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 a 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 potential 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:
- a copy of the lease
- a disclosure statement
- a Victorian Small Business Commission Information Brochure
Where there is a new lease for the retail premises, the Landlord must provide you with the completed proposed lease and also the disclosure statement at least 7 days before you enter into the lease.
If the landlord fails to give you a disclosure statement, you may be able to withhold rent after notifying the landlord.
Tip No. 2: Make sure you read the lease and be aware that the commercial terms are negotiable.
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
It is vital that you read the lease in full. In fact, you should review the agreement line by line.
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 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.
You should be aware that the landlord is not permitted to pass on their costs for lease preparation and negotiation to you.
Tip No. 3: Make sure you read the disclosure statement.
The landlord must provide you with a disclosure statement at least 7 days before you enter into the lease.
The disclosure statement contains information that allows you to make an informed decision about entering into a lease, including 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.
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.
Tip No. 5: Check how much is the rent and how it can be increased.
You need to check both how much is the rent and how it can be increased.
You should also find out how the weekly or monthly payments are calculated. Do your research and find out the average prices in the area. Make sure you are getting a fair price. If the rent is unreasonably high or low, find out why this is the case.
Rent can be without increase, increased by CPI per year or a fixed increase.
Check for any hidden fees. Unfortunately, these can add up quickly.
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 whether there is an option to renew the lease.
A. Options to renew
Many retail leases include an option to renew the lease. This is something you can negotiate with the landlord before signing the lease.
So long as you have complied with your obligations, the landlord must renew the lease if the lease contains an option to renew and the tenant has requested a renewal.
You need to be aware of the due date for writing to the landlord and taking up any option to renew the lease.
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.
Tip No. 8: Check whether you need council approval or any other permits to run the business.
You need to check whether you need any council or other permits to run the business.
You need to plan carefully and inform your solicitor as to what you intend to do with the premises. For example, you do not want to be stuck with a lease if you intend to sell alcohol but cannot obtain a liquor licence.
Tip No. 9: Check what are your obligations to restore the premises to the original state at the end of the lease.
You need to check what are your obligations to restore the premises to the original state at the end of the lease.
Usually, within a lease, there are make good obligations meaning to restore the premises to the condition it was in at the entry into the lease agreement subject to wear and tear. 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 to ensure that everything is in order from a legal perspective.
You need to get a lawyer to review the lease and disclosure statement before you sign the lease. 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