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Act puts leasing back 25 years

RETAIL leasing has been set back 25 years by the new Retail Shops Act, says Kott Gunning senior associate George Johnston.

Mr Johnston said the Act had sparked a major shift away from the use of net rental leases towards gross and semi-gross rent leases.

Gross and semi-gross leases are similar to those charged on residential rental properties.

The tenant pays an annual rent and the landlord pays for rates, maintenance, common area cleaning and the like.

While the actual rental fee is higher, the leases make it easier for tenants. They have a fixed rental cost that they can factor into their calculations.

WA Retail Traders Association manager Brian Reynolds said, at the end of the day, retailers were only interested in what their total occupancy costs were.

“With gross leases they can be protected from jumps in variable outgoings due to changes in management fees,” Mr Reynolds said.

Under the new Act, landlords can no longer levy a management fee from their tenants.

This particular omission has the Property Council of Australia’s WA branch chief executive Joe Lenzo concerned.

“Landlords will have to foot the management bill now,” Mr Lenzo said. “It may not affect a lot of the big operations but some landlords, particularly those operating small suburban shopping centres, may find they can’t afford property managers anymore and those properties will become run down.

“The new amendments purported to help the tenant but they are eroding the rights of the landlord.”

Mr Lenzo said a lot of landlords took up net rent leases because “tenants cried out about transparency”.

“Now it’s reverted back to where it was,” he said. “There’s sure to be another push by small businesses to ban gross leases.”

Mr Johnston said some landlords were still using net rent leases.

However, the choice between net rental and gross or semi-gross renting seems a hard one to make.

“The landlord has to consider management costs and the complexity of the operating expense provisions,” Mr Johnston said.

“Most management agencies of the larger properties seem to be taking the view that gross and semi-gross rentals are easier.

“They also have to consider maintaining rental growth. A landlord doesn’t want to be locked into a five or ten year arrangement and not see a return on investment.

“With gross and semi-gross leases, the landlord risks being locked into big maintenance costs. With newer buildings the risk is lower.”

Mr Johnston said valuers were concerned it would be harder to calculate the market value of rentals because they will not have access to outgoings figures.

The new Act has already created some anomalies.

Mr Johnston said Allendale Square had been caught in a part of the Act that defined any property with more than five retail properties as being a retail premises.

Because Allendale Square has more than five retail properties, it could be argued all leases in that building fall under the new Act.

“Another thing people are not really sure of is what is meant by a new lease and an existing lease,” Mr Johnston said.

“If a tenant that entered into a lease before 1 July wants to change the terms and agreements post 1 July, is it a new lease?”

Mr Johnston said he thought both tenants and landlords got something from the new Act.

“In some cases some landlords will get considerable premium bonuses over the short-term. In new buildings landlords can build up maintenance funds.”

Mr Johnston said some tenants feared having to do a new lease.

“They like to stick with what they know,” he said.

This approach could lead to some tenants opting to stick with their existing net rent lease, while others opt for either gross or semi-gross leases.

Mr Lenzo said this could be a nightmare for property managers and landlords because of the mixture of lease types.

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