Unfair Contract Terms Amendments to Pose Severe Penalties

DATE PUBLISHED: February 2, 2023

key takeaways

The Unfair Contract Terms regime is a set of laws in Australia which protects small businesses from unfair terms being included in standard form contracts;
New amendments to the regime will take effect in November 2023 and will impose severe penalties for breaches of the law;
It is important for landlords and tenants to understand their rights and obligations under the regime before entering into new leases, or amending existing leases, that are governed by the regime.

Landlords and tenants should be aware that any lease they prepare or negotiate may be subject to the Australian Consumer Law's (ACL) ‘unfair contracts terms regime.’

Recent amendments made to the ACL commence in November 2023 and impose significantly higher penalties for contraventions of the law.

Any existing lease regulated by the regime that is renewed on or after November 10, 2023, will be subject to the new regime, as will any lease amendment made on or after November 10, 2023.

Which leases will the unfair contract terms regime apply to?

The regime will apply to a lease that meets the following criteria:

'standard form contracts'

The ACL does not define what a 'standard form contract' is. However, if a party alleges that a lease is a 'standard form contract', it is presumed to be a standard form contract unless another party proves otherwise.

The ACL provides for a number of matters to be taken into account in determining whether a lease is a 'standard form contract', including whether one party to the lease prepares the document and whether one of the parties has made another lease on the same or substantially similar terms (which has been prepared by that party), and if so, how many such leases that party has entered into.

Importantly, the new regime provides that a lease may be determined to be a 'standard form contract' even if there was opportunity for:

the landlord or tenant to negotiate minor or insubstantial changes to the contract;
the landlord or the tenant to select a term from a range of options provided; or
a party to another lease or proposed leases to negotiate the terms of the other lease or proposed lease.

‘Small business contracts’

Once the amendments to the ACL take effect, a ‘small business contract’ will include lease where at least any one party (which could be either the landlord or the tenant) to the lease either:

enters into the lease in the course of carrying on business and at a time when the party has fewer than 100 employees; or
had annual turnover below $10 million.

When is the lease considered ‘unfair’?

Broadly speaking, a lease term regulated by the regime will be unfair if:

it would cause a significant imbalance in the parties’ rights and obligations arising under the lease;
it is not reasonably necessary in order to protect the legitimate interests of the party who would be advantaged by the term;
it would cause detriment (whether financial or otherwise) to a party if it were to be applied or relied on.

Examples of unfair lease terms

Some examples of common lease terms that may contravene the regime in the ACL include:

Recovery of costs from tenant

A clause that allows the landlord to carry out the obligations of a tenant under a lease (e.g. repair and maintenance obligations) and to recover the costs from the tenant of doing so. The clause should specify that the costs recoverable by the landlord must be reasonable.

Right to take possession of property

A clause which gives the landlord the right to take possession of and deal with the tenant's property at the expiry of the lease without prior notice. If this type of clause is included in a lease, it should provide that the landlord must give the tenant at least 14 days' notice before taking possession of the property or arranging for its removal.

Amendment of centre or building rules

A clause that provides that a landlord may unilaterally vary its shopping centre rules and allows the landlord to terminate the lease if the tenant breaches the rules. If this type of clause is included in a lease, it should provide that the landlord can only make reasonable rules and regulations (and reasonable variations) that are not inconsistent with and do not detract from a tenant's rights under the lease.

indemnities

a clause which requires a tenant to indemnify the landlord for any loss or damage that a tenant may cause and which is outside the control of the landlord. If this type of clause is included, it should provide that the tenant will indemnify the landlord, except to the extent that any liability was caused to or contributed by the landlord's negligence or breach of the lease.

termination clauses

A clause which provides the landlord with the ability to terminate the lease for any breach by the tenant, regardless of how trivial, without providing the tenant with the opportunity to remedy the breach. The landlord should only be entitled to terminate the lease after first notifying the tenant of its intention to terminate and then providing the tenant with a reasonable period to remedy the breach.

What about when parties have used a published form of template lease?

Landlords and tenants often use the template form of lease published by the State law society or real estate institute (e.g. the REIQ Commercial Tenancy Agreement). Although neither party creates this document, if any changes or additions are made, the ACL's rules may apply if the changes or varied terms are unfair.

What are the penalties for breach of the regime?

The table below summarises the significantly increased penalties that will apply for contraventions of the regime in the ACL .

Header	Now - Maximum Penalty	Previous - Maximum Penalty
Corporations	Greater of: AUD 50 million; or 3 times the value of the benefit (if the Court can determine the value of the benefit); or 30% of the adjusted turnover during the breach turnover period (if the Court cannot determine the value of the benefit).	Greater of: AUD 10 million; or 3 times the value of the benefit (if the Court can determine the value of the benefit); or 10% of the annual turnover of the body corporate (if the Court cannot determine the value of the benefit).
Individuals	AUD 2.5 million	AUD 500,000

What should I do next?

Landlords and tenants should consider the following before commencing lease negotiations going forward:

Resist the ‘cookie cutter’ approach

At the start of lease negotiations, landlords and tenants should perform due diligence on the other party to the proposed lease to assess if the regime will apply. This would include obtaining evidence of turnover and number of employees of the other party.

If the regime is found to apply to all or some leases in a building, centre or portfolio, the terms of those affected leases should be amended to remove any clauses that may be considered unfair terms under the ACL regime.

Importantly, leases may need to be individually tailored within a building, centre or portfolio depending on whether the regime applies to that particular landlord or tenant.

Review current lease templates

Landlords and tenants should have an experienced leasing solicitor review any lease templates currently being used (where the regime applies) to ensure the leases do not contain clauses that may be considered unfair terms under the ACL regime.

This review should include any amendments or additional terms to a standard, published form of lease template being used by landlords and tenants.

Be wary of lease renewals

The new ACL regime also applies to any amendments made to existing leases entered into from 10 November 2023. This means that any existing leases that are varied (for example, due to the exercise of an option to renew) will be regulated by the new ACL regime.
Any unfair terms in those existing leases should be removed as part of the variation to the lease or a new lease entered into that complies with the regime.

conclusion

The amendments to the Unfair Contract Terms regime will have a significant impact on lease negotiations between landlords and tenants that are governed by the regime.

It is important for both landlords and tenants to understand their rights and obligations under the regime in order to comply with the regime and to avoid potentially severe penalties.

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