Time to review your template contracts and precedent leases or risk parts being unenforceable

The ACCC has been exercising its powers on unfair contract terms in standard form consumer and small business contracts, and has turned its attention on serviced office leases. Its recent success in ACCC v Servcorp [2018] FCA 1044 is a good prompt to review template contracts and precedent leases for unfair provisions – or be exposed to a challenge by the ACCC, a finding that they are unenforceable, and the associated costs.

What happened in ACCC v Servcorp?

Servcorp Limited and its subsidiaries Servcorp Parramatta Pty Ltd and Servcorp Melbourne 18 Pty Ltd are in the business of providing serviced office spaces and virtual office services such as office suites, secretarial services, IT and communication services in locations across Australia. The ACCC contended that a number of the contracts entered into by Servcorp Parramatta and Servcorp Melbourne were void under the Competition and Consumer Act 2010 (Cth) (ACL) because the services contracts:

• were small business contracts (a contract for the supply of goods or service where at least one party is a business that employs less than 20 people and the upfront price payable for the contract does not exceed $300,000 or the contract does not exceed $1 million if the duration is more than 12 months);
• were standard form contracts (this is a rebuttable presumption under the ACL); and
• contained unfair terms (which would cause a significant imbalance of rights and obligations, were not reasonably necessary and would cause detriment to a party if relied upon).

Although each services contract was entered into prior to the commencement of the relevant provisions of the ACL, being 12 November 2016 (Commencement Date), each services contract was renewed after the Commencement Date, and thereby, captured under the ACL.

Servcorp did not challenge the ACCC's allegations. The parties jointly sought and obtained orders which:

• declared that the unfair terms in the services contracts were unenforceable;
• required Servcorp Parramatta, Servcorp Melbourne and Servcorp Administration Pty Ltd to establish and implement a program to facilitate compliance with the ACL; and
• required Servcorp Parramatta and Servcorp Melbourne to pay the ACCC's costs of $150,000.

What sort of terms were considered "unfair" in this case?

Section 25 of the ACL sets out examples of the kinds of terms in a small business contract that may be unfair. In this particular case, the Court found nine terms which were considered unfair terms:

1. Services Continuation: if either party does not give notice to terminate the services contract, then at the expiry date, the services contract will continue for the duration of the original term of the services contract at a service fee as determined by Servcorp.

   The court held that the automatic renewal clause allowed Servcorp to unilaterally vary the price payable under the contract without providing the client with a right to terminate at the commencement of the new term. The client is locked into a new agreement for the full term of the contract.

2. Insurance: the client agrees to not make any claim against Servcorp's landlord under the Headlease. The Court held that the limitation on the client's right to sue another party creates a significant imbalance in the parties' rights and obligations. Justice Markovic also noted the lack of reciprocal limitation on Servcorp.
3. Services: the client agrees to pay all charges at a rate stipulated by Servcorp from time to time. This clause gave Servcorp the unilateral right to vary the price payable without providing the client with any notice. There is also no limitation on Servcorp to act fairly or reasonably.
4. Notice: a termination notice is only deemed to have been served on Servcorp if a confirmation of termination letter is received by the client from Servcorp. This clause allows Servcorp to determine whether the client has exercised a termination right in the specified timeframe.
5. Headlease: if the client carries on illegal activities in breach of the Headlease, then the services contract terminates immediately. This clause allows Servcorp to terminate the agreement even where the breach is not a material breach and the client may not have been notified or be aware of the breach or even been given a chance to remedy the breach. This clause also lacks transparency.
6. Termination: Servcorp has the right to terminate the services contract at any time by giving 1 month's written notice. This right can be exercised without cause or reason with no right to compensation to the client. The client does not have a reciprocal right to terminate.
7. Security deposit: if the client does not request a refund of the security deposit within 360 days of termination, the security deposit is forfeited to Servcorp. There is no obligation on Servcorp to return the security deposit to the client or to notify the client of its forfeiture.
8. Indemnity: Servcorp accepts no liability whatsoever in relation to theft, loss, or damage during the client's occupation. With the exception of gross negligence or wilful misconduct, Servcorp also accepts no liability in relation to loss, damage or alternation of any data. There is no corresponding clause which limits the client's liability to Servcorp.

Penalty: if the client persuades another client to move to a competitor, the client must pay Servcorp an amount of US$15,000 as a penalty. The penalty is a set amount regardless of whether Servcorp suffered any loss or damage. This clause also lacks transparency as to its practical application.

What does this mean for landlords?

Although a number of the above clauses are not common in commercial leases, we have seen termination and indemnity clauses in commercial leases that are similar to those in the Servcorp case.

Currently, the ACCC and ASIC are restricted in their compliance and enforcement powers under the ACL because their investigative powers are triggered by "contraventions" or "possible contraventions" of the law. As the use of unfair contract terms is not prohibited by the law, it is not possible to contravene these provisions of the law.

The Treasury Laws Amendment (Australian Consumer Law Review) Bill 2018 (Cth) which was passed on 18 October 2018 however will allow the ACCC and ASIC to conduct more extensive investigations by allowing the regulators to request information from parties to ascertain whether a particular contract term is unfair.

With the commencement of the Bill, regulators are likely to increase the number of investigations to ensure compliance with the ACL. Landlords should act now and review their precedent commercial leases, particularly with respect to termination and indemnity clauses that could be considered to be unfair under the ACL.

Please contact us if you would like our assistance with review of your precedent leases.

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