Comasters Law Firm and Notary Public | Retail and Commercial Leases
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Retail and Commercial Leases

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 Though similar in nature, retail and commercial leases have notable differences which accommodate for their varying purpose.

  1. What is a Commercial Lease?

 

A commercial lease is a contract between the owner and landlord of a commercial property, and the tenant who wishes to conduct business on that property.

 

  1. What is a Retail Lease?

 

A retail lease, on the other hand, is a type of commercial lease where the property in question is used solely or predominantly for trade purposes e.g. opening a clothing store.

 

In NSW, retail leases are governed by the Retail Leases Act 1994 (‘the Act’). Pursuant to the Act, a lease will be a retail lease if the premises are:

 

  • To be used for one of the reasons stated in Schedule 1 of the Act; or
  • Located in a retail shopping centre.

 

Examples of retail shop businesses listed in Schedule 1 of the Act are as follows:

 

  • Bicycle accessories shops;
  • Department stores;
  • Newsagency shops; and
  • Restaurants, cafeterias, coffee lounges, food courts and other eating places.

 

However, even where the above requirements are satisfied, the Act does not apply to leases:

 

  • For a term of 25 years or more (with the term of a lease taken to include any term for which the lease may be extended or renewed at the option of the lessee);
  • Entered into before the commencement of this section;
  • Entered into under an option granted or agreement made before the commencement of this section; or
  • Any other lease of a class or description prescribed by the regulations as exempt in Australia.[1]

 

The Act also excludes the operation of certain retail shops including:

 

  • Shops that have a lettable area of 1,000 square metres or more;
  • Shops that are used wholly or predominantly for the carrying on of a business by the lessee on behalf of the landlord;
  • Any shop within premises where the principal business carried on on those premises is the operation of a cinema, bowling alley or skating rink and the shop is operated by the person who operates the cinema, bowling alley or skating rink;
  • Any premises in an office tower that forms part of a retail shopping centre; or
  • Premises of a class or description described by the regulations as exempt from this Act.[2]

 

  1. What are the Major Differences between Non-Retail Commercial and Retail Leases?

 

To determine whether a lease will be a retail or non-retail (yet still commercial) lease, one should look to the purpose of the lease.

 

Generally, the wholesale, manufacture or storage of goods on a property is not sufficient to deem the property as lettable for retail purposes. In contrast, premises that sell or provide goods and services to the public are likely to be considered a retail property.

 

The major differences between retail and non-retail commercial leases are the additional protections granted to retail tenants. Some of these differences are outlined in sections 9, 11, 12 and 16 of the Act.

 

Section 9 – Providing a Draft Lease

 

A landlord of retail premises must ensure a copy of the proposed lease is made available to any prospective tenant during negotiations.[3]

 

This is unlike the usual procedure for non-retail leases where a draft lease is generally not provided until negotiations have been finalised.

 

Section 11 – Lessor’s Disclosure Statement

 

The “Lessor’s Disclosure Statement” is a written statement containing information and materials which are relevant to the lease.[4]

 

In retail leases, the lessor (or landlord) must give the lessee (or tenant) the Lessor’s Disclosure Statement at least 7 days prior to entering into the lease whereas there is no requirement to provide such a statement to the tenant for non-retail commercial leases.

 

If the lessee is not given a disclosure statement or the statement is incomplete or materially false, the lessee is able to terminate the lease (by notice in writing) within 6 months of commencement unless:

 

  • The lessor acted honestly and reasonably; or
  • The lessee is in a position equivalent to what would have been if the lessor’s failure had not occurred.[5]

 

Section 12 – Paying Undisclosed Contributions

 

Unless disclosed in the Lessor’s Disclosure Statement, any provisions in a retail lease that require the lessee to pay or contribute towards the following are void:

 

  • Finishes;
  • Fixtures;
  • Fittings;
  • Equipment; or
  • Services.[6]

 

As for commercial leases, a lessee may be required to pay or contribute to the above costs since no disclosure statement is provided.

 

Section 14 – Prohibiting Lease Preparation Expenses

 

A lessor must not seek or accept the payment of key-money or lease preparation expenses for a retail lease. Any provisions in the lease to this effect are void.[7] This does not however prevent a lessor from:

 

  • Receiving payment of rent in advance;
  • Receiving a security bond or other performance guarantees;
  • Seeking and accepting goodwill (attributable to the business of the lessor);
  • Seeking and accepting payment for plant, equipment, fixtures and fittings sold by the lessor to the lessee in connection with the lease; or
  • Seeking and accepting payment for the grant of a franchise in connection with the granting of the lease.[8]

 

Expenses incurred during the preparation of the lease for amendments requested by the lessee or prospective lessee are not prohibited unless it is an amendment:

 

  • To insert or vary the particulars of the lease, the rent or the term;
  • To remedy a failure by the lessor to include or omit an agreed term; or
  • Requested before the lessor is given the Lessee’s Disclosure Statement.[9]

 

Section 16 – Minimum Term of Lease

 

Whereas commercial leases can be as short as three (3) years, not including options to renew, a retail lease must have a minimum term of five (5) years.

 

Yet this minimum term of five years can be reduced if a lawyer or licensed conveyancer, not acting for the lessor, certifies in writing that:

 

  • The lessee or prospective lessee requested the lawyer or conveyancer to give the certificate; and
  • The lawyer or conveyancer has explained to the lessee or prospective lessee the effect of the certificate on the application of this section.[10]

 

This certificate is to be given before, or within six (6) months after the lease was entered into.

 

 

Comasters can assist clients in drafting, negotiating and finalising leases (both Retail and Commercial) including the process of registration.

 

References:

[1] Retail Leases Act (No 46)1994 (NSW) s 6.

[2] Ibid s 5.

[3] Ibid s 9.

[4] Ibid s 11 (1).

[5] Ibid s 11(2).

[6] Ibid s 12.

[7] Ibid s 14 (1).

[8] Ibid (3).

[9] Ibid (4).

[10] Ibid s 16 (3).

 

© Comasters November 2016.

Important: This is not advice. Clients should not act solely on the basis of the material contained in this paper. Our formal advice should be sought before acting on any aspect of the above information.