A Brief Summary Of The Retail Leases ACT

This article provides a summary overview of the main provisions of the Retail Leases Act (NSW) 1994 as they apply to commercial retail tenants and landlords.

 

The Act applies to leases for a retail shop and leases for premises in a retail shopping centre. 

 

The Act defines a retail shop as a business listed in Schedule 1 of the Act. This Schedule includes a wide range of businesses and it is likely that if you are engaged in the sale of any goods or services your business will be mentioned in Schedule 1.

 

The Act also applies to a lease of premises in a retail shopping centre. The Act says a retail shopping centre is a group of premises where at least 5 of the premises are retail shops as listed in Schedule 1 of the Act. The premises are owned by the same landlord and located in one or more buildings, usually joined by a common area. 

 

The Act does not apply to certain retail shops such as retail shops with a square metre area greater than 1000 square metres.

 

A lease to which the Act applies may be a verbal or written lease. Landlords should be careful of verbal leases. The Act implies a minimum 5 year term into all leases. This is the case unless a certificate is executed by a tenant in the presence of an independent solicitor waiving his or her entitlement to a minimum 5 year term.

 

NB A minimum 5 year term under the Act includes both the term of the lease and the term of the option to renew. For example, a tenant would not need to execute the above certificate for a lease with a 3 year term and an option to renew for a further 2 year term.

 

The Act does not apply to leases for a term less than 6 months. However, where a tenant occupies a retail shop for more than one year, whether by a series of consequential short term (six month leases) or under the holding over provisions of a 6 month lease, the terms of the Act will come into effect. 

 

 

Before a landlord can advertise a retail shop for lease, the landlord must have:

available for inspection by prospective tenants. The Retail Tenancies Guide is a publication of the Department of Fair Trading and sets out the basic obligations of a tenant and landlord under the Act. 

 

The landlord is required to give the tenant a landlord's disclosure statement 7 days before the tenant enters into the lease. The landlord's disclosure statement basically sets out all of the essential terms of the lease as well as any representations made by the landlord or by the landlord's agent to the tenant. If the premises are in a retail shopping centre, details disclosing trading figures and other matters concerning the operation of the centre are to be disclosed for the information of the tenant.

 

Where the landlord fails to provide the above information in the landlord's disclosure statement, a tenant may terminate the lease within 6 months of commencement of the lease, on the basis of this non-disclosure.

 

A tenant is required under the Act to reply to the landlord's disclosure statement, setting out any additional matters or corrections to the landlord's understanding of negotiations as set out in the landlord's disclosure statement.

 

 

This a sum of money required by a landlord to secure the performance of the tenant's obligations and is normally about 3 months rent depending on the length of the lease term.

 

Under the Act a tenant may provide this amount by personal bank guarantee or by bank or personal cheque.

 

Where the funds are paid by cheque the landlord must deposit the funds with the Direction General. There is a set notice procedure which must be followed where a landlord draws on those funds, without the consent of the tenant.

 

 

A tenant can sometimes be required by the landlord to contribute to the cost of fixtures, finishes, fittings and equipment.

 

This contribution may be payable as an upfront lump sum amount prior to the commencement date of the lease, or by way of periodic contributions in addition to the base rent, known as "special rent".

 

These forms of payment are allowed under the Act provided certain requirements are met.

 

 

The Act allows a landlord to charge turnover rent in addition to the base rent. The turnover rent is based on the profitability of the tenant's business in a financial year. There are certain costs which must be deducted from the measure of the tenant's profits under the Act in order to determine the turnover figure.

 

 

The Act restricts the adjustment of base rent under retail leases.

 

Generally, the base rent may only be adjusted on each anniversary of the lease (limited exceptions apply).

 

Where a lease provides for 1 or more methods of calculation of the adjustment of the base rent the Act imposes certain requirements such as:

 

Outgoings are charged by a landlord in addition to the rent. Outgoings are specific to the lease where they apply directly to the premises such as water rates, council rates and land tax.

 

Under the Act, non-specific outgoings, such as expenses for cleaning services or plant and equipment provided by a landlord in a retail shopping centre, for which the tenant receives the benefit, must be apportioned according to the ratio of the area occupied by the premises to the total area occupied by the retail shopping centre.

 

 

Landlords of retail shopping centres are allowed to charge other costs incurred such as fees to promote the centre, advertising and marketing costs, and for contribution to sinking funds for capital replacement and maintenance. The landlord can only charge for these costs if certain information is provided to the tenant. Tenants should check with their solicitor in relation to these requirements.

 

 

The adjustment of the base rent may at some time during the term of the lease may be subject to a market rent review. 

 

The Act sets out the procedure for determination of market rent under a market rent review.

