A retail lease is a retail premises lease used wholly or predominantly for the sale or hire of goods by retail or the retail provision of services.
Generally, this is entered into through a “retail lease document” in which you as the lessee (or tenant) is given right to exclusive possession of retail premises in return for rent and other promises to the landlord.
How are retail leases regulated in Victoria?
In Victoria, retail leases are regulated by the Retail Leases Act 2003 (Vic) (the Act).
For this reason, as a tenant, you need to be aware of your rights and responsibilities under your lease and the legislation. This will help you avoid potentially costly and time-consuming disputes.
What types of business are covered under the Retail Leases Act?
The Act only covers businesses that are used mainly for the sale of goods in the retail sector. To be covered under the Act, you need to be paying less than $1 million in occupancy costs each year.
In addition, your business won’t be covered if it is:
- not used, or to be used, wholly or predominantly for the sale or hire of goods by retail or the retail provision of services (for example, a storage facility) a listed corporation or a subsidiary of a listed corporation
- under a lease term of less than a year
Signing a lease is a major commitment
Signing a retail lease is a major commitment because it is an enforceable and legally binding document. Generally, these leases also run for 5 years or more so each lease is a long commitment!
So, here are our top ten tips on what you need to consider when entering into a retail lease in Victoria.
Tip No. 1: Make sure the landlord has given you all the documents required by law.
Under the Act, the landlord must provide you with the following documents no later than 14 days before you enter into the lease:
- a copy of the lease
- a disclosure statement
If the landlord gives the disclosure statement and proposed lease less than 14 days before the lease entry date, the lease will start 14 days after the documents are given to the tenant. If the landlord fails to give you a disclosure statement, you may be able to withhold rent. There are specific time limits, so you need to act quickly if you have not received a disclosure statement.
Tip No. 2: Read the draft lease agreement in full and note the terms you want to negotiate with the landlord.
You should note that the lease will generally start when:
- you take possession of the premises, or
- you start paying rent, or
- the lease is signed by both you and the landlord
In Victoria, there are two standard form leases commonly in use – the Real Estate Institute of Victoria lease (generally used by commercial real estate agents) and the Law Institute of Victoria lease (generally used by lawyers). Quite often prospective tenants are presented with leases as if they are non-negotiable. However, you should be aware that these leases are starting points for tenants and they can be negotiated.
You should negotiate the commercial terms of your lease with your landlord before entering into the lease, including:
- the length of the lease
- the amount of rent
- the process of rental increases over time; and
- any special conditions which you wish to include (It could be almost anything! For example, rent-free periods, landlord responsible for building works, etc.)
Closely examine both your rights and those of the landlord. Make sure you understand the obligations of both parties. If there are any special terms or unusual clauses in the lease, talk them over with both your property lawyer and your prospective landlord.
Once you and your landlord agree on the terms of the lease, you should document them in a heads of agreement or letter of offer. The landlord’s agent or lawyer can then use this document to draft the lease.
Under Section 51 of the Act, the landlord is not permitted to pass on to the tenant the expenses for the negotiation, preparation, or execution of a new lease.
Tip No. 3: Review the disclosure statement carefully.
The landlord must provide you with a disclosure statement at least 7 days before you enter into the lease.
The disclosure statement is basically a summary of what you have negotiated and agreed with the landlord. It includes details about:
- the premises, including a plan (if available and the lettable area)
- structures, fixtures, plant and equipment that will be provided by the landlord
- the permitted use of the premises
- the term of the lease and length of any options to renew
- works, fit-out, refurbishment and alterations
- outgoings (costs you must pay), rent, and rent adjustments
You should also find out which repairs and maintenance are included under body corporate fees. There may be certain repairs and maintenance that are rolled into the owner’s corporation fees that should not be passed on to the tenant because they are landlord obligations.
Tip No. 4: Be aware that, as a retail tenant, you are entitled to a minimum 5-year lease.
You should be aware that in Victoria you are entitled to a minimum 5-year lease unless you agree to accept a shorter term.
Can a tenant apply for a shorter lease?
In order to accept a shorter term, you need to apply for a certificate of waiver from the Victorian Small Business Commission.
You should also be aware that if your total term adds up to five years you do not have to apply for a waiver certificate. For example, if the lease is for three years and there is an option for a further two-year term, then, you do not need to apply for a waiver certificate.
Can a tenant cancel a lease before moving in?
