Do you need to give disclosure statements for options leases?
The answer differs from State to State (and changes from time to time).
In some states, Victoria, the Northern Territory, Queensland and the ACT (at the tenant’s election) for example, the retail legislation specifically requires disclosure statements for option leases.
In Western Australia, the retail legislation specifies that an option lease does not require a disclosure statement.
And in the other states, New South Wales, South Australia and Tasmania, the retail legislation does not specify. What should a lessor do in these States?
In those ‘unspecified’ states, we need to decide whether an option lease is a new agreement when the lessee exercises the option (thereby accepting the lessor’s irrevocable offer), or whether the agreement was made (as a conditional contract) when the first lease was entered into (the condition being the lessee exercising the option). If it is a new agreement, a new disclosure statement is required; if it is not a new agreement, a new disclosure statement may not be required.
Whether an option lease is a conditional contract or an irrevocable offer is a complex legal question. The High Court has considered the issue many times, and with different results, however the conditional contract theory seems to be preferred. Property law text books tell us not to worry too much, because there is very little difference in practice – however, it does affect whether a disclosure statement should be given on an option lease that is subject to retail legislation.
The short answer is – play it safe … give a disclosure statement for option leases. The last thing you want is to have to go to the High Court about a retail option lease.
When should the disclosure statement be given?
Section 11(1) of the Retail Leases Act (NSW) (the “Act”) reads: “At least 7 days before a retail shop lease is entered into, the lessor must give the lessee a disclosure statement for the lease…”
Section 8 of the Act provides that a retail shop lease is entered into on the earlier of both parties signing the lease, the lessee entering possession of the premises under that lease, or the lessee beginning to pay rent under that lease. In an option scenario, the lessee enters into possession under the lease on the commencement date of the option lease.
Even though under the conditional contract theory, the agreement for an option lease occurred at the time of signing the first lease, the option clause would usually provide for a new lease to be drawn up and executed. The option lease is not entered into until that new lease is executed by both parties (or on the commencing date of the option lease – if that occurs earlier). From this, it seems that the disclosure statement may be given at the usually time – just before or when the draft lease is given to the lessee.
An alternative analysis is that a disclosure statement should be given before the lessee commits to the option lease, which is before they exercise the option. This would enable the lessee to have all relevant information about the new term before committing to the new term. This would require the lessor to give the disclosure statement to lessee at least seven days before their option exercise period begins, or if the lessee requests a disclosure statement.
Is that alternative analysis supported by the legislation?
Under the NSW Act, the lessee has the right to have the option term rent determined before they are required to exercise the option. Elsewhere in the Act, a lessee has a right to ask for an updated disclosure statement as part of the procedure for obtaining consent to an assignment of the lease. The omission in the Act of a right for the lessee to ask for a disclosure statement before exercising an option suggests that the alternative analysis is not correct.
To be consistent with the play it safe approach, if the option exercise window is approaching (or open) give the lessee a disclosure statement if they ask for one. The lessor has to under the assignment procedure anyway (without knowing whether there is a genuine potential assignment).
Matthew Rafferty, Partner