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Retail Leases

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Retail Leases
The Retails Leases Act 1994 (“the Act”) applies to the leases of retail shops and premises located in a retail shopping centre.

The Act defines a retail shop as a business listed in Schedule 1 of the Act. This includes a wide range of businesses and it’s likely that if you’re engaged in the sale of any goods or services  that your business will fall under the Act.

The Act also applies to a lease of premises in a retail shopping centre. The Act defines a retail shopping centre as:

  • A group of premises where at least five of the premises are retail shops
  • The premises are owned by the same landlord and are,
  • Located in one or more buildings usually joined by a common area.

The Act doesn’t apply to certain retail shops such as retail shops with a square metre area greater than 1000 square metres.

The Act implies a minimum five year term to all leases, unless a certificate is executed by a tenant in the presence of a solicitor waiving their entitlement to a minimum five year term. A minimum five year term under the Act includes both the term of the lease and the term of the option to renew.

The Act does not apply to leases that has a term less than six months.

Disclosure Statement by Landlord before Retail Lease is entered into with Tenant
Before a landlord can advertise a retail shop for lease, the landlord must have:

The landlord is required to give the tenant a landlord’s Disclosure Statement at least seven days before the tenant enters into the lease. The landlord’s Disclosure Statement sets out the essential terms of the lease and any representations made by the landlord or by the landlord’s agent to the tenant. If the premises are in a retail shopping centre, details disclosing trading figures and other matters concerning the operation of the centre must be disclosed to the tenant.

If the landlord fails to provide the landlord’s Disclosure Statement, a tenant may terminate the lease within six months of the lease’s commencement.

A tenant is required under the Act to reply to the landlord’s disclosure statement, setting out any additional matters or corrections to the landlord’s understanding of negotiations as set out in the landlord’s Disclosure Statement.

Security Bonds and Security Deposits
The bond is usually between one to six month’s rent but in most cases is three (3) month’s rent. The bond can be provided in the form of a bank guarantee or cash deposit.

A cash bond must be deposited with the Retail Tenancy Unit for the term of the lease. You don’t earn interest on this money.

Fit out Costs
Tenants generally pay the cost of installing shop fixtures, finishes, fittings and equipment. When the lease has ended, the tenant, unless agreed otherwise by the landlord, must remove the fit-out and return the shop to the condition it was in before the lease began. This is called “make good”.

A contribution to the fit-out cost may be negotiated with the landlord. This contribution may be payable as an upfront lump sum amount before the lease begins, or via regular instalments.

Turnover Rent
The Act allows a landlord to charge turnover rent in addition to the base rent. The turnover rent is based on the profitability of the tenant’s business in a given financial year. If you’re getting charged turnover rent, it’s very important that you speak to our Sanford Legal team because there are certain amounts which will need to be excluded from the calculation of turnover rent.

Rent Reviews
There are restrictions on the method and rate of rent reviews for retail leases. Generally, the base rent may only be adjusted on each anniversary of the lease (some exceptions apply). The landlord cannot reserve discretion as to which of the two methods of calculating an annual rent review will apply.

Outgoings are usually charged by a landlord in addition to the rent. However, the rent negotiated can be inclusive of outgoings. Outgoings must directly apply to the premises and include water rates, council rates, insurance and land tax.

Under the Act, non-specific outgoings include, expenses such as cleaning services or plant and equipment provided by a landlord in a retail shopping centre. These must be calculated according to the proportion of the net lettable area occupied by the tenant over the total net lettable area of the shopping centre.

Other Landlord Charges
Landlords of retail shopping centres are allowed to charge other costs incurred such as centre promotion fees, advertising and marketing costs and contribution to sinking funds for capital replacement and maintenance. The landlord can only charge these costs if certain information is provided to the tenant. Tenants should check with our team if they’re being billed for other charges.

Options to Renew and Market Rent Reviews
An option to renew is a right of a tenant to enter into a lease on the same terms as the original lease and for the length of time specified in the option.

