Ruth loves cats. No longer content with watching videos of cats on Youtube and posting cute cat pictures on Facebook at home with her cat Bella, Ruth has grand plans to open a cat café on the Central Coast of New South Wales so everyone can come and enjoy cats and buy some seriously good coffee while cuddling a cat.

Ruth has located suitable premises to open her café and her prospective landlord has given her a disclosure statement and lease. However, this is where it all gets too hard for Ruth. While she is passionate about cats, she is not quite as passionate about leases and she needs help to decipher the lease documents and ensure that the landlord is not taking advantage of her.

The following are key points Ruth must consider before entering into her lease of the cat café.

Retail Leases Act 1994 (NSW) (Act) 

As Ruth plans to open a café, the Retail Leases Act 1994 (NSW) (Act) will apply to the Premises.

The Act provides Ruth with a certain level of statutory protection in relation to things such as disclosure, the landlord being unable to pass on lease preparation and key expenses, and dispute resolution mechanisms.

The Landlord asked that Ruth pay his costs for the preparation of the lease, but after our advice, Ruth knows she does not have to pay these costs under the Act and has told the landlord she will not be responsible for lease-preparation costs.

Disclosure

The Act requires landlords or their agents to make a copy of the proposed retail lease available to any prospective tenant in writing prior to the landlord advertising the premises as being for lease. This is important for Ruth so that she can see the main terms of the retail lease from the beginning. Failure by the landlord to comply with this requirement is an offence under the Act.

The landlord must also provide Ruth with a Lessor’s Disclosure Statement about the lease terms and the retail lease premises together with a Retail Tenant’s Guide (published by NSW Fair Trading) at least 7 days before the lease is to begin.

Ruth must then provide the Landlord with a Lessee’s Disclosure Statement to the landlord within 7 days of receiving it (or within such further period as may be agreed).

The Lease

Ruth must consider the following provisions/ issues before agreeing to and signing her lease:

  1. How will Ruth enter into the lease? Will she enter into the lease in her personal name or incorporate a company to act as lessee? If she incorporates a company to act as lessee, it will limit her personal liability but the landlord has asked that she provide a personal guarantee for the obligations of the company in any event – this exposes her house and car if the business fails. Ruth needs accounting advice to limit her personal debt exposure.
  2. Ruth has only been provided with a 2-year lease term. Ruth does not realise that, under the Act, a retail lease is to be for at least 5 years unless a solicitor or conveyance explains to her how the Act works and provides the landlord with a certificate under section 16 of the Act. After obtaining advice, Ruth wants a longer term (3 years) plus a 3 year option to ensure her business has security of tenure.
  3. The Lease Ruth has been given states that the rent is to increase after the first year by a fixed percentage of 10%. Ruth did not realise that this was far too much and that a more balanced rent increase would have been using the Consumer Price Index or a smaller fixed price increase of 4%.
  4. The Landlord has requested that Ruth supply a bank guarantee equivalent to 6 months rent as security for her lease, believing that the cats might damage the premises. Ruth was unaware that the equivalent of 2 to 3 months bank guarantee was more standard in terms of retail leases.
  5. Ruth has been asked to pay all of the outgoings for the Premises. However, the landlord did not specify details of these in the disclosure statement. Ruth has asked the landlord to specify the exact amount of the outgoings so she is aware of what she has agreed to pay before entering into the Lease.
  6. The lease Ruth has been given states that the lease cannot be transferred under any circumstances. LegalVision advised Ruth this is not in compliance with the Act. We advised Ruth that a landlord can specify in the lease that the landlord’s prior written consent is required for you to assign a lease. However, a landlord can only refuse such consent on very limited grounds and, provided Ruth complies with the procedure set out in the Act in applying for the landlord’s consent to transfer the lease and there are no grounds for refusal, the landlord must provide consent.
  7. The lease states that Ruth requires public liability insurance. Ruth asks whether this is really necessary? Our advice was that this is essential, particularly given Ruth’s proposed Use of the Premises.
  8. The use of the Premises set out in the Lease given to Ruth states only “café”. Ruth needs to make sure that she can use the premises as a “Cat Café”, noting there may be some health requirements in relation to having cats on the premises and Ruth will also require the approval of the Local Council before she can open up trading as a Cat Café. It is crucial that Ruth ensure the lease is subject to Development Approval by the local council. If she signs a lease and this approval is rejected, Ruth will not be able to operate her café. If she forfeits the lease, however, it will be with a large financial penalty.
  9. The Lease states that Ruth cannot affix any signs to the Premises. Ruth wants to put a large billboard above the café so she can let people know where her business is and advertise. Our advice is that Ruth should incorporate signage rights into the lease to ensure there is no dispute later.
  10. Ruth sees that the lease refers to “essential terms” and wonders what that means? We explained to Ruth that essential terms are terms in the lease which, if breached, mean the lease can automatically be terminated by the landlord without notice. Examples of essential terms are rental obligations, the obligation to comply with assignment of lease clauses, the obligation to obtain insurance and the obligation to make good the premises at the end of the lease.
  11. Finally, the Premises Ruth is looking at are old and run down and will need a lot of work for Ruth to be able to open up her cat café. The lease states she must re-paint the premises and re-carpet them at the end of lease. Given the condition of the premises at the start of the lease, our advice to Ruth is to negotiate that the make good clause at the end of lease be limited only to delivering up the premises in the same condition she received them in and that she should not be obligated to undertake a refurbishment of the Premises.

Conclusion

If you are considering opening up a business like Ruth, it is a great idea to have your lease documents looked at to ensure you are getting the best deal possible. Call one of our experienced leasing lawyers today on 1300 544 755.

Emma Heuston

Ask Emma a Question

If you would like further information on any of the topics mentioned in this article, please get in touch using the form on this page.