An Overview of Retail Leases
Commercial leases form part of many business transactions. When leasing commercial property, it is important for both landlords and tenants to understand the relationship they are entering and the rights and obligations they each have. A commercial lease governs such matters.
Some commercial leases are classified as ‘retail’ and, in New South Wales, are governed by the Retail Leases Act 1994 (NSW) (the ‘Act’). A retail lease is essentially a commercial lease regulated by the Act.
The Retail Leases Amendment (Review) Act 2017 which commenced on 1 July 2017 aims to enhance transparency during the leasing process and streamline some of the key features of retail leasing. This article provides a brief overview of retail leasing and explains some of the important changes impacting retail leases.
Landlord’s key requirements for retail leasing
A landlord must provide all information relevant to a prospective tenant’s decision about whether to enter or renew a retail lease. For a new retail lease the following documents must be available before the landlord or agent offers to lease retail premises:
- a draft copy of the proposed lease;
- a disclosure statement;
- the NSW Retail Tenant’s Guide, which outlines the rights and obligations of retail tenants and landlords and explains some commercial matters.
These requirements are widely referred to as a landlord’s disclosure obligations.
The disclosure statement outlines important information about the lease and includes details about:
- the premises to be leased, amenities, shared facilities and any other items included such as air conditioning or other services;
- the term of the lease and renewal options;
- the rent payable, rent reviews and the method for calculating reviews;
- the tenant’s estimated liability for itemised outgoings;
- tenant’s fit out requirements;
- relocation or demolition clauses and details of any future works planned;
- specific information for shopping centre leases such as trading hours and details of other retail shops, leases, etc.
The lessor disclosure statement must be provided to a tenant at least seven days before the lease commences.
Key changes introduced
The characterisation of a property as a ‘retail premises’ is usually obvious by the nature of the property itself and its location. Retail premises largely include shops and outlets situated in a retail centre and / or utilised for selling, hiring or providing goods and services to the public.
Certain premises, although located in a retail shopping complex, are now excluded from the Act. These include premises in which ATMs, vending machines, storage lockers and digital display screens are situated. Market stalls of a temporary nature are also excluded from the Act.
No minimum lease terms
Retail leases previously needed to be for a term of at least five years unless the tenant obtained a solicitor-verified section 16(3) certificate waiving that requirement. Traditionally, this was to allow tenants the opportunity to develop longevity and goodwill in a business. The requirement however was frequently contracted out of by agreement between the parties and a retail lease no longer has a minimum term requirement.
Leases for a term exceeding three years must be lodged for registration within three months after being signed by the tenant and returned to the landlord. The landlord must also provide the tenant with a copy of the fully-signed lease within three months of having received it from the tenant.
The Act provides some leeway for delays due to the need for a landlord to obtain mortgagee consent to the lease and for delays beyond the control of the landlord.
Compensation for termination within six months
Failure by the landlord to issue a lessor disclosure statement within seven days prior to the lease being entered or for providing a materially false, misleading or incomplete disclosure statement enables a tenant to terminate the lease within the first six months.
The Act now provides that tenants who validly terminate a lease in such circumstances have the additional right to claim compensation for expenses reasonably outlaid in entering the lease including recovery of fit-out costs.
Disclosure statements and outgoings
Disclosure statements play an important role in the retail leasing process and must set out the tenant’s liability for outgoings and estimate the cost of those items.
New provisions preclude a landlord from requiring a tenant to pay for an outgoing that has not been included in a disclosure statement. Further, landlords are restricted to claiming only the estimated amount of an outgoing noted in a disclosure statement in circumstances where the actual cost exceeds the estimated cost and there are no reasonable grounds for the estimate provided.
The restriction does not apply to taxes, rates or levies imposed under legislation and not anticipated or effective prior to issuing the disclosure statement.
The definition of outgoings now specifically includes fees charged by the landlord in connection with the management, operation, maintenance or repair of the retail shop building or land.
Disclosure statements may be amended by agreement between the parties after the lease has commenced – any changes will be effective as determined in the agreement. Additionally, the New South Wales Civil and Administrative Tribunal (NCAT) may order the rectification of a disclosure statement or deem that a disclosure statement has been provided in certain circumstances.
The jurisdictional limit for resolving retail lease disputes at NCAT has increased from $400,000 to $750,000.
Online transactions are clearly excluded from calculating percentage turnover rent. Except when goods relating to the transaction are delivered to the leased premises for collection, or where the online transaction occurs whilst the customer is on the premises. The landlord is prohibited from requesting information about online transactions unless they fall into the exempted categories noted above.
A demolition clause allows the landlord to terminate a lease if the building in which the leased premises is situated is to be demolished. These provisions have been unclear in the past. The definition of demolition has been amended to clarify that ‘repair, renovation and reconstruction’ works may invoke a demolition clause.
This means that only part of a building needs to be the subject of demolition work for a landlord to rely on a demolition clause in the lease.
Reforms to the Retail Leases Act 1994 have introduced changes to the retail leasing process. Leasing documents and procedures should be carefully reviewed to ensure compliance with the Act. Parties should be conversant with their respective rights and obligations.