Key Points for a Prospective Tenant’s Consideration Before Signing a Retail Lease

Taking out a lease on business premises will be one of the most significant decisions that a business needs to take. As such, it is important to understand what is being taken on and properly investigate the property and lease documents before committing.

In the case of retail leases, there are essential differences from other commercial leases to be aware of. These leases need to be compliant with the Retail Leases Act 1994 (NSW) with 2017 amendments. The Act was intended to give further protections to retail tenants compared to other commercial lessees and added certainty during negotiations. It is important, therefore, to be clear about whether the lease is a retail lease because of the protections and points of difference.

Is the Lease A Retail Lease?

The Retail Leases Act applies to shop premises, including those in a shopping precinct. There are, however, some exceptions which the Act does not apply to:

• leases over 25 years (including options to renew);
• leases for a term of less than six months without any option to renew;
• premises greater than 1000 square meters;
• shops operated within, for example, a cinema operated by the owner of the cinema;
• premises used only for an excluded use as defined in the Act, e.g. vending machines;

Differences Between Retail and Non-Retail Leases

There are several differences between a retail and non-retail lease. In a retail lease, the Act prevents a landlord from charging certain costs to a tenant such as a landlord's legal fees for preparing the lease; mortgagee consent fees; or an amount paid for granting the lease ("key money"). However, the cost of registering a lease is paid by the tenant. Leases with a period of more than three years are to be registered. This adds protection to the tenant's interest.

Unlike a non-retail commercial lease, the required cash security deposit must be lodged with NSW Government’s arrangements. The deposit cannot be called upon without the tenant’s agreement.

When a dispute arises, in a non-retail commercial lease, a party can start proceedings without the need for mediation. For retail leases, mediation processes are expected before a dispute is heard in the NSW Civil and Administrative Tribunal.

As regards transferring a lease, a lessee can transfer the lease to a third party as specified in the governing commercial lease agreement. In a retail lease, the Act governs transfers.

Negotiations with the Landlord

In a retail lease negotiation, the prospective landlord must provide a Disclosure Statement. This document provides relevant detailed information to the tenant. There will be several terms to be negotiated with a prospective landlord. As well as the period of the lease, these will include:

(i) The date for commencing the lease, fitting-out the premises and the necessary approvals. A fit-out period usually occurs at the beginning of the lease. It allows the tenant time to set up the shop. A rent-free period will usually apply. There may also be some work that the landlord needs to carry out that may require a contribution from the tenant. This should be set out in the landlord’s Disclosure Statement.

(ii) The rent to be paid and its frequency. There will also need to be an agreed method for reviewing the rent. The most common method of rent review is by a market rent valuation.

(iii) Options for renewing the lease and method of renewal. If there is an option to renew then a set period will need to be stated under which the tenant must notify the landlord of their intention to take up the option.

(iv) Who will be responsible for the various outgoings? The details of those outgoings additional to the rent should be set out in the Disclosure Statement.

(v) The maintenance arrangements. Tenants typically are only responsible for day-to-day maintenance.

(vi) What can the premises be used for? If the tenant decides to use the premises for a different use, then the approval of the landlord and local Council will be required.

(vii) Does the landlord give consent to assignment or sub-letting and what process is required for obtaining it? If a business is sold, the lease would need to be transferred to the new owner. This will need the consent of the landlord, which should not be unreasonably withheld. Following consent, a Deed of Assignment will be prepared.

(viii) The insurance requirements. Tenants will generally be expected to take out insurance, for example, public liability insurance.

(ix) Both parties’ obligations at the end of the lease. “Make good” requirements mean the tenant must return the shop premises to the same condition it was before the lease commencing, apart from fair wear and tear. The Condition Report completed at the start of the lease provides an important basis for negotiation.

(x) A demolition clause allows a landlord to terminate a retail shop lease if the landlord proposes to demolish or substantially renovate the property. The landlord will be expected to pay a certain amount towards the tenant’s fit-out costs but not, for example, the costs of moving or loss of profits. It may be possible to negotiate removal of the clause or agree on compensation.

What Does It Mean?

A retail lease is a particular type of commercial lease for shop premises. Such leases benefit from additional statutory protections.

There are differences between the non-retail and retail commercial leases. There is more of a consumer protection aspect in a retail lease, with more obligations placed on the landlord.

Contact Our Commercial Property Lawyers, Sydney NSW

It is important to know the State retail lease legislation and be aware if it applies. This is also necessary to be able to check if the landlord is compliant.

Contact Our Commercial Property Lawyers, Sydney NSW

It is important that tenants, and landlords, fully understand their rights and obligations concerning their commercial property lease. At Szabo & Associates Solicitors, we can provide expert advice on all aspects of your retail lease and advise on retail lease disputes. Please contact us on (02) 9046 8466 or fill in the online contact form.