The relationship between landlord and tenant is often difficult and can result in disputes across a wide range of issues, including rent, lease term, relocation, redevelopment, quality and maintenance of premises, annual rent reviews, fit-outs, and terminations.
It is imperative before signing a lease that you seek professional advice on both the commercial and legal aspects of the agreement. Time spent making a sound decision will significantly reduce the likelihood of major conflict during the term of the lease.
Retail tenancy in most states is governed by specific legislation, and assistance is available through your state government department.
Case Study Retail Tenancy
- John & Mary Jones were the owners of ‘Glitz Gifts’, a gift shop located in a metropolitan shopping centre. The Centre had recently undergone a major redevelopment and under the terms of the lease the gift shop was relocated to a lower floor.
- The Dispute
- Twelve months after the relocation the shop had not achieved its prior year’s sales and was unable to pay the rent which had increased by 30%. John & Mary had written to Centre management on three occasions and made numerous personal requests to review the impact of the relocation on their business. However, no one was prepared to listen. John & Mary needed assistance to break through the communication barrier with centre management.
- The lease did allow for compulsory relocation to a “reasonably suitable alternative premises”.
The new shop had an increased area but reduced frontage and visibility.
The rent increased by 30% on relocation.
The annual rental increase of 6% was now due.
- The Process
- John & Mary were a married couple in their mid to late fifties and were experienced retailers with a proven track record in this Centre and prior business. Since notification of the proposed relocation 18 months earlier they had strongly objected, however under the terms of the lease they relocated. The Retail Tenancy Unit was contacted and as prescribed under the State legislation a commercial mediator was appointed to help the parties resolve the matter.At the first joint mediation session John & Mary stated their belief that the new premises were inferior and that the sales results over 12 months now proved their assessment of the location. The increased rent was not achievable and the commitments made by the leasing manager had not been honoured.The Centre manager, Simon Smith, believed that performance would improve over time with a more positive attitude by the tenants. Neither party was prepared to concede their positions.The mediator started the resolution process by gaining an acknowledgment from both parties that they were keen to find a mutually acceptable outcome and that maintaining a good business relationship was important. This provided the basis for private discussions with the parties.In private the mediator reviewed Centre management’s role in the relocation and identified the risks and costs of not resolving the matter by mediation. Simon conceded the matter was poorly handled and was now prepared to sign a new lease agreement. The mediator asked Simon to prepare an offer of settlement for the joint session.
John & Mary acknowledged that business was improving but the rent was too high, in particular the proposed annual increase of 6%. They also conceded that it would be impractical to relocate back to their original premises.
The parties reconvened in joint session where Simon made an offer of settlement. Although not acceptable John & Mary were pleasantly surprised at the turnaround. The parties were then requested to justify their position on the financial figures provided. Both parties moved ground and the gap narrowed. Both parties had developed a better understanding of the other’s needs and concerns and the mediator was able to further develop this level of understanding into a final agreement.
The Mediated Outcome
- A new lease was signed with the rent reduced by 30%.
The lease provided for an annual rent increase tied to the C.P.I. instead of the 6%.
Lessons to be learnt
- Centre Management should implement the ‘Dispute Avoidance’ benchmarks in the Australian Competition and Consumer Commission booklet ‘Benchmarks for dispute avoidance and resolution’, October 1997.NOTE: In addition to the above, the terms & conditions of a retail tenancy lease may provide for some form of dispute resolution procedure. Check the relevant provisions of the lease and follow the procedure.