Once you’ve signed a lease, it becomes a legally binding agreement. You cannot generally back out of a lease agreement without penalty. Make sure you review and agree to all the terms and conditions on the lease agreement before you sign.
Tip No. 5: Check how much is the rent and how it can be increased.
How will you know if you’re getting a fair rent price? Is the rent unreasonably high or too low to the point that it seems too good to be true?
Learn how rent and outgoings are calculated. Keep an eye out for hidden undisclosed outgoings and other charges such as turnover rent, marketing levy, etc. as these can add up quickly.
Section 35 of the Act requires a retail lease to include details about when rent reviews will take place. The increase in rent should be based on one of the following:
- a fixed percentage;
- an independently published index of prices or wages;
- a fixed annual increase;
- the current market rent of retail premises;
- formula prescribed by the regulations.
Tip No. 6: Check the amount of the security deposit/bond/bank guarantee.
A security deposit, bond, or bank guarantee is an amount of money that you pay the landlord as security for the tenant occupying the premises.
The security deposit gives the landlord a level of protection if you fail to comply with your obligations under the lease. There is no legal requirement for a tenant to pay a security deposit but it is common for lease agreements to include one.
A landlord or a real estate agent acting on behalf of a landlord is required to hold the security deposit in an interest-bearing account. The landlord must account for the interest earned on the deposit but is entitled to hold the interest.
You need to check the amount of the security deposit/bank guarantee. Usually, it is equal to one or more month’s rent. The amount isn’t regulated under the Act. Instead, you need to negotiate the amount with the landlord.
At the end of the lease, if you have performed all your obligations under the lease, the landlord must return the security deposit (including any interest earned) to you.
Tip No. 7: Check the agreement for options to renew the lease.
A. Options to renew
If you want to continue your business beyond the initial lease term, you should negotiate with your landlord to include further options to renew in the lease agreement. The option details should include the following information:
- the date after which you can no longer take up the renewal option
- how the option is to be exercised
- the terms and conditions for lease renewal
- the process of determining the rent payable during the lease renewal term
Having options to renew is usually a preferred choice as it gives you the option to end or keep committing to the lease after a specific period. So long as you have complied with your obligations, the landlord generally must renew the lease if the lease contains an option to renew and the tenant has requested a renewal.
B. No option to renew
If your lease does not contain an option to renew, your landlord must give you written notice setting out their intentions for renewal. The notice will either:
- offer you a renewal of the lease (on terms specified in the notice)
- inform you that they do not plan to offer a renewal of the lease
Your landlord must provide the option to renew or not to renew the lease at least 6 months but no more than 12 months before the expiry of the lease.
If your landlord does not give the notice within this time, the lease is extended by 6 months after the date on which the landlord gave the notice to the tenant.
How long can a tenant stay after the lease expires?
By ‘holding over’ after the initial lease term has ended, the tenant can keep occupying the premises on a monthly tenancy basis.
Tip No. 8: Learn about the licences and permits you may need to run the business.
The licences, permits, and other compliance requirements you will need depend on your business type, activities, and industry. Some situations where you’ll need to apply for a permit to your local council or state government include:
- import/export of goods
- displaying signage on the premises
- preparing and/or selling food/drinks
- selling and distributing liquor and tobacco products
- storing and using hazardous substances
- outdoor seating
Tip No. 9: Be aware of your obligations to restore the premises to the original state at the end of the lease.
You need to check your obligations to restore the premises to the original state at the end of the lease.
Usually, a lease agreement includes make-good obligation clauses. These require a tenant to restore the retail space to its original condition prior to the start of the lease. Obligations may include but are not limited to:
- removing installed partitions and joinery e.g. stairs, doors, etc.
- reinstating fixtures
Some of these requirements to repaint etc might also be included in long tenure leases. Therefore, if you are considering any renovations or have any plans to demolish parts of the premises, you should negotiate that with the landlord prior to entering into the lease agreement.
Tip No. 10: Ask a lawyer to review a lease before you sign anything.
Ensure that everything is in order from a legal perspective by getting a commercial lawyer to review the lease and disclosure statement before you sign them. This could help you avoid a lot of problems further down the track.
Are you thinking about entering into a retail lease in Melbourne or Victoria? At TNS Lawyers, we specialise in providing retail lease clients with cost-effective legal advice. Please call us on +61 3 9052 3214 or email us at email@example.com