A guide to retail leases
The law recognises that there are different types of leases based generally on the use of the premises. In broad terms there are 3 basic types:
- Commercial; and
NSW (along with other states) has legislation that regulates residential and retail lease.
The Retail Leases Act 1994 NSW (the Act) is the relevant legislation that governs retail leases in NSW.
What is a retail shop lease
A retail shop lease is a lease of a “retail shop”. The Act defines a retail shop as premises that:
- Are used, or proposed to be used, wholly or predominantly for the carrying on of one or more of the businesses prescribed for the purposes of this paragraph (whether or not in a retail shopping centre), or
- Are used, or proposed to be used, for the carrying on of any business (whether or not a business prescribed for the purposes of paragraph (a)) in a retail shopping centre.
The list of prescribed business are listed here.
The Act regulates the relationship between landlords and tenants of retail shops. It provides for rights and obligations between the parties.
In very general terms, the Act protects tenants from landlords and provides a minimum safety net that landlords are not permitted to contract out of in their leases.
One protection the Act offers is a compulsory disclosure statement.
At least seven days before the lease begins the landlord must give the tenant a landlord’s disclosure statement. This statement sets out important facts about the shop and the lease.
Within seven days of receiving this statement, the tenant must give the landlord a tenant’s disclosure statement.
If the shop is in a shopping centre, look for extra items that must be included in the landlord’s disclosure statement, if they are available to the landlord. These include:
- The annual sales of the centre
- turnover for specialty shops per square metre, using at least three categories (food, non-food and services)
- Centre traffic count
- Details of fit out construction standards
- Details of when the leases for major tenants end.
Read the landlord’s disclosure statement carefully. Check that it includes all the agreements you reached during negotiations and any promises made. Make a note in the tenant’s disclosure statement of all verbal commitments made to you by the landlord or the landlord’s agent. Tell the landlord immediately if you don’t understand or don’t agree with their statement. If you need to, ask the landlord for a new disclosure statement.
Lease preparation costs
The landlord pays the cost of preparing the lease, unless the tenant asks for it to be changed after the tenant’s disclosure statement has been returned to the landlord.
The tenant pays stamp duty (if any) on the lease and registration fees, if the lease is to be registered. Leases with a lease period of more than three years, including any option period should be registered to protect your interests.
Rent and outgoings
Rent is one of your largest ongoing costs and is normally paid monthly in advance.
Even if you have financial problems, you still must pay the rent and use the shop only for the business stated in the lease. If you sign a lease saying that you will keep actively trading in the lease period, you cannot close your shop.
In addition to the rent, some leases require the tenant to pay outgoings for the premises as well. Outgoings are expenses of the landlord the tenant has agreed to pay under the lease. Lease-related outgoings are usually major costs for the tenant. You need to understand these costs before signing a lease, and make plans to meet these payments.
The landlord may ask you for some form of security when negotiating the lease. This security may be:
- A cash bond, which must be deposited and held by the Retail Tenancy Unit of Fair Trading NSW;
- A third party guarantee, which is a promise by an individual to pay the landlord if you break the terms of the lease;
- A bank guarantee, which is a promise by your bank to pay the landlord an amount up to an agreed limit if you break the terms of the lease. You usually have to give the bank some security to obtain a bank guarantee.
The Act says that the Registrar of Retail Tenancy Disputes provides mediation services for disputes between the landlord and tenant of a retail shop lease. The Registrar will use mediation to try and resolve the dispute. Mediation is an effective and cost efficient way of resolving disputes. A neutral mediator helps both parties try to negotiate a solution. There is a cost for both landlord and tenant for using the services of a mediator. Litigation may be necessary, but other avenues for resolution should be explored first if at all possible as litigation tends to be a longer more expensive process where the outcome is not assured.