Commission rejects calls for retail tenancy revolution

The Productivity Commission has rebuffed calls by small business and tenants groups for a major overhaul of the retail tenancy market in a draft report released today.

Small retail tenants and their representatives argued in submissions to the commission that theinequality in bargaining power between tenants and shopping centre owners means the tenancy market does not operate fairly or produce good outcomes for consumers.

But in its report, the commission rejects this view, stating that while the “competitive pressures and tensions in the retail tenancy market and the certainty that some businesses will fail have led some participants to suggest that there are fundamental failings in the market”, overall the market is operating effectively.

“Hard bargaining and varying business fortunes should not be confused with market failure warranting government intervention to set lease terms and conditions,” the report says.

The commission says it accepts that in some high-demand shopping centres the balance of power is tilted in favour of centre owners and anchor tenants, but says these “market tensions” would be better dealt with by due diligence and better use of available information by tenants than tougher regulation.

Some of the commission’s recommendations for change may also prove controversial, particularly its view that consideration should be given to doing away with laws that provide retailers in some states with minimum initial lease periods of up to five years.

Also likely to be controversial is its view that a voluntary code of conduct agreed between shopping centre owners and retailers to establish acceptable norms in the landlord/tenant relationship may help to address tenant concerns and lower administration costs associated with leasing.

Further key recommendations include:

• Moves to create a nationally consistent regulatory framework for retail leases.
• Examination of state and local government planning guidelines to free up shopping centre space in in-demand locations.
• Improved communication with tenants on the information and advice resources that are available too them.

Southern Sydney Retailers Association president Craig Kelly says he is “shocked” by the commission’s failure to take up many of retail and small business group’s submissions.

“We don’t have an open market for retail space in Australia – we have all these massive increases in rent at the end of leases simply because of abuses of market power, and I think they must have gone into the inquiry with blinkers on to come up with the response they have,” Kelly says.

The recommendation for a voluntary code of conduct also amounts to little more than a “sham”, Kelly says. “It’s commercial naivety on behalf of bureaucrats to think a voluntary code would have any effect, they’re fine in theory but in reality its optional and if something doesn’t suit, they just won’t go along with it.”

Australian Retailers Association tenancy director Michael Lonie says he is unsurprised by the commission’s findings. “They are economic rationalists and about less regulation, not more,” he says.

Lonie says that while is his still in the process of analysing the 270 page draft report, its recommendations that state planning laws should be reviewed and a voluntary code of conduct examined warrant further investigation.

Milton Cockburn, the executive director of shopping centre owner’s representative body the Shopping Centre Council of Australia, had a positive initial response to the report.

“We’re encouraged by the fact that the commission has generally found the market for retail tenancies is working reasonably well, but we will certainly be studying the report in considerable detail. It’s a thoughtful and thorough report and we look forward to responding to it,” Cockburn says.

The commission will next year conduct public hearings in most capital cities and receive further submissions on its draft report before preparing its final report early in 2008.