Entering into retail lease can have considerable financial implications on both you and your business. This article provides a guide on what a retail lease is, and some of the key things you should always take into consideration when signing a retail lease. This is a non-exhaustive list, and you should always speak to a specialist retail property lease lawyer before signing a lease.
What is a retail lease?
The Retail Leases Act 1994 (NSW) regulates certain types of leases.
It will depend on your use of the premises or the location of the premises (retail shopping centre) as to whether you are a tenant protected by the provisions of the Retail Leases Act. A list of businesses protected by the Retail Leases Act can be found in Schedule 1 of the Retail Leases Regulation 2022 and the definition of a retail shop in the Retail Leases Act.
Commercial terms in retail leases, cannot contain provisions inconsistent with the provisions set out in the Retail Leases Act. If they do, the provisions in the lease which contravene the Retail Leases Act, can be void to the extent of the inconsistency.
Unfortunately, we see many retail leases, with provisions inconsistent with the Retail Leases Act.
It is crucially important as a tenant or a landlord to engage a lawyer who has experience in retail leasing.
Finding the premises for your retail business - Commercial terms
You have found the premises you are wanting to operate your business from, what next?
Retail leases will typically be negotiated directly between the landlord, their leasing agent and the tenant. Sometimes the parties might engage a real estate agent or tenant representative to negotiate the commercial terms on their behalf. This might include valuations of what might be considered fair market rent, whether or not the rent includes outgoings, there is a rent fee period or fit out period, as well as other terms and conditions.
Normally, you negotiate the commercial terms (sometimes called a heads of agreement) of the lease with the leasing agent or the landlord and when the commercial terms are agreed by the parties, then the commercial terms are normally signed by the parties or at least agreed.
We understand most people are not familiar with leases or the impact this can have on you and your business in the future. We highly recommend that our clients engage us, when they are finalising their negotiation of the commercial terms of the lease with the leasing agent or landlord, to ensure that they get the right advice from the onset.
It is difficult to change the main commercial terms of a lease after you have signed the commercial terms as you already agreed to the main commercial terms of the lease and the lease is drafted by the leasing agent or landlords solicitor reflecting these commercial terms. These are items such as option terms, rent increases, fit out period if applicable, make good provisions, personal guarantees etc.
After this is signed or agreed, a disclosure statement and a lease is drafted by the leasing agent or the landlord’s solicitor incorporating the commercial terms agreed by the parties.
A disclosure statement is a requirement of the Retail Leases Act and includes a summary of the terms and conditions of the lease agreed between the parties and also sets out a detailed breakdown of costs to the tenant, breakdown of estimated outgoings if applicable, existing landlord fixtures plant and equipment in the premises, operating hours and will also provide some landlord disclosures such as alteration works planned or known to the landlord to the premises, building/centre including surrounding roads during the terms or any further terms of the lease.
The disclosure statement must be served on the tenant at least 7 days prior to the lease being signed and commencement of the lease. The Retail Leases Act sets out the prescribed form of the disclosure statement i.e what needs to be included in this disclosure statement.
Common retail property lease terms
Most retail property leases will contain the following terms:
Term. This is the length of the retail lease and might include the initial term of the lease, but also any option to renew the retail lease.
Option lease.
Rent. The amount of rent payable on the first year of the lease and when it needs to be paid.
Annual increase of the rent. This could be a fixed percentage, CPI or market increase.
Outgoings. Who is responsible for payment of different outgoings. This can include things like water rates, council rates, strata contributions, insurance premiums, fire safety and land tax.
Security. Does the tenant have to provide the landlord with security? It is common to see things such as a security deposit, bank guarantee, or personal guarantee.
Make good obligations - What needs to happen at the end of the lease, such as removal of fittings and fixtures, or obligations to repaint or restore the premises to its original condition.
Insurance obligations on both the Landlord and the Tenant.
Mechanisms to work out market rent, which is common on the exercise of an option lease.
Any other obligations of the parties, such as fit out requirements.
Indemnity and liability provisions – who is liable if someone injures themselves in the premises?
Permitted use of the premises – this is important as you need the landlord’s approval to change this during the term of the lease and they may not agree. You need to describe this as broad as possible in the lease to allow you flexibility.
How long are retail leases?
The length of a retail lease is dependent on what is negotiated by the parties. It is common to see lease periods for 3-5 years, with additional option periods available to the tenant.
Sometimes lease arrangements can last for 10-15 years or more, after taking into consideration the option periods granted to a tenant.
Due to the lease lasting so long, it is essential to speak to a specialist retail leasing lawyer to ensure that the terms are correct from the outset, as you may be stuck with those terms for a very long time.
What is a retail lease option to renew?
The parties to a retail lease will agree to the length of the lease term. Many leases will also include options for the tenant to extend the term for a longer period. This is usually to the benefit of the tenant, who has no obligation to exercise the option, however is able to do so if they want to stay in the premises. If a tenant validly exercises an option to renew a retail lease, then the landlord must continue to allow them to continue to lease the property.
