Finding a location for your business can be stressful. Not only are you signing up to a long-term financial commitment, but the lease can also contain onerous or hidden terms. We have compiled 10 frequently asked questions to help you navigate the key issues you should consider before signing a lease.
Does Retail Leasing Legislation Apply?
There are two types of commercial leases:
- retail, and
Retail leases, unlike commercial leases, offer greater protection to retail tenants under state specific retail legislation (see table below).
The landlord has certain obligations towards retail tenants and cannot:
- charge the tenant key money (i.e. a sum of money the tenant pays upfront for the provision of the lease which is not a guarantee or a deposit);
- recover its lease preparation costs from the tenant (except in South Australia where the landlord can recover up to half of these costs); or
- withhold its consent to an assignment of the lease unless it provides reasonable grounds.
Retail tenants should also ensure the landlord provides them with a disclosure statement generally seven days before the commencement date of the lease.
What State is Your Business Located?
Each state abides by its own rules for retail leases. These differences become very important if you intend to open multiple stores across Australia. For instance, Schedule 1 of the Retail Leases Act 1994 (NSW) contains a specific list which sets out every type of retail shop business that the Act protects. If your business does not fall under the list, the legislation does not apply. In Victoria, however, the definition is much wider. It extends to any premises used wholly or predominantly for the “sale or hire of goods by retail or the retail provision of services”.
State Retail Legislation
|VIC||Retail Leases Act 2003|
|NSW||Retail Leases Act 1994|
|SA||Retail & Commercial Leases Act 1995|
|WA||Commercial Tenancy (Retail Shops) Agreement Act 1985|
|ACT||Leases (Commercial and Retail) Act 2001|
|QLD||Retail Shop Leases Act 1994|
|NT||Business Tenancies (Fair Dealings) Act 2003|
|TAS||Fair Trading (Code of Practice for Retail Tenancies) Regulations 1998|
What is an Unfair Contract Term Under my Lease?
Tenants should also familiarise themselves with the unfair contract terms legislation that came into effect on 12 November 2016. These provisions help to protect small businesses (i.e. 20 employees or less).
If a term would cause a significant imbalance between the rights of the landlord and the tenant, it may be considered unfair. For instance, unfair terms may include clauses that:
- restrict a tenant’s right to claim compensation from the landlord;
- appoint the landlord as the tenant’s power of attorney if they default on the lease; or
- terms that allow the landlord to grant an easement over the premises.
Do I Need to Register My Lease?
If a tenant registers their lease, a notation will appear on the landlord’s certificate of title over that piece of land. This is beneficial for tenants particularly if the landlord decides to sell the property because any new purchaser (i.e. the new landlord) must then recognise the lease.
There are certain circumstances where registration is not necessary. Some states will automatically protect leases with terms under a certain number of years. This will vary from state to state. For instance, tenants in NSW and QLD do not have to register a lease if the term is less than three years (including the option term). Tenants in SA, on the other hand, do not need to register a lease that is less than one year. In Victoria, all leases are protected regardless of the term length. As a result, tenants rarely register a lease in Victoria.
Do I Need to Seek Professional Advice?
We advise that tenants obtain professional advice before signing the lease to ensure they understand their rights and obligations. In some cases, depending on the terms of the lease, tenants can negotiate the removal of onerous terms.
Most leases are over three years and attract substantial obligations. It may then also be prudent for tenants to obtain financial advice from an accountant.
Who is Responsible For Executing the Documents?
Parties must prepare various documents and follow certain procedures to execute a lease. As a guide, you can expect the following:
- The landlord (or their lawyer) prepares the lease and gives it to the tenant (together with a disclosure statement if it is a retail lease).
- The tenant obtains professional advice regarding the lease and, if necessary, negotiations occur.
- The tenant must provide all documents to the landlord before gaining access to the premise. These normally include a bank guarantee/security deposit, initial rent deposit, certificate of currency for insurance and the fully executed lease.
- The landlord is responsible for obtaining mortgagee consent (if necessary) and registering the lease if required.
What Key Clauses Should I Look For in the Lease?
We have summarised the key clauses tenants should look for in their lease in the table below.
|Term||The length of the term, options to renew and holding over provisions.|
|Rent review||Typically falls on the anniversary of the lease’s commencement date and can take the form of a CPI increase, a market review or a fixed percentage increase, or a combination of these regimes.|
|Outgoings||The landlord may sometimes require the tenant pay operating expenses of the building (or outgoings) in addition to the rent.|
|Tenant obligations||This clause differs in each lease. Standard obligations usually include:
|Demolition||The landlord has the right to terminate the lease early if they propose to demolish or remodel the premises.|
|Assignment and/or Subletting||This clause sets out the circumstances in which the tenant can assign the lease or sublet to another party. The tenant will usually require the landlord’s reasonable consent.|
|Default||The landlord can terminate the lease where the tenant is considered to have breached an essential term of the lease. While events of default vary, typical examples include:
How Much Does My Lease Cost?
Leasing a premises requires a significant financial commitment on the tenant’s behalf.
Before a tenant receives access to the property, the landlord will require they provide the following:
- a bank guarantee/security deposit (generally equivalent to three months’ rent); and
- an initial rental deposit (usually your first month’s rent).
In addition to monthly rent payments, a tenant may need to pay other costs, such as:
- outgoings/operating expenses;
- promotional fund contributions; and
- turnover rent (particularly if the premises is a shop that is part of a shopping centre).
These costs can add up quickly.
If the lessee is a corporate lessee, the landlord may also require the directors provide a personal guarantee. Directors should always seek advice regarding their liability under any such guarantee.
Do I Need the Mortgagee’s Consent to Register the Lease?
Parties must obtain consent from any relevant mortgagee (if applicable) to register the lease. It is usually the landlord’s responsibility to get this consent, but the tenant may be required to cover the cost.
Where Do I Go To Resolve a Dispute?
If a dispute arises about a retail lease, each state provides a dispute resolution procedure under the relevant state legislation. For instance:
- the Queensland Civil and Administrative Tribunal in QLD; and
- the NSW Civil and Administrative Tribunal in NSW.
If you are a tenant entering into a commercial lease, remember the following points:
- Determine whether your lease is a retail lease. Retail tenants receive additional protection under state-based legislation.
- Know which legislation applies to your premises.
- Always obtain professional advice to sort out any hidden or unfair terms in your lease, and be aware of the key terms that your lease contains.
- Understand the process so that you know what’s coming next.
- Be prepared for the cost.
If you have any questions or need assistance reviewing your lease, get in touch with our commercial leasing lawyers on 1300 544 755.
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