Commercial Leases – What protections are there for small businesses?

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Many small businesses lack the time, resources, expertise and bargaining power to negotiate changes to terms specified in standard form contracts and more often than not are finding themselves trapped or at a loss as a result.

Whilst it is always imperative to ensure that any contract entered into is effectively negotiated before signing on the dotted line, protection against unfair contractual terms previously provided to individual consumers has since been extended to certain small businesses.

The Treasury Legislation Amendment (Small Businesses and Unfair Contract Terms) Act 2015 (Cth) (the Act) allows a court or tribunal to determine if a contract term is unfair and if found to be unfair, provisions making such a term unenforceable or void.

For the Act to apply the following criteria must be met:

  • one party to the contract must be a small business; and
  • the contract is a standard form contract.

The Act will apply to contracts entered into or renewed after 12 November 2016.

What is a small business?

For the purpose of the Act a small business is determined by two thresholds:

  1. at the time the contract was entered into at least one party to the contract is a business that employs fewer than 20 persons; and
  2. either the upfront price payable under the contract does not exceed $300,000.00 or the contract has a duration of more than 12 months and the upfront price payable under the contract does not exceed $1,000,000.00.

There are some specific contracts that have been excluded from the Act, however, these are not relevant in the context of commercial leases.

What is a standard form contract?

Unfortunately, there is no clear definition for what a standard form contract is, however, a number of factors are to be taken into consideration including:

  • the relative bargaining power and opportunity to negotiate upon the transaction taking place;
  • if the contract was pre-prepared by one party;
  • if the contract was presented as a take it or leave it contract;
  • if the terms of the contract either do not consider the characteristics of the parties to the transaction or consider characteristics of a non-related third party.

Given that the determination of whether a contract is a standard form contract is largely circumstantial it is important to document all correspondence had during the transactional process.

What is an unfair term?

Ultimately, the court or tribunal will determine whether a contract term is unfair though consideration of the following will be had:

  • whether the term is transparent;
  • if the term causes detriment;
  • if a term would cause a significant imbalance in the rights and obligations under the contract; and
  • whether the term is necessary to protect the legitimate interests of a party who would be advantaged by such a term.

Further guidance as to what may be considered an unfair term can be found in the Competition and Consumer Act 2010, Australian Consumer Law in addition to Australian Securities and Investment Commission Act 2001 (Cth).

The 2-year Review…

In November 2018, 2 years following the operation of the Act, the Treasury opened a review into the Act allowing for submissions to be made on the current thresholds set in addition to the coverage of the Act.

Multiple submissions were made from a variety of sources wherein key issues were identified with the operation of and actual protection afforded by the Act.

It is anticipated that the Treasury will make recommendations which further expand the reach of the Act as well as the consequences of breaching the Act, however, no report has been published as at yet.

Conclusion

While the Federal Government is ensuring that small businesses are afforded better protection when entering into contracts this should be seen as a last resort.

It is always best to seek legal advice from the onset to assist in identifying any unfair terms as well as ensuring that the lease apportions both the risk and liability.

If you need assistance in this area please do not hesitate to contact our office on (02) 9264 4833.

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