Updates to the unfair contract terms regime: the impact on your standard form lease

Significant changes to the unfair contract terms regime under the Australian Consumer Law were introduced by the Treasury Laws Amendment (More Competition, Better Prices) Act 2022 (Cth) and took effect on 9 November 2023. These amendments require parties to consider whether their form of lease is compliant with the new requirements.

Below, we provide a brief summary of the important changes (including potential penalties for non-compliance) and consider the various lease terms that may require update to comply with the new regime.

What changes have been introduced?

The Australian Consumer Law makes void any term of a ‘small business contract’ if the term is unfair and the contract is a ‘standard form contract’. Recent changes to the unfair contract terms regime include:

  1. Scope of protection – the Act expands the scope of protection offered by the unfair contract terms regime for ‘small business contracts’. The broadened definition captures a lease where one party either is a business which employs fewer than 100 people or has an annual turnover of less than $10 million. The monetary contract threshold has since been removed.
  2. Determining whether a lease is a ‘standard form contract’ – in addition to the previous factors that a court must consider in determining whether a lease is a ‘standard form contract’, the court now also take into account whether one of the parties has used the same lease (or substantially similar terms) before.

A court may also determine a lease to be a ‘standard form contract’ despite there being an opportunity for a party to negotiate alterations to the lease terms or select a term from a range of options determined by the other party.

  1. PenaltiesA landlord may now face financial penalties imposed by the courts for breach of the unfair contract terms regime, with maximum penalties up to the amount of $2.5 million for an individual and for a corporation, the greater of:
    • $50 million;
    • three times the value of the benefit obtained by the corporation directly or indirectly from the unfair term (to the extent this is able to be determined); and
    • if a court cannot determine the benefit obtained by the corporation, 30% of the adjusted turnover during the offence period.

A separate penalty may be imposed for each unfair term proposed.

Which terms of a lease should be considered on review?

We recommend that businesses involved in leasing activities conduct a review of their standard form lease to ensure compliance with the new regime. This review should ensure a fair balance of rights and obligations between the parties to the lease and avoid terms that would unreasonably favour one party over the other.

In the table below we have set out examples of common lease terms which may require specific review or consideration in light of the unfair contract terms regime.

Lease Provision Points to consider
Termination rights Consideration should be given to whether certain termination rights should be available to both parties (eg damage or destruction to the premises or building).

If the termination right is connected to the default of a party, the defaulting party should be given a reasonable period to remedy the default.

Notice periods Ensure any notice period imposed on a counterparty is fair and allows a reasonable period of time for compliance.
Amendment of rules If a landlord is permitted to vary its rules (ie for a centre or building) at its discretion and without providing sufficient prior notice or reasonable time for compliance by the tenant, this may be deemed unfair.
Works to premises, building or centre If the lease permits a party to perform certain works to the premises, centre or building, the other party should be given reasonable notice of such works. There may need to be a requirement on the party performing the works to minimise the disruption caused to the counterparty and other occupiers of the building or centre.
Indemnities and releases Consideration should be given to the scope of the indemnities and releases in a lease to ensure they are not too broad and extend to matters outside the other party’s control. Furthermore, appropriate ‘carve-outs’ for any negligent act, omission or default of the other party should be included.
Act reasonably The lease terms should reflect that a party must act reasonably in exercising its rights under the lease.
Recovery of costs The lease should expressly state that any costs incurred by a party must be reasonably and properly incurred.

At the time of a tenant exercising a lease renewal (or parties varying the terms of the lease), the underlying lease terms will need to be reviewed and updated to ensure compliance with the unfair contract terms.

It is important to note that the unfair contract terms regime does not apply to small business contracts to which terms or matters are prescribed by law (eg retail legislation or prescribed environmental obligations and requirements).

Where to from here?

These amendments mark a pivotal moment in the protection offered for small business contracts in relation to unfair contract terms. Businesses involved in leasing activities should review and update their standard form leases to align with these requirements to avoid financial penalties. If you require any assistance in undertaking a review of your standard form lease, please feel free to reach out to Sarah Roettgers, Matthew Butchard and Faye Winterflood.