Before signing a lease for your retail shop, you should ensure that you understand the commercial and legal terms your lease contains. Although each state has different laws that cover retail leases, there are several common terms that you will likely come across. This article will discuss:

  • some of the key terms in a retail lease; and 
  • what you should look out for before signing your lease.

1. Outgoings

As a retail tenant, you will likely need to pay outgoings. These are the landlord’s expenses relating to the building, such as:

  • utilities (e.g. common area electricity, water);
  • council rates;
  • taxes;
  • security; and
  • cleaning.

The outgoings you have to pay will depend on the type of property you are leasing. However, as the tenant, you should be aware that the landlord must ensure that the outgoings are:

  • meaningfully disclosed;
  • related to the shop being leased; and
  • applicable to the management, operation, maintenance or repair of the building or shopping centre.

It is a good idea to ask your potential landlord for an itemised estimate of outgoings for the previous financial year. The disclosure statement the landlord provides should also contain the details of the outgoings you will have to pay. Depending on which state you are in, you may not need to pay outgoings that the landlord failed to disclose.

2. Legal Costs

Often with retail leases, the landlord will be responsible for paying the costs of preparing the lease. However, the landlord may pass on any costs associated with negotiating the lease to you, and many landlords choose to do so. 

For example, if you ask for changes to the lease after returning the disclosure statement to the landlord, you will likely need to cover the costs of making those changes. You should take your time negotiating the commercial terms upfront so that there is less negotiation when it comes time for the lease.

If your lease is to be registered then the tenant will usually cover the fees for lease registration.

3. Make Good

A ‘make good’ term sets out how you must leave the property for the landlord when the lease ends. The extent of the make good is something you should carefully review and negotiate with the landlord before you sign the lease. Typically, you will need to remove your fit-out completely to make good. This means stripping out your shop to a base building open plan layout. This can be a costly exercise.

If your fit-out is expensive and a de-fit is required when the lease ends, then you should ensure that the lease term is long enough to make the investment worthwhile.

4. Assignment and Subletting

Most retail leases will include terms on assigning the lease (i.e. transferring the lease to somebody else or another business).

For example, if you decide to sell your business during the lease term, you would usually want to transfer the lease to the buyer.

The laws in your state will set out what you must do in the case of an assignment. However, it will usually involve the following steps:

  1. the existing tenant (assignor) and new tenant (assignee) obtain the landlord’s written consent to assign the lease;
  2. the assignor requests an updated copy of the disclosure statement from the landlord and provides this to the assignee;
  3. the assignee provides all requested information to the landlord to confirm their financial standing and suitability as a tenant; and
  4. the landlord approves or refuses the request to assign the lease, following the relevant retail leasing laws.

By contrast, subleasing is completely controlled by the landlord and it is up to them whether they will provide you with this right. You should consider what plans you have for your business.

For example, if you are a hairdresser, you may want to sublet additional space to a nail technician to expand your business services.

In cases like this, you should ensure that the lease allows for this possibility and deal with it upfront. If you leave it until later, the landlord may not agree and your business plans may have to change.

5. Indemnities

Indemnity terms in a lease will typically require you to compensate and release the landlord against any loss or damage, particularly damage to the property that was within your control. Before signing the lease, you should seek advice from an insurance broker and ensure that your insurance policies cover what is required by the indemnity terms.

6. Permitted Use of Premises

The use of the premises is an important term that sets out how you are allowed to use the property. You can usually find this term in a schedule to the lease or in the disclosure statement. As the tenant, you will want a broader or general definition of permitted use, as this will offer you more flexibility for your business. The landlord, on the other hand, will typically want a more specific permitted use.

For example, if the lease states ‘café’ as the permitted use, then you must only run a café during the term of the lease. If you decide to start selling coffee mugs and other merchandise, you may be in breach of the lease as the permitted use does not include retail sales.

If this is the case, you should negotiate this term with your potential landlord so that your business can expand in the future.

7. Security

Landlords will commonly require you to provide security under the lease in case any issues arise, such as non-payment of rent. If you are entering into the lease with your company entity, the landlord may require a personal guarantee from the directors of the company. A personal guarantee means that you are personally liable if anything goes wrong, and therefore should be avoided. It is worth trying to negotiate other alternatives, such as: 

  • increasing the security bond; or 
  • a bank guarantee (which is more common these days).

Key Takeaways

Entering into a retail lease can be an exciting step for your business. However, it is important that you understand the key terms under the retail lease and how they may affect your business. This includes:

  • outgoings;
  • legal costs;
  • make good;
  • assignment of the lease and subletting;
  • indemnities;
  • permitted use of the premises; and
  • security.

The key is to carefully review and negotiate these terms before signing the lease to avoid any nasty surprises during the term of the lease. If you have any questions or need assistance with reviewing your retail lease, contact LegalVision’s leasing lawyers on 1300 544 755 or fill out the form on this page.

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