Options are in your favour, and you should always try and negotiate an option term as it will be up to you as to whether or not you exercise your option term.
How much is a retail lease bond?
How much of a bond is required for a retail lease is a matter for negotiation between the lessor and lessee.
It is common for a landlord to get an understanding of the financial circumstances and the business experience of a potential tenant before agreeing to lease a retail property to them. This is because a retail lease is a long-term financial commitment, and it is important that the tenant is able to meet that commitment.
In circumstances where a landlord is unsure whether a tenant will be able to meet its obligations under the retail lease, it is common to see higher amounts of security to be provided, ranging from 4-6 months’ worth of rent.
On the other end of the spectrum, it is also possible to see security of 1-3 months’ rent being provided.
Security under a retail lease is often provided by way of a cash deposit, known as a security deposit which is lodged with the rental bond board or a bank guarantee.
Unlike a commercial lease, retail tenants are protected by the retail leases act which prevents the landlord from holding a security cash bond. The landlord or their leasing agent must submit the bond to the retail bond board. The retail leases act prevents the landlord holding the bond, unless of course they are entitled to it, as a result of the tenant’s breach of the lease.
Retail lease, can the rent be uncertain?
With a retail lease, landlords cannot insert ratchet provisions. Ratchet provisions are provisions which change the rental amount and causes uncertainty. For instance, a ratchet clause in a lease would read:
‘rent to be increased by 4% or CPI (Sydney) whichever is the higher.’’
This is a ratchet clause and is void in a retail lease.
Landlord fees to prepare the lease
The landlord is not able to pass their legal fees for preparing a lease onto a retail tenant, only the changes requested by the tenant after the lease is issued.
This is different to commercial tenants. Commercial tenants can be charged the landlords legal fees for preparing, negotiating and finalising the lease.
The landlord, however, pass on costs where the tenant requests a variation to the lease, assignment of a lease, subletting of a lease, surrender of lease, fit out supervision for their consultants or where the tenant is in breach of their lease.
Who is responsible for capital cost
The Retail Leases Act provides that the landlord is responsible for capital work carried out to the premises unless of course they are required due to damage caused by the tenant or their visitors, contractors etc.
What happens when a retail lease expires?
The terms of the lease agreement will determine what happens at the end of a retail lease. Sometimes a tenant will be able to continue to stay in the premises, often on a month-to-month basis, known as ‘holding over’. Other times, the tenant will need to vacate the premises.
Sometimes the rent increase on a hold over basis can act as a penalty on the tenant for not negotiating a new lease. We have seen rent on a hold over lease increase from the previous rent by 8%.
Your leasing lawyer should always negotiate this before the lease is entered into as in our experience people do enter into this hold over phase which is not ideal in any event as caused uncertainty for both the landlord and the tenant and may even affect the landlord’s lending capability.
It is common to see a requirement for a tenant to ‘make good’ the premises at the end of the lease. This is often done by restoring the premises to a base shell by removing the tenant’s fit out, or by restoring the premises to the condition it was in at the start of the lease.
The lease might also include certain requirements to redecorate the premises, such as by repainting or reflooring the premises.
These provisions should be negotiated by your leasing lawyer before the lease is entered into taking into consideration the state of the premises when the tenant first entered into the lease.
What is the role of a retail lease lawyer?
A retail lease solicitor acting for a landlord will typically be responsible for preparing the retail lease agreement.
A retail lease solicitor acting for a tenant will usually review the document that has been prepared by the landlord’s leasing lawyer and will provide advice to the tenant on their obligations.
Both sets of retail lease lawyers will ensure that the commercial terms are incorporated into the final lease agreement, and will often be required to negotiate the finer details of the legal agreement on behalf of their clients.
What is the cost of a retail lease lawyer?
The cost will usually vary depending on the length and complexity of the lease documentation, the amount of negotiation that might be required, the commercial terms (such as the rent payable under the lease), and the seniority of the property lawyer that is representing you.
At Thornton + King our real estate lawyers have deep expertise in retail lease transactions and are able to provide fixed price quotations to act on the preparation or review of retail lease documents.
What is a retail lease fit-out?
Depending on the premises being leased, and the use that is intended for that premises, the parties may need to alter and fit out the premises. For example, often retail premises may be provided as a ‘base shell’ and it will be the tenant’s responsibility to reconfigure it in a way that is acceptable to their proposed use.
The Lease Will Contain Provisions such as:
What works can be done to the premises;
When those works can be done;
Who is responsible for doing those works;
What approvals might be required (such as the from the landlord or the council);
Who is responsible for getting those approvals.
Every premises and every lease is unique, and its crucial to undertake deep due diligence on both the premises and the lease documentation prior to signing a lease.
You must always make enquiries with the local council to determine, the use rights of the premises you are looking to lease, as you may be required to obtain council approval for your use of the premises as well as your fit out.
At Thornton + King we have numerous Accredited Specialists in Property Law. Our expert retail leasing lawyers have decades of experience preparing, reviewing, and negotiating retail leases. If you’d like to work with us, give us a call or submit an enquiry now.
