils. Of the 79 councils in Victoria, 31 have now undertaken the program and a further 12 councils are scheduled to participate this year. The Better Approvals Project is estimated to save small businesses up to $93 million a year once fully implemented.
The Food Safety Reforms currently being implemented will deliver new guidance material which is currently being developed through co-design, including an animated tool. Record keeping requirements are being simplified, and a new on-line portal for fixed premises food businesses is being codesigned with councils and businesses.
Making retail leases fairer and easier to understand
The Bill amends the Retail Leases Act 2003 to implement retail lease reforms from the Small Business Regulation Review Retail Action Statement announced in June 2018, which aim to increase fairness and reduce regulatory burden in retail leasing arrangements by addressing information asymmetry and timing issues between landlords and retailers.
These amendments will improve the Victorian retail leasing environment by providing more timely information for tenants on proposed leases, disclosure statements, and lease renewal options. The amendments will also improve the timely return of security deposits to tenants, including bonds and bank guarantees, by introducing legislative time limits.
Some changes have been made to reforms since the release of the Small Business Regulation Review Retail Sector Action Statement to incorporate stakeholder feedback on the practical operation of the Retail Leases Act 2003.
I now turn to the key elements of the Bill.
More time to consider new leases
The Small Business Regulation Review found tenants often cannot make informed decisions about whether to enter a new lease as there is insufficient time to review or seek professional advice regarding the proposed lease and disclosure statement.
The Retail Leases Act 2003 currently requires the landlord to provide a copy of the proposed lease and disclosure statement to the prospective tenant at least seven days before entering a retail lease, which is often not enough time to seek professional advice.
Amendments to section 17 extend the minimum timeframes by requiring landlords to provide the proposed lease (including rent, tenant particulars and the term) and a disclosure statement to the tenant at least 14 days before entering a lease. This gives prospective tenants more time to consider the details of the proposed lease and the disclosure statement and seek professional advice where necessary.
The amendments also require landlords to notify tenants of any changes made to the proposed copy of the lease since the previous version to ensure tenants are aware of any changes.
The amendments allow for flexibility in how the landlord notifies tenants. For example, any changes could be notified in a marked-up copy of the lease, through tracked-changes in an electronic version or through a cover sheet highlighting the changes.
A penalty for non-compliance has been proposed to deter landlords from not complying with this requirement.
Improving information for options to renew a lease
The Small Business Regulation Review found tenants are often unable to make informed decisions about whether to exercise their option to renew their lease as they have insufficient information about what rent or significant changes will apply to their lease at the time they need to make this decision.
The current timeframes in the Retail Leases Act 2003 means the landlord is not obliged to provide a disclosure statement before the tenant must determine whether to exercise the option to renew lease.
Many retail leases state that the rent for the renewal period will be determined through a market review. This does not provide adequate certainty for the tenant when considering whether to exercise an option to renew a lease because in practice the tenant needs to exercise the option before they can commence a formal process to review the rent.
The Bill amends the Retail Leases Act 2003 to require landlords to give more timely information to tenants with options to renew retail premises leases. The amendments ensure that tenants are provided with all relevant price and non-price terms within a reasonable time before they must decide whether to exercise an option to renew the lease.
Landlords will be required to provide notice to tenants at least three months before the last date that an option to renew the lease may be exercised containing: the last date by which the option to renew may be exercised, the rent payable for the first twelve months of the new term, the availability of an early rent review process and a cooling-off period and any changes to the most recent disclosure statement provided to the tenant.
The amendments create a new early rent review process for tenants whose retail leases provide for a rent review to be made on the basis of the current market rent. Tenants will be provided a 28-day period to request an early rent review, and at least 14 days to consider once notified of the rent amount.
If, after that time, the tenant decides not to exercise their option to renew the lease, the amendments provide for an extension the lease if required to allow for three months from that point for both the tenant and landlord to make alternative arrangements unless both parties agree otherwise.
The amendments also establish a 14-day cooling off period for tenants renewing retail premises leases in certain circumstances. This will allow tenants who exercise an option to renew their lease to change their mind provided they have not engaged in an early rent review process.
These reforms will increase small businesses’ confidence in making sound business decisions about entering new leases and enable them to renew existing leases with fewer surprises.
These reforms will decrease the need to engage in costly and time‐consuming processes for rental reviews and will protect against paying excessive rent throughout a lease extension. Helping businesses avoid unexpected costs is expected to decrease failure rates and improve profitability for the sector overall.
Clear timelines on the return of security deposits
The Retail Leases Act 2003 currently provides for the security deposit to be returned ‘as soon as is practicable’.
The Small Business Regulation Review found that while most landlords seek to return bonds and deposits in a timely manner, sometimes tenants can experience a lengthy delay awaiting the return of security deposits (cash bonds or bank guarantees) due to the lack of precision in this timing, resulting in disputes. This includes situations where very minor amounts are in dispute relative to the amount of the guarantee. There is no financial limit on security deposits, and many are of significant value. Delays in returning the deposit to a business can lock up a significant amount of capital and may delay or stop small businesses from investing in new opportunities.
The Bill amends the Retail Leases Act 2003 to clearly specify the timeframe within which landlords must return security deposits to tenants under retail premises leases. The amendments introduce a time limit requiring landlords to return security deposits, including bonds and bank guarantees, to the tenant within 30 days after the lease ends if a tenant has fulfilled all their obligations under the lease. This reform will not impact on a landlord’s right to recover costs where the tenant has not fulfilled all of their obligations.
Having a time limit to return bonds or bank guarantees will free up capital for small business retailers, who often need to access their capital quickly to start up their next business venture. Small businesses will have increased confidence in making business decisions knowing that they can take on new leases or invest in other aspects of their business.
