Key Differences Between a Retail Lease and a Commercial Lease

In Short

• Retail leases are governed by state-specific retail legislation, providing tenants with additional protections such as mandatory disclosure statements and limits on lease preparation fees.

• Commercial leases are typically used for offices, warehouses or industrial spaces and offer more flexibility, with terms largely determined through negotiation between landlord and tenant.

• Determining lease type depends on factors like the nature of the business, location and state laws.

Tips for Businesses

Before signing a lease, ascertain whether your premises fall under retail or commercial lease regulations, as this affects your rights and obligations. Retail leases often offer greater tenant protections but come with stricter compliance requirements. Consulting a legal professional can help ensure you understand the lease terms and negotiate favourable conditions.

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Table of Contents

• What is a Lease?
• Commercial Leases
• Retail Leases
• 3 Key Differences Between a Retail and Commercial Lease
• Obligations in Standard Commercial and Retail Leases
• Key Takeaways
• Frequently Asked Questions

If you currently, or are planning to, lease premises for your business, you have probably heard the terms ‘retail lease’ and ‘commercial lease’. But what is the difference? Retail leases differ from commercial leases because they have different regulatory frameworks that are outlined by legislation. This article will outline key differences between a retail lease and a commercial lease.

What is a Lease?

A lease is a contract that sets out the rights and obligations of the owner of a property (the landlord or lessor) and the person or entity who will occupy the premises (the tenant or lessee). The lease document will bind both parties, so it is important that both parties negotiate the lease prior to entering into any contractual arrangement.

Commercial Leases

Commercial leases usually apply to premises that are used as a warehouse, industrial site, manufacturing plant, distribution centre or an office in a commercial building with no retail activity. The distinction is in the use of the premises and if any form of buying and selling to the public is to take place at the premises, then it may be considered a retail lease.

Features of a Commercial Lease

The retail versus commercial lease distinction is often blurred for businesses that provide services (i.e. dentistry practices or travel agents), and the test relies on their location. A business premises will be considered retail (and therefore protected by retail legislation) if the premises is located in a shopping centre. However, if the same business is conducted in a commercial building with other commercial offices, then the lease for those premises will be commercial.

All leases usually contain clauses for:

• payment of rent;
• rent increases; and
• maintenance and repairs of the premises.

Retail Leases

A retail lease is a lease of a business premises where the permitted use is for selling goods. These shop premises are usually located in shopping centres, protected under state-based retail Acts. Each Act has different criteria as to what is considered a retail lease. You should refer to the relevant Act to see if your permitted use falls under the classification of being a retail lease.

What are Retail Premises?

As a general rule, if the premises are in a shopping centre (a cluster of five or more shops) and predominantly used for selling goods or services, then the arrangement is likely to fall under one of the state or territory retail leasing Acts.

Each state also has exceptions as to what will be considered a retail lease. For example, exceptions may apply if:

• the size of the premises exceeds 1,000 square metres;
• a shop in NSW operates within a cinema or bowling alley;
• the tenant is a listed corporation; or
• the lease is for over 25 years.  

How to End a Lease Factsheet

A factsheet that sets out the three ways to end a commercial lease in Australia: surrendering your lease, assigning it or subletting it.

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When Do You Enter Into a Retail Lease?

It is important that you know you are in a retail lease, because your landlord will be subject to additional obligations. Under the Retail Leases Act 1994 (NSW), a retail lease commences when a person enters into possession of the retail shop or begins to pay rent as a lessee under the lease.

3 Key Differences Between a Retail and Commercial Lease

Although commercial and retail leases have many similarities, they have distinct legal differences. State-specific retail legislation governs retail leases, whereas state-specific property and conveyancing acts regulate commercial leases. Additionally, a commercial lease, unlike a retail lease, may contract out of some sections contained in the property and conveyancing acts. Here, the underlying assumption is that a retail tenant has unequal bargaining power to its landlord (usually a corporate shopping centre owner).

Further, retail and commercial leases have three other distinctive differences:

1. Disclosure of Information: Retail lease legislation imposes obligations on landlords to provide a tenant with a disclosure statement before entering into the lease. A disclosure statement is a summary of the commercial terms of the lease. It provides additional information about the shopping centre and all costs payable under the lease. Failure to disclose certain information may give the tenant the right to terminate the lease, even after the parties enter into it.
2. Unconscionable Conduct and Misleading or Deceptive Conduct: Retail leasing premises also receive additional protections concerning unconscionable conduct and misleading or deceptive conduct of landlords.
3. Lease Preparation Fees: In a retail lease, most states do not allow the landlord to charge the tenant for the landlord’s lease preparation or mortgagee consent expenses. Comparatively, parties will usually negotiate these fees in a commercial lease context.

Obligations in Standard Commercial and Retail Leases

Some standard obligations that are generally found in leases include that the tenant must:

• only use the premises only for a ‘permitted use’ as stated in the lease or agreed with the landlord;
• pay the rent on time and at the amounts agreed;
• reimburse the landlord for the cost of utilities attributable to the leased space;
• provide a suitable security bond, bank guarantee or personal guarantee to the landlord;
• keep the premises clean and in good working condition at all times;
• conduct internal maintenance (like internal painting);
• keep the premises secure when not in use (correctly close and lock premises); and
• repair any damage done to the premises by the tenant or their visitors.

Key Takeaways

There are significant differences between a retail and commercial lease. Retail landlords and tenants should understand what is permitted under the retail legislation regarding their lease terms. They should also understand the consequences of noncompliance with the retail legislation. In some instances, the tenant has a right to early termination or compensation. 

On the other hand, commercial leases are ‘free for all’ and require careful negotiations on the part of the tenant to ensure that the lease term is not onerous or heavily favouring the landlord.

If you need help with your business structure, 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