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01.09.2018

News

Limiting tenant compensation claims for disturbances

Since 2016, landlords in Queensland have been allowed to agree to limit the compensation a tenant can claim for business disturbance. However, the agreement is only effective if the tenant is given written notice of the anticipated disturbance prior to entering into the lease and it complies with the specific Retail Shop Leases Act (RSLA) requirements.

Here, partner Kristy Dorney takes you through what is required to ensure these limiting clauses can be enforced.


Compensation for business disturbance

Generally, a tenant is entitled to 'quiet enjoyment' of their leased premises and may have a right to recover compensation from their landlord if they can prove the landlord's action (or inaction) has disturbed their business, causing the tenant loss. However, for tenants who fall within the protections of the RSLA, there is a list of actions deemed to constitute 'business disturbance' for which it may claim compensation if it can show it has suffered loss.

Examples of 'business disturbance' include actions restricting the tenant's access to its retail shop or altering the flow of potential customers past the shop, failing to repair plant or equipment under the landlord's control, or anything causing disruption to trading.

Compensation for the tenant is usually measured by comparing the tenant's profit before and after the alleged 'disturbance' and accounting for any loss for which the tenant is responsible.


When a disturbance is anticipated

Many leases include a clause seeking to limit compensation payable for business disturbance, particularly when all parties know the landlord intends to carry out works or alterations. The most common example is when a tenant signs a new lease on the basis of a planned upgrade or development. This is often a significant drawcard for the tenant and quite often incentives negotiated by the tenant will reflect the intended business disturbance.

Prior to 2016, the RSLA provided any clause attempting to limit the amount of compensation a tenant could claim for business disturbance was void. This prohibition created a risk of a tenant 'double dipping' on compensation for the anticipated disturbance.

However, in 2016, a new provision was included in the RSLA which recognised the need for a landlord to negotiate leases on the basis the tenant acknowledged some form of disturbance was likely to happen shortly after commencement for which the tenant could not seek compensation.


The pre-lease disclosure

Under the new law, a retail shop lease may limit a claim for compensation for an anticipated disturbance which occurs within one year from the date the lease is entered into, provided the tenant is given notice of and information about the anticipated disturbance prior to entering the lease.

The notice must include the following information:

  • A specific description of the nature of the anticipated disturbance.
  • A statement assessing the likelihood of the anticipated disturbance occurring, including the basis on which the assessment was reached.
  • A statement of the timing, duration and effect of the anticipated disturbance.

The new section reflects the commercial reality of these types of deals and aligns Queensland, in part, with other states. New South Wales has had similar legislation for some time. However, the New South Wales provision is more favourable to the landlord as there is no requirement for the disturbance to occur within 12 months of the tenant entering into the lease.

Giving proper notice is the key to taking advantage of this provision. A notice which does not include all this information will not be sufficient notice nor will a notice not given prior to the lease being entered into.


Some important tips for landlords

If you are a landlord negotiating a retail lease which falls within the RSLA, you will be familiar with the pre-lease disclosure statement regime. At the time the disclosure statement is prepared, the landlord should identify any planned works which could be disclosed prior to entering the lease.

If information can be provided in advance which meets the requirements, you should consider:

  • providing formal disclosure of the anticipated disturbance
  • including a clause limiting the tenant's right to claim compensation associated with the disturbance.

The disclosure could be made within the disclosure statement itself. However, given the prescriptive nature of both the disclosure statement and the new provision, we recommend providing notice of the anticipated disturbance in a separate document addressing each of the matters required by the RSLA.

Our Real Estate team can assist with all aspects of documenting and managing anticipated disturbances in a tenant's prelease disclosure and the lease itself, along with advising on claims for compensation under the RSLA.


Authors

Kristy Dorney

Kristy Dorney

Partner

Contact McMahon Clarke

Brisbane
T +61 7 3239 2900
A Level 7, 100 Creek Street, Brisbane Qld 4000

Melbourne
T +61 3 9909 1400
A Level 2, 696 Bourke Street, Melbourne Vic 3000