5 things to consider when entering into a retail lease – for the savvy tenant!

Given that there are countless retail leases on foot in Australia, it’s not surprising that this is one of the most common areas of small business disputes. Sadly, it is often the tenant who is caught off guard after signing a landlord friendly lease and it’s all too common for tenants to wait until a dispute has arisen before familiarising themselves with their rights and obligations under their retail lease.

Be a savvy and forward-thinking tenant and consider these things before signing a retail lease:

Retail Lease v Commercial Lease

First things first, is the lease you’re entering into a commercial or retail lease? The difference is a legal question and something that you should seek advice about. The consequences of getting it wrong are serious, as the rights and obligations of landlords and tenants can be significantly different under a non-retail lease. This is because state laws have recognised the uneven bargaining position between landlord and tenant and passed tenant friendly retail leasing laws to address this imbalance.

For example, in Victoria a landlord of a retail premises cannot recover land tax  as an outgoing, even if the  terms of the lease allow them to. However, if the lease is not a retail lease, there is no such restriction on the landlord.  Imagine if as a tenant you didn’t know this and paid land tax for years on end!

Each state and territory has its own retail leasing laws and varying definitions of what a “retail lease” is. Therefore, understanding the distinction and what it means to your lease is something you should determine from the onset.

Rent and Rent Reviews

Understanding the amount of rent that you have to pay to the landlord sounds simple right? Yet so many tenants get caught out. An easy error to make is negotiating rent with the landlord and then realising that you have to pay GST in addition to the amount that you’ve just negotiated. You may not have factored this into your expenses and if you have signed the lease, it is a tricky position to get yourself out from.

The other sticking point is how and when the rent will be reviewed. Is it annually or only on the commencement of a further term? Is it by reference to CPI (and do you know what that is) or by a fixed amount? A good exercise to do is to write down what the estimated rent will be each year following the proposed rent review and making sure you will be able to afford this moving forward.

Describing the Premises

It’s exciting scouting out a new office or inspecting a trendy location for your new business. You get to visualise your dreams becoming a physical reality. The real estate agent points out that you can use the storage space in the basement. Wow, that’s a bonus. Also, four of the car parks downstairs will be reserved for you and your staff. Great.

What typically happens is that these finer details (being what you have been told by the real estate agent about the storage space and car parks) don’t always make their way into the lease (or in writing, anywhere). Sometimes even the street address and the address of the property on title are very different and can cause confusion down the line. The description of the premises should be detailed and reflect your understanding of all the space you are renting.   

Make Good Provisions

What is the condition of the premises on the date that you take it over? Is there an existing fit out or will you be installing your own fixtures and fittings (such as office partitions or commercial kitchen)? A retail lease will usually make clear what processes and procedures you will need to go through fitting out your new premises and turning it into your dream office, showroom or cafe.

Fast forward a few years – what happens when the lease comes to an end? Typically, what goes up must come down, or should we say what goes in must come out. A lease should set out what the landlord’s requirements are when the tenant hands the premises back to the landlord. Most leases require you to return the premises to the condition that it was in on the day that you took it over, but how do you even know what that condition was 5, 10 or 15 years down the track? Occasionally, a retail lease will require that you strip the premises and return it to its bare shell, which could be a significant expense to factor in at the end of your tenure in a particular spot. Understanding your obligations before you enter into the lease will help you plan for the future, and your exit.

Default and Termination

What happens if the landlord isn’t meeting their end of the bargain, you can just hold back some rent as payback, right? Wrong! Many tenants think to use rent payments as leverage and find themselves in a fight that they are destined to lose.

On the other hand, do you know what the procedure is if the landlord tried to evict you? Believe it or not, the process to be followed when terminating a retail lease is a source of many disputes, especially with laws in place aimed at protecting tenants from arbitrary termination by landlords.

The terms of each lease must be read in conjunction with each state’s applicable laws to properly understand each party’s rights and obligations when dealing with disputes and bringing a lease to an end. Understanding these provisions and thinking through the different circumstances will help you understand your rights and obligations when dealing with landlords.

If you require assistance with reviewing your retail lease or are in a leasing dispute, please feel free to contact us for assistance.