Top 12 Tips for Landlords on Leasing Retail Space

At TNS Lawyers, we are one of the Melbourne law firms that specialise in advising both landlords and tenants on retail leases. Here are our top ten tips on what you, as a landlord, need to consider when entering into a retail lease in Victoria.

Tip No. 1: Check whether your premises are retail premises or commercial premises.

In Victoria, retail leases are regulated by the Retail Leases Act 2003 (Victoria) (The Act). For this reason, as a landlord, you need to check whether your premises are regulated by the Act. The Act does not apply to:

Premises in a building that are wholly or predominantly used for the provision of retail services other than those located on the first three storeys of the building
Barristers’ chambers
15-year leases or longer where they impose substantial works or financial obligations on the tenant
‘Market land’ as defined by the Melbourne Market Authority Act 1977 (Victoria).
Local council premises used for community or charitable purposes
Bodies corporate or companies or corporations whose securities are listed on a stock exchange outside Australia

Tip No. 2: Be aware of your rights and responsibilities under the Retail Leases Act 2003(Vic).

Under the Act, you must provide the prospective tenant with:

a copy of the lease
a disclosure statement which includes information that allows a tenant to make an informed decision about entering into the lease
a Victorian Small Business Commission Information Brochure

This must be done at least seven days before you enter into the lease. If you fail to provide a tenant with a disclosure statement, the tenant may be able to withhold rent after notifying you. You also will need to:

Provide the tenant with a copy of the lease within 28 days of signing the lease
Repair and maintain the premises, structure, appliance, fittings, and fixtures provided under the lease
Provide annual estimates of outgoings and reconciliation statements
Hold a security deposit in an interest-bearing account
Pay for capital costs, the cost of preparing the lease, and costs of complying with the Act
Give reminder notices about lease options and renewals (if these notices aren’t given, the lease can be extended automatically)
Not unreasonably withhold consent to transfer or assign the lease

In addition, under the Act, the following outgoings cannot be passed onto tenants:

Land tax
Contributions to a sinking fund for capital costs
Capital costs
Expenses that do not benefit the premises
Management fees, unless the management fees related to the management of the building or shopping centre in which the premises is located
Interest on borrowing

These requirements automatically form part of the lease. As a landlord, you cannot ‘contract’ out of these requirements by altering the terms of the lease.

Tip No. 3: Be aware of what needs to be included in the disclosure statement.

What is a disclosure statement?

A disclosure statement is a document that you, as a landlord, must give a tenant when entering into or renewing a lease so that they can understand, at a glance, the key elements of the lease.

What should the disclosure statement contain?

The disclosure statement may include details about:

The terms or duration of the lease
Whether there are options for further terms
The occupancy costs for leasing the premises (including rent and outgoings)
Specific information for shopping centre leases
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
Works, fit-out, refurbishment, and alterations

Are there more than one kind of disclosure statement?

Yes, there are 4 kinds of standard disclosure statements:

Non-shopping centre retail premises
Shopping centre retail premises
Renewal of lease
Assignment of lease with an ongoing business

What kinds of timings are associated with disclosure statements?

If you are signing a new lease, you must provide a disclosure statement to the tenant at least 7 days before the signing of a new lease.

If a tenant exercises an option to renew a lease or has the right to do so, you must provide a copy of the renewal of a lease disclosure statement to the tenant at least 21 days before the end of the current term of the lease.

If you and the tenant agree to renew the lease, the landlord must provide a copy of the renewal of a lease disclosure statement to the tenant within 14 days of you and the tenant having agreed to renew the lease.

Tip No. 4: Be aware that tenants are entitled to a minimum 5-year lease.

When tenants enter into a retail lease, they are entitled to a minimum 5-year lease unless they agree to accept a shorter term. In order to accept a shorter term, the tenant needs to apply for a waiver certificate from the Victorian Small Business Commission. You should also be aware that you do not have to apply for a waiver certificate if the tenant’s total term adds up to 5 years. For example, if the lease is for 3 years and there is an option for a further 2-year term, then the tenant does not need to apply for a waiver certificate.

Tip No. 5: If you want your tenant to cover outgoings, these need to be specified in the lease.

Outgoings are costs payable relating to the premises or in the case of a multi-occupancy property, such as a shopping centre, the premises, and the property. They include, amongst other things:

Water
Rates
Council rates
Owner corporation fees

Tip No. 6: Be aware of when you can transfer the cost of outgoings to a tenant.

In certain situations, the costs of outgoings can be transferred to the tenant. However, you will need to specify these in the lease and the disclosure statement must provide estimates of outgoings that the tenant is expected to pay under the lease. This must be done before the lease is entered into and one month before the end of the landlord’s accounting periods. You also need to be aware that a tenant is not required to pay for outgoings if they have not been provided with an estimate.

Tip No. 7: Be aware of how to handle a security deposit, bond, or bank guarantee.

What is a security deposit, bond or bank guarantee?

