Insights / February 6th, 2017

That’s Not Fair! Unfair Contract Provisions. How Do They Affect You?

Late last year the “Treasury Legislation Amendment (Small Business and Unfair Contract Terms) Act 2015” (“UCT Act”) came into force. It prohibits unfair terms in standard form contracts where one party is a small business, including contracts relating to real property. It has implications for many leases. Any leases entered into, renewed or varied will be subject to the UCT Act.

Therefore it is important for Landlords to consider:

  • whether their contract is with a small business;
  • where their contract is a standard form contract; and
  • if any of the terms are at risk of being “unfair”.

What is a ‘small business’ contract?

The UCT Act only applies where one party is considered to be a small business. This will occur if:

  • At the time the contract was entered into, at least one party is a business which employs less than 20 people (including all people employed by the business including full time and part time employees).
  • The upfront price (i.e. annual rent) payable under the contract does not exceed $300,000, or $1,000,000 if the contract duration is more than a year.

What is the ‘upfront price payable’ of a contract?

When determining whether a contract falls under the relevant threshold the upfront price payable is the total value of all payments that:

  • can be calculated with certainty; and
  • are disclosed prior to or at the time the contract is entered into.

For example: The upfront price payable for a three year lease with rental payments of $100,000 per annum increasing by CPI +1% each year would be $100,000 (the rental payments for the first year of the lease). Because the CPI component of the annual rental increase is unknown, it is only the first years rent that can be calculated with certainty and is therefore considered.

That situation can be contrasted with a three year lease with rental payments of $100,000 per annum increasing by 3% each year. In those circumstances the upfront price would be $309,090 as the rental payments for the entire three year period can be calculated with certainty.

Is the upfront price “fair”?

When determining whether or not an upfront price payment term is unfair (e.g. an obligation to pay rent under a lease) terms that form part of the upfront price payable under a contract are not subject to the unfair contract term provisions provided they are fully disclosed at the time the contract was entered into.

What is a ‘standard form’ contract?

The UCT Act will apply to ‘standard form’ contracts. There is no exhaustive definition for what classifies as a standard form contract, however the following factors are relevant:

  • Where one party has all or most of the bargaining power;
  • Where one party is required to either accept or reject the terms of the contract as presented;
  • Where the contract was prepared by one party before any discussion;
  • Where the terms of the contract do not take into account the specific characteristics of another party or the particular transaction; and
  • Where one party was not given an opportunity to negotiate terms.

In a leasing context, quite often a Landlord will offer a lease on a ‘take it or leave it’ basis or present to the Tenant for signing its “standard” or “template” lease. This will fall within the meaning of a standard form’ contract.

Does the contract contain unfair terms?

If we have a small business and a standard form contract, the final step is to determine if any of the terms in the contract are “unfair”. An unfair term is one that:

  • Causes a significant imbalance in the parties’ rights and obligations under the contract;
  • Would cause detriment (whether financial or otherwise) to a party if it were to be relied on, and
  • Which is not necessary to protect the legitimate interests of the party who would be advantaged by the terms.

As stated above the UCT Act does not provide any practical examples of what is considered an unfair term. In the event of a dispute or uncertainty it would be a matter for the Courts to determine what is “unfair”. Until the Courts provide some further clarity, based on the commentary from the ACCC and the objects of the UCT Act the following examples are likely to be considered unfair terms:

Unfair Insurance Requirements

Any requirement for the Tenant to take out insurance in a manner and with an insurer specified by the Landlord.

Indemnity Clauses

Leases in which a Landlord requires the Tenant to indemnify the Landlord for any loss or damage but without any “carve out” for circumstances in which the Landlord may have caused or contributed to the loss. An indemnity clause may also be unfair if the Tenant is required to grant a broad indemnity to the Landlord in circumstances where the Tenant does not have control (i.e. exclusive use) of the premises (this may be the case under a non-exclusive licence arrangement).

Make Good Clauses

Terms which give the Landlord the right to take possession of and deal with the Tenant’s property at the expiry of the lease, without giving the Tenant prior notice, are likely to be considered unfair under the UCT Act. Any provision which permits the Landlord to deal with the Tenant’s property, at the Tenant’s expense, must provide the Tenant with adequate notice and a reasonable opportunity for the Tenant to remove such property, otherwise it is likely to be unfair.

Unilateral Variation of Rules and Regulations

Leases, in particular retail shopping leases, often contain clauses that provide the Landlord power to unilaterally vary the rules of the Centre. Often a lease will state that the Landlord can terminate the lease if the Tenant is in breach of these rules (as varied). Such provisions will need to be reviewed in light of the UCT Act to ensure that there are limitations on the Landlord’s ability to vary the rules and also to ensure the Landlord provides the Tenant with notice before any variation to the rules.

Terms that Limit Works

Terms which state the Tenant must obtain the Landlord’s approval for any works and that such approval is at the Landlord’s absolute discretion are likely to be considered unfair. Requirements for carrying out the works to the Landlord’s ‘satisfaction’ are also at risk of being considered unfair, along with any reference to the Landlord’s consent without the clarification that it be not unreasonably withheld.

What are the consequence of unfair terms and what should you do?

If a term is found to be unfair, it will be deemed void and will not be binding on the parties. That is, the term is not read down to be made “fair” but is struck out completely. For example, if an indemnity clause is deemed unfair the entire indemnity clause will be struck out. This may lead to severe consequences for a Landlord that had sought to rely on the indemnity to recover from a Tenant certain costs or damages incurred.

Many standard form or template contracts have until now been prepared in a manner most favorable to the party that the contract is prepared on behalf of (i.e. the Landlord under a lease). Many of these contracts will need to be amended to comply with the UCT Act.

Accordingly it is strongly advised that Landlords review their existing leases and seek appropriate legal advice.