Unfair contract terms in the property space – Landlord & Tenant – Leases

The unfair contract terms regime first came into operation back
in 2010. The latest iteration of the regime came into effect on 9
November 2023 and has wider application than one would expect.

What types of contracts are covered by the unfair contract
terms regime?

The unfair contracts regime applies to unfair terms in contracts
that are:

1. consumer contracts, namely contracts for the supply of goods or
   services or the sale or granting of interests in land involving an
   individual for personal, domestic, or household use or
   consumption




2. small business contracts, namely contracts for the supply of
   goods or services or the sale or granting of interests in land
   involving a party that:




3. (a) employs less than 100 people; or

   (b) has an annual turnover for the last income year of less than
   $10 million,

and which involve a standard form contract.

Given precedents are commonly deployed in the property space, we
would expect the regime to apply to a significant number of
property-related contracts, such as:

• land sales contracts, including those for off-the-plan
  developments




• residential tenancy or accommodation agreements, including
  those that may be subject to industry-specific legislation such as
  specialist disability accommodation and retirement village
  accommodation




• retail and commercial property leases or licences




• property easements and covenants

especially where there is a disparity of bargaining power and
limited ability to negotiate or change the terms of the
contract.

When is term considered unfair?

A term is generally considered unfair if the term:

• causes a significant imbalance in parties’ rights and
  obligations




• is not reasonably necessary to protect the legitimate interests
  of the benefiting party




• is detrimental (financial or otherwise) to the other
  party.

Whilst each term does need to be assessed on a case-by-case
basis and in the context of the relevant contract as a whole, terms
that could potentially be considered unfair include for example
only:

• in land sale contracts:
  

  • clauses that allow a vendor to unilaterally make changes (for
    example, to plans and materials), especially where those changes
    are material and the implications are not apparent

  
  

  • termination clauses that allow a vendor (but not the purchaser)
    to terminate the contract for any reason, such as the project not
    being viable or insufficient presales being reached

  
  

  • clauses that penalise one party (but not the other) for a
    breach or termination of the contract; clauses that extend due
    dates or conditions at the discretion of the vendor.




• in commercial leases or licences:
  

  • ratchet clauses (that is, clauses that prevent rent from going
    down after a review), especially given their prohibition already in
    retail leasing legislation in multiple states and territories

  
  

  • automatic renewal clauses

  
  

  • termination for convenience clauses which give the landlord
    only the right to terminate the lease for any reason at any
    time

  
  

  • clauses which allow a landlord to terminate the lease for
    breach by a tenant, without giving the tenant reasonable time to
    remedy such breach (for example, assignment without consent,
    failure to comply with a specific obligation)

  
  

  • clauses which allow a landlord to carry out obligations of a
    tenant under a lease (for example repair or maintenance) and to
    recover costs from the tenant to do so without limiting such costs
    to reasonable costs

  
  

  • unlimited indemnity clauses which require a tenant to indemnify
    the landlord for broad or unclear indemnities, losses outside a
    tenant’s reasonable control or losses caused or contributed to
    by the landlord’s negligence or breach

  
  

  • clauses which allow landlords to take possession of and deal
    with a tenant’s property without prior notice to the tenant,
    for example, where a tenant has failed to remove their property at
    the end of the lease.

Note that some of the above provisions are already prohibited
under the Retail Leases Act 1994 (NSW) and retail leases
to which the Act applies may already have these protections.

What can happen if I get it wrong?

In addition to being void or unenforceable, the courts do have
the power now to:

1. make declarations that a term is unfair




2. make orders for redress for loss or damage




3. order an injunction




4. issue penalties:




5. (a) against individuals of up to $2.5 million; and

   (b) against companies of up to the greater of:

   (i) $50 million;

   (ii) three times the value of the benefit obtained by the
   corporations directly or indirectly, if able to be determined (the
   Benefit Multiple Amount); and

   (iii) 30% if the corporation’s turnover during the offence
   period if the value of Benefit Multiple Amount cannot be
   determined.

As a contract may contain multiple unfair terms, multiple
penalties could be applied in relation to the same contract.

What should I be doing?

While there are certain carve outs and exceptions that can apply
under the unfair contracts regime, property owners that are small
businesses or deal with individuals or small businesses generally
should work on the assumption that the regime applies to them and
their contracts, leases and other agreements.

This means that property owners (including vendors and
landlords) should be taking steps, if they haven’t already, to
ensure that their contracts don’t contain unfair terms moving
forward. This would involve, amongst other things:

• commissioning a thorough review of all precedents and
  considering, on a clause-by-clause basis, whether a term could be
  considered unfair and modifying them as appropriate




• providing the other party an opportunity to negotiate the
  contract, rather than providing the contract on a ‘take it or
  leave it’ basis and keeping records of pre-contract
  negotiation




• acting reasonably in contract negotiations




• where a lease or other agreement is due for renewal, consider
  moving existing tenants onto new leases or agreements (that
  don’t contain any unfair terms), rather than simply renewing
  those leases or agreements.

The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.