Signing a retail lease? What you need to know…
It’s so exciting when a small business is ready to sign its first lease. But unlike residential leases, which are largely the same, retail/commercial leases can vary hugely.
The devil is in the detail. A lease can be both your biggest expense and one of your most valuable business assets, so it pays to have a lawyer check it over.
Which legislation?
The first thing I check is that the lease comes under the Retail Leases Act 2003. If it does, this Act provides some tenant protections. But not all leases qualify. If it doesn’t, you will need to negotiate for these protections to be included.
The protections for retail leases include:
- the lease must be in writing
- you must be given a copy of the lease and information from the Victorian Small Business Commissioner
- you must be given a disclosure statement at least seven days before the lease starts. This outlines information about the property, outgoings and any surrounding shopping centre.
- a specific procedure if you want to assign your lease
- the landlord can’t force you to move (unless there is a relocation clause in the lease)
- a right to compensation in some circumstances such as disrupted business or the landlord failing to fix damage
- an obligation to mediate disputes before going to VCAT.
Test for a ‘retail lease’
The Retail Leases Act only covers businesses that are wholly or predominantly for the hire or sale of goods in the retail sector, or the retail provision of services, and the rent payments must be less than $1 million per year.
Each lease and its circumstances is assessed individually, looking at the actual and intended use of the premises. ‘Retail’ is defined as the selling of a good or service to an ultimate consumer for a fee or reward.
The legislation does not apply to storage, manufacturing and wholesaling businesses; listed corporations, body corporates or subsidiaries of corporations; or to leases for less than a year.
The usual minimum term for a commercial retail lease is five years. The rent amount cannot be directly related to the turnover of the business. And the lease cannot be between a tenant carrying on business on behalf of the landlord.
Commercial leases compared
Outgoings
Before entering a commercial lease, tenants are usually required to put up security: a three, six or nine-month bank guarantee. And the landlord may want you to pay for the drawing up of your lease agreement, which is likely to be at least $1500-$2000.
It is important to check if the rent includes the landlord’s operating costs (i.e. are you getting a gross or net rental deal?). Operating costs or further outgoings can add tens of thousands of dollars per year. Commercial lease agreements also usually provide for an annual percentage based rent increase. Make sure this percentage is not excessive. I can negotiate with your landlord to cap the percentage after a certain amount of time.
Fit-outs will usually be at your expense, unless you are offering the landlord a long-term lease. At the end of the lease, you may be required to remove any changes you make to the property (even if you think they were improvements). This is called your ‘make good’ obligations.
Often in a commercial lease, landlords and tenants share the cost of maintaining the building and equipment. The lease should spell out who is to maintain and repair the premises, including the heating and air-conditioning systems. It should also state who pays the rates, taxes, building insurance and contents insurance.
Other things to check before signing a lease
- Are the signs your business requires allowed?
- Does the lease (and planning scheme) permit your intended use of the premises?
- What exactly are you renting – – will you have access to hallways, bathrooms, and elevators?
- Term of lease. Landlords would generally prefer a long-term lease. But if you are a new business, a short lease might be better, even if you pay more rent.
- Does the lease allow subletting, should your business fail or you need to move to bigger premises?
- What options to renew the lease exist?
- How can you terminate the lease?
Lease reviews are our bread and butter at Sinclair + May. If you are thinking of moving to new premises, book a free 15-min chat with one of our friendly lawyers here: https://calendly.com/sinclairmay
This is general advice only. Liability limited by a scheme approved under Professional Standards Legislation.
Published Jul 3, 2017
Jessica Kerr is the Director of Sinclair + May, a female-led, boutique commercial law firm based in Melbourne’s inner north. Sinclair + May work with small businesses to ensure their legals are in order. Book a free 15-min chat here to talk with one of our solicitors.
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