In Short
- Your lease may include a covenant to trade, requiring you to keep your business open during specified hours. This is common in retail leases but less so in commercial or industrial leases.
- Breaching a covenant to trade, such as closing during required hours, can lead to serious consequences, including lease termination or legal action.
- Before signing a lease, carefully review any obligations to trade and negotiate terms that align with your business strategy.
Tips for Businesses
If your lease includes a covenant to trade, ensure you understand your obligations before signing. If you anticipate needing flexibility, negotiate terms upfront or seek legal advice. Unexpected closures could put you in breach, so check whether your lease allows for temporary shutdowns due to renovations or other circumstances.
Whether you are required to keep your business open depends on the terms of your lease. There is no obligation under Australian legislation for a lease to contain such a clause. It is, however, in the lessor’s interest, specifically where the premises are included in a shopping complex. As a lessee, you must carefully consider your contractual obligations, financial considerations and the strategic interests of your business when entering into a lease agreement that contains a covenant to keep trading. This article explains what a covenant to trade is and how this may affect your business.
What is a Covenant to Trade?
A covenant to trade (otherwise known as a keep open covenant or trading hours covenant) requires you, as the lessee, to actively operate your business and to keep the premises open for trade during specified hours and/or days.
Importantly, the covenant is different to the permitted use of the premises or how the lessee is to conduct itself as lessee.
When Might I Be Required to Continue Trading?
Various advantages to the lessor arise when you continue to trade. Specifically, for a retail shop lease, more lucrative benefits contribute to the vibrancy and foot traffic of the retail precinct. A retail shopping centre with many closed shops or empty premises indicates an unsuccessful shopping centre.
On the other hand, these factors are less important for other uses of premises, including:
- manufacturing;
- wholesale;
- professional; or
- office use.
While commercial and industrial leases may contain permitted use clauses, they generally do not extend to mandating specific trading hours or active trade like retail shop leases. This reflects the different nature of a retail and commercial/industrial lease.
Continue reading this article below the formWhat Constitutes a Breach of the Covenant to Trade?
What constitutes a breach of the lessee’s covenant to trade depends on the language of the lease agreement and the circumstances of the lessee’s breach. The most common acts and/or omissions that constitute a breach are:
- failing to open during required trading hours;
- abandonment of premises; or
- change of the permitted use (if the trading covenant specifies the type of business the lessee must conduct on the premises).
A factsheet that sets out the three ways to end a commercial lease in Australia: surrendering your lease, assigning it or subletting it.
What Remedies Are Available to the Landlord?
If a tenant breaches the covenant to trade in a lease agreement, several remedies may be available to the lessor. The types of remedies available depend on the severity of the breach on the landlord’s commercial business and finances and the terms of the lease agreement. Generally, the landlord may be entitled to:
- terminate the lease and re-enter the premises;
- sue for damages or losses such as lost rental income, lower rental income from an incoming tenant, reduced foot traffic impacting nearby tenants’ business efficacy or reputational harm to the precinct;
- apply and be granted injunctive orders requiring the tenant to fulfil its obligation to trade from the premises; or
- recover legal costs or ancillary expenses incurred in connection with enforcing the tenant’s obligation to trade.
Key Takeaways
While a landlord may not force you to trade at law, the covenant to trade may form part of the terms in your lease agreement which, upon signing, becomes an obligation you will be bound to fulfil. Prior to entering into a lease, it is important to consider the implications of agreeing to be bound by a covenant to trade.
If you are entering a lease, our experienced leasing lawyers can assist as part of our LegalVision membership. For a low monthly fee, you will have unlimited access to lawyers to answer your questions and draft and review your documents. Call us today on 1300 544 755 or visit our membership page.
Frequently Asked Questions
Yes, you can negotiate with your landlord to exclude a covenant to trade from your lease. While landlords in shopping centres may prefer to include such clauses to maintain foot traffic, you can discuss alternative terms, such as flexible trading hours, to better suit your business needs.
It depends on your lease terms. Some agreements allow for temporary closures due to renovations, emergencies or unforeseen circumstances, while others require you to seek the landlord’s approval. If you are unsure, review your lease or seek legal advice to avoid potential penalties.
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