 

Market rent is defined under the Act as the rent that would reasonably expected to be paid by a willing landlord and a willing tenant engaged in an arm's length transaction.

 

A market rent review under the Act cannot consider certain matters including the goodwill of the tenant's business. A market rent review must however include consideration of certain matters including other rent free periods or concessions which have been provided by the landlord of a retail shopping centre to other tenants in the centre.

 

There are procedures under the Act, which must apply where agreement cannot be reached between a landlord and a tenant in relation to the market rent. The parties may agree to the appointment of a specialist retail valuer, being a licensed valuer with 5 years experience in the valuation of market rent for retail shops. In the absence of agreement a party can apply to the Consumer Trader and Tenancy Tribunal for an order appointing a specialist retail valuer. The costs of such an application are shared equally between the parties. There are grounds for appeal by either party in the event the determination of the specialist retail valuer is disputed.

 

As market rent reviews may result in a substantial increase to the base rent, dependant on the market, a tenant should consult his or her solicitor in the event of disagreement with the landlord as to the value of the market rent to ensure that the proper procedures under the Act are followed.

 

 

An option to renew is a right of a tenant to enter into a lease on the same terms as the original lease and for the term of lease specified in the option.

 

The option must be exercised strictly in accordance with its terms, or the tenant loses this right.

 

As discussed earlier, the Act sets out how the market rent is to be determined in the event of a disagreement between the parties to a lease.

 

The Act assists a tenant exercising an option to renew by providing the tenant with the ability to request from the landlord a determination of the market rent 3 to 6 months before expiration of the date for exercise of the option.

 

The tenant should make use of this provision if there is likely to be a disagreement with the landlord about the value of the market rent. This is because a request for an early determination under this clause extends the time within which the tenant may exercise the option to a date 21 days after the date of the determination.

 

This preserves the tenant’s right to call on the option under the lease if the option has not been exercised under the terms of the lease because the tenant is still waiting for a market rent determination pursuant to this section of the Act.

 

 

The tenant should be careful of proposals by the landlord, which interrupt the tenant’s occupation of the premises during the term of the lease.

 

 

Where the landlord proposes to relocate a tenant in order to refurbish or redevelop a retail shopping centre, the landlord is required to demonstrate that:

The tenant may terminate the lease within 1 month of receipt of a relocation notice. If the tenant does not terminate the lease within this period, the tenant is deemed to have accepted the offer to relocate (provided the relocation notice is valid). 

 

 

A landlord may provide a demolition clause in a lease. The Act imposes certain requirements on a landlord who elects to terminate a lease in order to demolish the retail shopping centre or premises. The landlord must demonstrate that:

The landlord is not obliged to provide the tenant with any other compensation other than that referred to above. A tenant may want to consider insuring against the loss and disturbance such an occurrence would cause to the tenant’s business.

 

 

The Act prescribes the liability of the landlord under a retail shop lease if damage occurs to the premises and the damage is not due to any fault of the tenant. 

 

If a retail shop is damaged and the damage is not due to any fault of the tenant, the tenant is not liable to pay rent or outgoings if the tenant is unable to use the premises. If the damage only affects part of the premises, the rent and outgoings are reduced in proportion to the area damaged or unable to be used as against the total lettable area of the premises. The tenant can serve a notice on the landlord requesting the landlord to repair the damage within a reasonable time. If the landlord notifies the tenant that it considers repair of the damage is not practicable or undesirable the tenant may terminate the lease on 7 days notice. No compensation is payable by either party in the event that this occurs.

 

 

The tenant has rights to compensation for disturbance to the tenant's business, if the landlord's actions have an adverse effect on the trading of the shop or disrupts the tenant's passing trade. The landlord can limit its obligation to pay compensation under this clause if it has disclosed the possibility of specific disturbances in the lease to the tenant in the disclosure statement.

 

 

The tenant may wish to assign a lease to another person during the term of lease for any number of reasons.

 

The landlord is entitled to withhold its consent to an assignment of a retail shop lease in limited circumstances. These are:

The landlord can also request that the tenant obtain from the assignor references in relation to financial standing and retail shop experience.

 

The tenant should by no means assume that the landlord will approve an assignment of lease as a matter of course.

 

A tenant will want to make sure that any clause in the lease relating to an assignment is fair and reasonable in its terms so that a tenant can avail himself / herself of this option should he or she wish to do so.

 

These are just some of the matters affecting leases of a retail shop and leases of premises in retail shopping centres.

 

This article should not be relied on as substitute for obtaining legal advice legal advice from a solicitor. It is only intended to provide a useful overview for general information purposes. We recommend that before entering into such a retail lease, whether you are a tenant or a landlord, you first speak to a solicitor to make sure that your lease terms meet with your requirements and the circumstances of your business / investment as well as complying with the requirements of the Act.