02 February 2024

Landlords Beware: Substantial Penalties for Unfair Contract Terms extend to Leases

With recent changes to the Australian Consumer Law, Landlords now potentially face serious consequences, including penalties of up to $50m for companies and $5m for individuals, if their Leases contain Unfair Contract Terms (UCT).

On and from 10 November 2023:

the UCT regime will apply; and it’s important to bear in mind that, if a Tenant claims that the Lease is a ‘standard business contract’, the onus is on the Landlord to prove that it is not.

To determine if a term of your Lease is “unfair”, it is necessary to consider the following:

  1. The term must cause a significant imbalance between the parties’ rights and obligations under the Lease;
  2. That term must not be reasonably necessary to protect the legitimate interests of the party advantaged by the terms – usually the Landlord; and
  3. The term must cause detriment (financial or otherwise e.g., reputational), to the other party, if relied on.

The types of Lease terms that are likely to be considered unfair are:

  1.  Any Breach clauses that do not allow an appropriate ‘cure’ period;
  2. Provisions that allow a landlord to take possession of, or deal with, a tenant’s property, at the end of the Lease, without giving the tenant a reasonable period of time to remove that property after the end of the Lease;
  3. Terms that allow landlords to recover costs, including reimbursement of repair and maintenance costs where a tenant has failed to meets its obligations, and on a default, that have no qualifiers or limitations (such as being ‘reasonable’ or, even, capped);
  4. Restrictions on a tenant’s right to claim compensation from a landlord for any reason;
  5. Guarantor provisions providing that a guarantor remains liable to a landlord, even where the tenant’s liability under the lease has become legally unenforceable;
  6. Indemnities in favour of landlords that extend to circumstances where the landlord caused or contributed to the loss; and
  7. Restrictions on a tenant’s right to engage in actions that will not directly impact the landlord e.g., a business restructure or a change in advertising methods.

The new UCT regime is not retrospective, but if a relevant Lease that existed on 9 November 2023, is subsequently varied, including by extension of the Term, that Lease will be captured by the regime.

Accordingly if the regime applies, all new Leases, and any variations or extensions of existing Leases, will be caught.

Along with the penalties noted above, if a Lease is found to contain UCT, a Court can declare the offending term void, declare the entire Lease void, vary the Lease and/or refuse to enforce the Lease against the tenant.

To avoid falling foul of the UCT regime, it is, therefore, critical to have your Leases reviewed by an experienced leasing lawyer as soon as possible, and O’Shea and Partners, Lawyers can assist in that review and in incorporating any amendments required to ensure compliance.