If you are, or are planning to, lease premises for your business, you have probably heard the terms “retail lease” and “commercial lease”. But what’s the difference? Retail leases differ from commercial leases because they have different regulatory frameworks. 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).
Commercial leases usually apply to premises that are used as a warehouse, industrial site 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.
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 premise is located in a shopping centre. If the same business, however, is conducted in a commercial building with other commercial offices, then the lease for that premises will be commercial.
All leases usually contain clauses for:
- payment of rent;
- rent increases; and
- maintenance and repairs of the premises.
With commercial leases, the extent of the tenant’s liability depends on their ability to negotiate for a level playing field, unlike retail leases, where retail legislation prescribes the majority of leasing provisions.
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.
|New South Wales||Retail Leases Act 1994 (NSW)|
|Victoria||Retail Leases Act 2003 (Vic)|
|Queensland||Retail Shop Leases Act 1994 (QLD)|
|Tasmania||Fair Trading (Code of Practice for Retail Tenancies) Regulations 1998 (TAS)|
|South Australia||Retail & Commercial Leases Act 1995 (SA)|
|Western Australia||Commercial Tenancy (Retail Shops) Agreements Act 1985 (WA)|
|Australian Capital Territory||Leases (Commercial and Retail) Act 2001 (ACT)|
|Northern Territory||Business Tenancies (Fair Dealings) Act 2003 (NT)|
What is a Retail Premises?
As a general rule, if the premises is 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. Further, a dental or accounting practice in a shopping centre will fall under one of the state retail leasing Acts. However, if those same businesses are located outside of a shopping centre, they would not attract the protection offered under retail legislation.
Each state also has exceptions as to what will be considered a retail lease. For example, if:
- the size of the premises exceeds 1,000 square metres;
- a shop in NSW operates within a cinema or bowling alley; or
- the lease is for over 25 years.
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.
If you have not yet taken possession of the premises, the lease will commence as soon as both parties execute 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, can contract out of 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). The law will not interfere with the business arrangements of commercial land and tenants.
Further, retail and commercial leases have three other distinctive differences:
- Disclosure of Information: Retail lease legislation imposes obligations on landlords to provide a tenant with a disclosure statement at least seven days before entering into the lease (except South Australia). 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 will give the tenant a right to terminate the lease, even after the parties agree to it.
- Unconscionable Conduct and Misleading or Deceptive Conduct: Retail leasing premises also receive additional protections concerning unconscionable conduct of landlords.
- 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 can usually negotiate these fees in a commercial lease context.
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. Therefore, if you need assistance reviewing your retail or commercial lease, get in touch with LegalVision’s leasing lawyers on 1300 544 755 or fill out the form on this page.
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