Deciding to set up your own business is a momentous decision and settling on a retail shop lease is vital in ensuring its success. A lease agreement is at the core of the relationship between the landlord and you. Our experienced lease property lawyers have put together this article to explore tenant’s rights in retail shop leases.

The Legal Framework

Retail shop leases in NSW are governed by the Retail Leases Act 1994 (“the Act”) Here are some initial points to note:

  • Most shops are covered by the Act – those excluded are shops with a lettable area of 1,000sqm or more, and leases with a term of 25 years or more
  • The proposed retail shop lease together with Lessor’s Disclosure Statement should be made available to prospective tenants in writing to encourage transparency of the terms and conditions
  • Obligations under a retail shop lease may start even before the lease is signed (such as starting rental payments or taking possession)
  • A retail shop lease is to be for a minimum of five years, unless you give the landlord a certificate stating that you elect to waive that minimum period in favour of lesser terms
  • The Act prohibits landlords from asking for ‘key money’. Any non-refundable payments are void
  • A lease for premises in a retail shopping centre will usually set out the core trading hours which must be within the trading hours permitted by the relevant council and/or any other relevant authority
  • Failure to receive a Lessor’s Disclosure Statement, or where there is a serious misrepresentation contained in the Lessor’s Disclosure Statement, may give you the right to terminate the retail lease within the first six months, by giving notice in writing
  • As a tenant, you are required to give a Lessee’s Disclosure Statement to the landlord within a certain time after receiving a Lessor’s Disclosure Statement
  • The Landlord is expected to present you with a Retail Tenant’s Guide within reasonable time

Preparations before Signing

Financial

The duty to pay rent regularly is a key term of a retail shop lease. Late payment of rent allows a landlord to take possession of the shop and lock you out (without written notice). Thinking about how much rent you are agreeing to pay is therefore vital. It is also important to remember that it is usual for the landlord to request for a cash bond or bank guarantee to be provided upon entering into a rental shop lease which will be withheld in case of unpaid money or unperformed obligations during or at the end of the retail shop lease. If you give a cash bond, the landlord must lodge it with the Office of NSW Small Business Commissioner. If there are disputes, the bond is held by the Office of NSW Small Business Commissioner until the matter is resolved.

Making sure that your business has sound financial backing is another preparatory essential. Appoint a professional to advise you on whether the business is a good investment and understand that even with the best advice, unexpected events can happen.

Council Checks

Local councils require written consent for certain types of businesses in certain localities. You should check with the local council before you sign a sign retail shop lease to see if written consent is needed for the type of business that you plan to run. The same applies if you are planning to do a shop “fit out” or building works – check with the council’s duty planner to see whether you need to lodge an application for development consent.

During Tenure

If a chosen location is extremely vital for your business, be aware of clauses that permit the landlord to relocate your premises or to terminate the retail shop lease before the expiry of its term, usually because of the landlord’s own renovation or demolition plans. This usually appears in standard lease agreements because the Act permits so, provided you are given sufficient notice in writing.

Disputes and Resolution

Many disputes that end up in Court can be avoided if parties took the time to put their agreement in writing before any money changed hands or before any works are initiated. If a breakdown in relationship cannot be avoided, trying to reach a commercial settlement is always a better option than taking the matter to Court.

If the dispute is not settled by informal negotiation, you can apply to the Office of the NSW Small Business Commissioner for mediation where both parties will be contacted to discuss the facts. Understanding each perspective helps the mediation officer work with the parties to resolve the problem informally at no cost. If the problem is too complex, then a formal mediation will be arranged where both parties have a face-to-face meeting guided by a mediator. If resolution is not achieved here, the next step is to take your “Certificate of Failed Mediation” to the New South Wales Civil and Administrative Tribunal or a Court.

Transferring the Lease

The Act caters for scenarios where a tenant decides to legitimately sell a business whilst in the midst of a lease tenancy. It recognises a process for assigning a retail shop lease where the tenant becomes the assignor of the retail shop lease, and the potential new tenant becomes the assignee. To give legal effect to an assignment of a retail shop lease, you have to do the following:

  • Get an updated copy of the Lessor’s Disclosure Statement (if none exists, this requirement does not apply)
  • Give a copy of the Assignor’s Disclosure Statement to the assignee (and to the landlord at least seven full days before the assignment if you want to be protected from ongoing liability)
  • Gather information from the assignee to give to the landlord, for example the assignee’s name and contact details, financial standing, and any documents to show the business experience of assignee
  • Provide the above information to the landlord in writing by either delivering it personally to the landlord or the landlord’s agent as set out in the retail shop lease.

While a landlord can specify that prior consent is required for you to assign a retail shop lease, he is afforded limited grounds on which to refuse granting such consent. The limited grounds on which consent can be withheld by the landlord are:

  • if the proposed assignee proposes a change of use to the retail shop
  • if the proposed assignee has financial resources or retailing skills that are inferior to the outgoing tenant
  • if the tenant has not complied with the Act’s set procedure for seeking consent to assignment.

Ending the Lease

An option to renew a retail shop lease is a valuable asset because it allows lease renewal on the same terms as the original lease except for the commencement rent for the renewed lease which is determined by agreement between the landlord and the tenant and failing agreement, by the appointment of a Specialist Retail Valuer. If you have such a clause, note the date when you need to exercise your option as exercising it late or incorrectly will deem it lost. The date for the exercise of an option to renew a lease is usually between three to six months before your lease ends. An option to renew a lease is usually ‘exercised’ by writing expressly stating that you wish to exercise it.

If the retail shop lease has no option to renew the lease when it finishes, the landlord has no obligation to renew the lease. If the tenant continues to stay, the relationship usually becomes a month-to-month lease. This means either party can end or change the lease with one month’s notice. Where there is no option to renew the lease, the landlord should give you notice of whether or not he or she plans to offer a new lease at least six months before its expiry.

When you vacate a retail shop, make sure that you understand the ‘make good’ requirements in your retail shop lease. Subject to fair wear and tear, usually you would need to return the premises in the same condition it was in at the start of the retail shop lease.

There is plenty to consider when committing to a retail shop lease. To avoid disappointment, seek legal advice early. Our lease property lawyers may be contacted at 1800 770 780 or contact us via ohl@owenhodge.com.au, so that we can help you address the issues that you face.