Retail and Commercial Leases – A Guide to business leases and common problems and pitfalls

Almost all businesses operate out of retail or commercial property. While some businesses own these properties, most rent these premises for their continual operation. Whether you are a landlord or tenant, this article will help you by providing an overview of retail and commercial leases and some of the most common issues faced in drafting and finalising these leases. 

Leases – Do you know the Basics about Leases?

A lease is a property right under the law that allows a tenant (or lessee) to the possession and exclusive use of premises owned by a landlord (or lessor) for a fixed period. In NSW, this agreement must be in writing, and a lease of three or more years must be registered on the title of the property with NSW Land Registry Services. The three main types of lease are residential, commercial, and retail. This guide will focus on the retail and commercial leases, the main types used for businesses. 

What are Retail Leases?

One of the most common issues during lease negotiations is the lack of knowledge of what constitutes a “retail” lease and the specific requirements related to this type of lease. Retail Leases, as opposed to Commercial Leases, are leases that are required to be drafted to comply with the Retail Leases Act 1994 (NSW) (“the Retail Act”). Under the Retail Act, retail leases require far more stringent requirements by the landlord, including but not limited to: 

1. A landlord is not permitted to charge the lease preparation costs to the tenant. 
2. A landlord must provide a copy of the lease and retail tenancy guide to the tenant during the lease negotiation process. 
3. A tenant is not required to pay undisclosed contributions or outgoings that are not in the lessor’s disclosure statement.
4. If a fit-out is required for the premises, the maximum amount payable by the tenant must be agreed upon in writing between the parties. 
5. The tenant must be provided with a copy of the lease. 

Common Issues with Retails Leases 

Often landlords, and the solicitors who draft these retail leases, forget to adhere to some of the conditions mentioned above, which can cause issues later in the life of the lease. For example, suppose all the outgoings are not disclosed to the tenant. In that case, the landlord will become liable for these outgoings, and the agreed deal may not be what was initially agreed, thus costing the landlord more than expected and leading to a dispute. 

A common mistake is that many leases should be retail leases due to location but are not drafted to be retail leases under the Retail Act. The “Retail Lease” definition in the Retail Act also applies to general commercial businesses located in Retail Centres. For example, an accounting firm located in a shopping centre will likely require a retail lease, with the same conditions under the Retail Act, even though they do not operate as a “retail” establishment. Often the parties will be under the misconception that a commercial lease is applicable and fall foul of the multiple legislated requirements for a retail lease, risking both legal action and dispute.   

The NSW, Small Business Commission, has a guide that must be provided to all tenants who require a retail lease. This guide can be found here and can be helpful for anyone interested in or will soon be involved in negotiating a retail lease. Our team here at Eleven Legal can help you with any retail leasing issues and ensure that you do not run into any of the abovementioned pitfalls. 

What are Commercial Leases?

Contrary to a retail lease, a commercial lease is made in a commercial setting between the landlord and tenant for general commercial property (such as an office, warehouse or factory). These leases are not governed by their own act but rather by the general law regarding property and leases. Standard terms that are included in commercial leases are: 

1. That the lessee pays for the costs of the lease preparation (this is not allowed for a retail lease). 
2. An onerous make good clause. These clauses are designed to allow the landlord to require the tenant to return the property to a particular state or condition. These clauses can often incur immense costs for the tenant if they are not negotiated before signing the lease (especially if the tenant is unaware). 
3. There are no statutory requirements regarding disclosure of outgoings or fees. Instead, the lease agreement governs these conditions as a matter of contract law. Therefore, the agreement must outline all outgoings, fees, and the tenant must be aware of these fees in the lease. 

Commercial leases aren’t as heavily regulated, so they rely much more on the lease agreement itself. Therefore, the terms of the agreement must be negotiated and included with complete care to avoid any unnecessary disputes or misunderstandings. Our team here at Eleven Legal can help ensure that the lease is drafted correctly and no details are missed, preventing potential conflict before it arises. 

What are Common Issues for the Tenant?

Regardless of the type of lease, while not an exhaustive list, if you are planning on signing a lease as a tenant, you should be aware of the following: 

1. Outgoings: Besides the rent, you should be aware of additional fees. In the case of a retail lease, have these been outlined to you? In the case of a commercial lease, are the charges clearly outlined in the agreement. You may also wish to ask for further details, such as recent invoices of these outgoings, so that you are sure that the landlord is not passing additional costs on to you. 
2. Land Tax: Landlords often attempt to pass the land tax to the tenant. While this is usually apportioned to the property, the clauses concerning land tax can sometimes bring in land tax for other properties owned by the landlord. You should be careful that if it is agreed that land tax is payable, you know how much you are paying and for which property. 
3. Make Good: As discussed above, the make good clauses can be particularly onerous. Often the landlord is also at liberty to take directly from the bank guarantee or deposit to rectify any deficiencies per the terms of the agreement. It is essential that you are aware of your obligations when the lease is terminated or you vacate and how much this will cost you. You should also factor this cost into your expenses in renting the property.
4. Air-Conditioning and other services are often overlooked when drafting a lease. You should be aware of who is obligated to repair and maintain all the services on the property. If it is unclear, then clauses will need to be added to the lease to ensure there is no dispute if one of these services stops working or breaks down. 

What are the Common Issues for a Landlord?

Regardless of the type of lease, while not an exhaustive list, if you are planning on renting out a property, you should be aware of the following: 

1. Suitability of Tenant: You must check the viability of the business that wishes to rent the premises. Is the tenant a company or a sole trader? Will they have the funds to pay you the continued rent and outgoings? If the tenant is a company, do you need to include a guarantee in the lease so that you can personally recover the rent and expenses from the directors? These questions must be asked before a lease is drawn up for the property. 
2. Outgoings: What have you agreed to charge the tenant? Some tenants will be willing to accept more costs than others. Are these costs calculated in what you expect to make from the rent of the premises? 
3. Fit Out and Landlord’s works: Have you agreed to do any work to the premises to make the place ready for the tenant? Does the tenant require any work (fit-out) to operate their business? If these do need to occur, the details of the works need to be included in the lease to ensure no confusion. 
4. Make Good: In what condition does the tenant need to leave the property when they leave the premises? Do you have specific requirements (depending on the type of property)? If so, these need to be again negotiated and documented in the lease to ensure there is no dispute if the tenant leaves for whatever reason. 

The team at Eleven Legal can help, contact us today.