A security deposit, bond, or bank guarantee is an amount of money that the tenant pays you as security for the tenant occupying the premises. The security deposit gives you a level of protection if the tenant fails to comply with their 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 a security deposit.

How should you handle a security deposit, bond, or bank guarantee?

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 and deal with it as money paid by the tenant to form part of the security deposit. Usually, the security deposit can range from one month’s rent to 6 month’s rent or longer. The amount isn’t regulated under the Act. Instead, you need to negotiate the amount with the tenant. At the end of the lease, if the tenant has performed all of their obligations under the lease, you must return the security deposit to the tenant (including any interest earned).

Tip No. 8: Avoid any confusion about who pays for repairs and maintenance.

When it comes to repairs and maintenance for retail properties, there can be confusion about who is responsible for what. Both you and the tenant need to understand their legal obligations and what they need to do when there is a need for repairs or maintenance. Under the Act, you, as the landlord, are responsible for repairs and maintenance. This means that, even if the lease includes provisions for repairs and maintenance, the legislation will always override them.

What are your responsibilities as landlord?

As landlord, you are required to ensure that the following are kept in the same condition as when the lease was entered into:

The structure of the premises (e.g. walls and roof)
The fixtures in the premises (e.g. items belonging to the landlord such as built-in shelving)
The plant and equipment at the premises (e.g. the air-conditioning system)
The appliances, fittings, and fixtures provided by the landlord under the lease as relating to services such as gas, electricity and water

However, you are not responsible for maintaining those items if the need for repair arose out of the tenant’s misuse of them or the tenant is entitled to remove the item at the end of the lease.

What are the tenant’s responsibilities?

The tenant is responsible for keeping the premises clean and in good order, subject to ‘fair wear and tear’ over the term of the lease.

Tip No. 9: Be aware of how options and renewals for retail leases work.

You may want a retail lease to include an option to renew. This is something you will need to negotiate with the tenant before entering into the lease. As a landlord, so long as the tenant has complied with their obligations, you must renew a lease if the lease contains an option to renew and the tenant has requested this option.

How do options to renew work?

Under the Act, when the lease contains an option for the tenant to renew, the lease for a further term, you, as a landlord, must:

Notify the tenant in writing reminding them of the date after which the option is no longer valid
Give this notice at least 6 months but no more than 12 months before the date the option is no longer valid

However, if the tenant exercises the option before the tenant received the notice from the landlord, you are not required to provide the notice.

What if there is no option to renew in the lease

When the lease does not contain an option to renew a lease for a further term, you must give written notice to the tenant, setting out your intentions for renewal. The notice will either:

Offer the tenant a renewal of the lease
Inform the tenant that you do not plan to offer them a renewal of the lease

You must provide the option to renew or not renew the lease at least six months but not more than 12 months before the expiry date of the lease. If you do not give the notice within this time, the lease is extended by 6 months after the date on which you gave the notice to the tenant. If you fail to provide the notice within the notice period and the tenant does not want the lease to be extended beyond the expiry date, the tenant can give you written notice to terminate the lease. The date of termination must not be any earlier than the date of expiry of the original lease.

Tip No. 10: Be aware that asking the tenant to pay key money is prohibited.

Key money is money (generally a premium and a form of inducement) paid to a landlord by a person wishing to rent a property. Under the Act, seeking or accepting key money or any consideration for the goodwill of any business carried on at the retail premises is prohibited. This covers landlords, prospective landlords, and anyone acting on their behalf. A retail lease is void when it includes provisions for the payment of key money or consideration for goodwill.

Tip No. 11: Be aware of the situations where you can refuse consent to transfer a lease.

You need to be aware of your rights as a landlord when a tenant requests to transfer a lease. The tenant’s request to transfer the lease must be in writing. It must also include information about the financial resources and business experience of the proposed tenant. As landlord, you can withhold consent to a transfer of the lease on the following grounds:

The proposed tenant wants to use the premises in a way that is not permitted under the lease
You do not believe that the proposed tenant has sufficient financial resources or business experience to meet the obligations under the lease
The tenant has not complied with the reasonable assignment provisions of the lease
Where the assignment involves the sale of an ongoing business, the tenant has not provided the proposed tenant with business records for the past three years

Once you have received the tenant’s request to transfer the lease, you must give the tenant a timely response.

Tip No. 12: Be aware of your options if you end up in a dispute over rent with your tenant.

When there is a disagreement about market rent between a landlord and a tenant, the Victorian Small Business Commission can assist parties by appointing a specialist retail valuer to determine the rent. However, it is worth trying to come to an agreement with the tenant because the cost of a rental determination by a specialist valuer can be significant. This is because it is based on the time and effort involved in the valuer satisfying their obligations under the Act.

Are you a landlord considering entering into a retail lease in Melbourne or Victoria? At TNS Lawyers, we specialise in providing not only retail lease tips for landlords but also cost-effective legal advice. Please call us on +613 9052 3214 or email us at info@tnslawyers.com.au

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Top 12 Tips on Retail Leases for Landlords