The tenant cannot be in breach of the lease when it exercises any option. That means the rent and all other monies must be paid and all of the tenant’s other obligations under the lease must be met.

The option must be exercised during the option exercise period specified in the lease. This is usually a period of between three to six months from the termination date of the lease. Time is of the essence which means if you try to exercise the option after the option exercise period, then you haven’t validly exercised and your rights under the option will be lost.

Usually, the rent under an option is determined by a market rent review. Market rent is defined under the Act as the expected rent payable by a willing landlord and a willing tenant.

A market rent review under the Act cannot consider certain matters including the goodwill of the tenant’s business. A market rent review must however include consideration of other rent free periods or concessions which have been provided by the landlord of a retail shopping centre to other centre tenants.

The Act sets out the procedure when an agreement can’t be reached between the parties. The market rent must be determined by an independent valuer. The parties may agree to the retail value, being a licensed valuer with five years’ experience in the valuation of market rent for retail shops. If the parties cannot agree, a party can apply to the NSW Civil and Administration Tribunal who will then appoint a specialist retail valuer. The costs of the valuation must be shared equally between the parties. There are grounds for appeal by either party if the specialist retail valuer is disputed.

A market rent review may result in a substantial increase to the rent. A tenant should consult the Sanford Legal team if a satisfactory agreement can’t be reached on market rent.

Interruption to Tenant’s Business and Quiet Enjoyment
A tenant should include clauses in a lease which may interrupt the tenant’s occupation of the premises.

The Act sets out the procedure if a landlord wishes to relocate a tenant in order to refurbish or redevelop a retail shopping centre.

The landlord must:

  • Demonstrate there is a genuine proposal for the work to be performed within a reasonable time;
  • Provide the tenant three months’ notice of the relocation date;
  • Offer the tenant alternative premises on comparable terms of lease; and
  • Pay the tenant’s reasonable relocation costs.

The tenant may terminate the lease within one month of receiving a relocation notice. If the tenant does not terminate the lease within this period, the tenant is deemed to have accepted the relocation offer.

A landlord may include a demolition clause in a lease. The Act sets out the procedure if a landlord proposes to terminate a lease for the purposes of demolishing the premises.

The landlord must:

  • Demonstrate there is genuine proposal for work to be performed within a reasonable time;
  • Give tenants a minimum of six months’ notice of termination;
  • Compensate the tenant for any up-front fit-out costs the tenant has incurred.

A tenant may insure against the loss and disturbance such an occurrence would cause to the tenant’s business.

Damages to Premises
If a retail shop is damaged and the damage is not due to any fault of the tenant, the tenant is not liable to pay rent or outgoings if the tenant is unable to use the premises.

If the damage only affects part of the premises, the rent and outgoings are reduced in proportion to the area damaged or unable to be used as against the total lettable area of the premises.

The tenant can serve a notice on the landlord requesting the landlord repair the damage within a reasonable time. If the landlord notifies the tenant that it considers repair of the damage not practicable or undesirable, the tenant may terminate the lease on seven days’ notice. No compensation is payable by either party should this occur.

Assignment of Lease
The tenant may wish to assign a lease to another person during the lease’s term for a number of reasons.

The landlord may not unreasonably withhold consent to an assignment of a retail shop lease. The landlord has the right to withhold consent if:

  • The proposed assignee seeks to change the retail shop’s use;
  • The proposed assignee has financial resources or retail skills inferior to those of the tenant;
  • The tenant hasn’t complied with the requirements set out in the Act for seeking the landlord’s consent.

These are just some of the matters affecting assignment of a retail leases.

Please be aware that this information isn’t a substitute for the professional legal advice Sanford Legal can provide for you. It’s really only intended for general information purposes. So whether you’re a tenant or a landlord, we strongly recommend that speak with a member of our team before entering into a retail lease to ensure your lease terms meet with your requirements, your business and the Act.


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