Retail Lease

17 November, 2016

Most boutiques and shops in NSW would be classified as a retail shop and would likely be subject to the provisions of the Retail Leases Act 1994 (“the Act“).  The Act governs the relationship between the Landlord and the Tenant of Leases which fall under the terms of the Lease.

Both the Landlord and the Tenant should be aware of their respective rights and obligations prior to entering into a Retail Lease and should obtain appropriate financial and legal advice regarding the document.

Although most shops and boutiques would be covered by the Act, Sections 5 and 6 of the Act mandate those which are excluded from coverage of the Act.  These include Leases with respect to premises which are over 1,000m² of lettable area, Leases which are over 25 years or more and also Leases which had began prior to the commencement of Section 6. Unlike Commercial Lease Agreements, a Retail Lease begins before the Lease is signed in the event that either the payment of rent or possession of the shop is taken, even if the Lease has not been signed.

It is an offence under the Act if the Landlord does not provide a copy of the Lessor’s Disclosure Statement to the Lessee, or if there is a serious misrepresentation contained in that Statement. This may give rise to the right of the Lessee to terminate the Lease within the first six (6) months by giving written notice to the Landlord to that effect.

Prior to entering into a Retail Lease, the Landlord must give to the Tenant a copy of the Disclosure Statement together with a Retail Tenant’s Guide within certain time frames which are provided for by the Act.  The form of both the Lessor’s Disclosure Statement and the Lessee’s Disclosure Statement is provided for by the Act and such forms are available on the website from the Office of Fair Trading New South Wales.

Under Section 16 of the Act, it is required that a Retail Lease be for a minimum period of five (5) years, unless the Landlord is provided with a Section 16 waiver which is given to the Landlord upon the Lessee receiving advice with respect to the Section by their solicitor or their conveyancer.

It is an offence under the Act for either party to misrepresent or mislead the other party. Such an offence may make that party liable to compensation for damages suffered as a result of the misrepresentation to the other party.  This is important as misrepresentations included in a Lessor’s Disclosure Statement can, in certain circumstances, entitle the Lessee to terminate the Retail Lease within six (6) months of the Tenant entering into such Lease.

Fit out costs can be quite expensive and they are commonly attributable to the Tenant being liable for the costs of those works.  For this reason, it is pertinent that the parties are quite clear about the specification of the works which are required prior to the commencement of the Retail Lease in order to avoid disputes which may arise as to whether the works were necessary or not.  The Act provides that a maximum amount for the costs of these works is agreed to in writing by the Lessor and the Lessee prior to the commencement of the Lease.  This means that the Act prohibits the Lessor from attempting to charge for works which exceed the maximum agreed value in writing.

The Act strictly prohibits Landlords of Retail Leases from asking or accepting ‘key money’ from the Lessee or otherwise including clauses in the Lease or Contract which refer to the payment of key money to the Landlord.  Key money may be defined as a “premium, non-repayable bond or otherwise… or any benefiting connection with the granting, renewal, extension or assignment of a lease.”

It is common for a bond to be requested by the Landlord in respect to a Retail Lease and these are usually given either in the form of a cash bond, which is to be lodged by the Landlord with the New South Wales Retail Bond Scheme or a bank guarantee which is provided in lieu of a cash bond.  Banks issue bank guarantees under which they guarantee to the Landlord the performance of the Tenant to the terms of the Lease.  It is worth noting that if the Landlord requests that the bank pay the money under the guarantee, the bank must do so, regardless of the merits of the Landlord’s claims.

Another common feature of Retail Leases, in our experience, is the insertion of relocation and/or demolition clauses.  As the name suggests, a relocation clause allows the Landlord to relocate the premises or terminate the Retail Lease prior to its expiry, usually because the Landlord is undertaking renovations.  The Act will only permit the insertion of the relocation clause on the basis that the Landlord gives at least three (3) months written notice to the Tenant in relation to any move.  In accordance with the Act, the Landlord shall pay the reasonable costs of the Tenant’s relocation which can be agreed upon by the parties or alternatively, by a quantity surveyor which will work them out.

The Act also permits a Retail Lease to contain a demolition clause which enables the Landlord to end the Lease if they require the shop to be vacated for works.  The Landlord is obliged to provide at least six (6) months written notice that the Lease will end because of demolition.  During the six (6) month period the Tenant may end the Lease with a seven (7) day written notice to the Landlord.

If the Retail Lease includes an option to renew, then the Landlord will be obliged to provide the Tenant with a new Lease on the terms required by that option.  However, if there is no such provision for renewal then the Landlord is not obliged to offer the Lessee a new Retail Lease.  The Act requires the Landlord, between six (6) to twelve (12) months before the expiry of the Retail Lease, to write to the Tenant and either:-

  1. Offer renewal or extension of the Retail Lease on terms specified in the notification; or
  1. Inform the Tenant that the Landlord does not propose to offer renewal or extension of the Retail Lease.

Negotiating and drafting the terms of a Retail Lease can be quite a daunting task and it requires the right legal advice to ensure that your interests, whether they be as a Landlord or a Tenant, are protected.  The experienced, friendly and professional team at Access Law Group can assist you with this process and help you to ensure that the terms as a party to a Retail Lease are as favourable as possible.