Regulation Review Reforms: Commencement and Transitional Provisions
The amendments implementing rental reforms from the Small Business Regulation Review of the Retail Sector in the Bill will come into operation by proclamation, or on 1 October 2020 if not proclaimed earlier. The new requirements will apply to retail premise leases entered into after the amendments commence. Transitional provisions have been included in the Bill to clarify that the amendments also apply to the future operation of existing retail premises leases, except in circumstances where there is insufficient time after commencement to comply with new requirements.
Clarifying Essential Safety Measures
The Bill includes amendments to the Retail Leases Act 2003 and the Building Act 1993 to increase certainty in retail leasing arrangements about who pays for costs relating to the installation, repair and maintenance of essential safety measures.
Building owners, including landlords of retail premises are required to maintain Essential Safety Measures under the Building Act 1993. Essential Safety Measures include the fire, life safety and health items installed or constructed in a building. These are set out in the Building Regulations 2018.
Examples of essential safety measures include but are not limited to traditional building services such as sprinklers and fire detection and alarm systems, and passive fire safety mechanisms such as fire doors, fire-rated structures and other building infrastructure items such as paths of travel to exits.
Essential safety measures compliance is important to ensure that safety systems within the building remain at the required operational level throughout the life of the building. Compliance is also important for the safety of building occupants, passers-by, and the occupants of adjoining buildings.
The Retail Leases Act 2003 sets out landlords’ obligations in respect of expenses they can recover from tenants as outgoings. Outgoings are expenses directly attributable to the operation, maintenance or repair of the retail premises.
Longstanding industry practice in Victoria, consistent with other jurisdictions, has been for landlords to recover expenses associated with meeting Essential Safety Measures by charging tenants as outgoings. Leases commonly provide for this arrangement. This practice was thrown into doubt by a VCAT Advisory Opinion in 2015 to the contrary. Following several disputes about Essential Safety Measures, in 2014 the then Victorian Small Business Commissioner referred the issue of the interaction between the Building Act 1993, Building Regulations 2006, and Retail Leases Act 2003 to VCAT for an advisory opinion about the application in relation to a landlord’s capacity to recoup Essential Safety Measures through outgoings under commercial and retail leases.
The VCAT Advisory Opinion issued in May 2015 found that in relation to Essential Safety Measures the Building Act 1993 prevailed. It provided that the landlord must bear the cost of compliance with Essential Safety Measures obligations and cannot pass these costs on to the tenant as outgoings under the Retail Leases Act 2003.
While not binding, the Advisory Opinion could be persuasive in relation to future court decisions. Consequently, landlords and tenants have raised concerns about liability for Essential Safety Measures costs, and uncertain about how Essential Safety Measures costs can be recovered. This has particularly impacted leases that were negotiated in good faith by both parties before the Advisory Opinion was issued.
Essential Safety Measures Reforms
This Bill seeks to provide clarity on this issue, guided by the principle that the obligation for building safety remains that of the building owner, however landlords and tenants should be able to negotiate to pass on the costs as part of the overall lease negotiations. The Bill also seeks to validate those leases that were negotiated and entered into in good faith by both parties before the Advisory Opinion was issued.
The Bill amends section 251 of the Building Act 1993 to provide that an occupier cannot recover from a building owner expenses relating to the installation, repair or maintenance of essential safety measures that the occupier has agreed to bear under a retail premises lease to which the Retail Leases Act 2003 applies.
Essential safety measures are defined in the Building Act 1993 and Retail Leases Act 2003 to have the same meaning as in the Building Regulations 2018 or any future remake of those regulations.
The Bill amends section 41 of the Retail Leases Act 2003, inserting new exceptions to enable the lease to require a tenant to pay for the cost, or part of the cost, of carrying out repairs or maintenance work in respect of an essential safety measure, or the installation of an essential safety measure relating to fit out of the retail premises for which the tenant has agreed to pay.
The Bill inserts new sub-sections into section 52 of the Retail Leases Act 2003 enabling the landlord and tenant to agree for the tenant to carry out or cause to be carried out repairs or maintenance work in respect of an essential safety measure on behalf of the landlord.
Such an agreement is not intended to displace the landlord’s obligations as a building owner under the Building Act 1993 and regulations in respect of essential safety measures. The landlord as a building owner remains responsible to comply with their obligations under the Building Act 1993 and any associated regulations.
Further, the existing and new provisions in section 52 of the Retail Leases Act 2003 are not intended to limit the obligations of a tenant under a retail premises lease to contribute to outgoings for repairs and maintenance work in respect of an essential safety measure for which the tenant has agreed to contribute under the lease.
Essential Safety Measures: Commencement and Transitional Provisions
The amendments in the Bill that increase certainty in retail leasing arrangements about who pays for costs relating to the installation, repair and maintenance of Essential Safety Measures will come into operation the day after the Bill receives the Royal Assent.
Transitional provisions in the Bill provide that the Essential Safety Measures amendments apply to retail leases that were entered into before the amendments commenced if the lease contains a provision to the effect that the tenant must pay the landlord, as a contribution to outgoings, the cost, or part of the cost, of installation, repairs or maintenance work in respect of an essential safety measure.
The provisions in the Bill relating to Essential Safety Measures do not operate retrospectively for retail premises leases entered into before the commencement of this Bill; rather, they only affect the future operation of affected leases. This is necessary to give effect to the intention of the parties at the time the lease was entered into and clarify the validity and effect of provisions in existing retail premises leases relating to essential safety measures.
Providing clarity on this issue will reduce barriers to compliance that can impact building safety, whilst ensuring the purpose and objectives of the Building Act 1993 are upheld.
I commend the Bill to the house.