Whether you are a Landlord or Tenant there are some terms that it is good to have a refresher on from time to time, especially with the changes introduced to the Retail Leases Act in 2017.
Below is an overview of the basic terms and concepts you may come across in retail leasing.
In the beginning… negotiations…
Retail Tenancy Guide
When negotiating a lease with a Landlord they are required to provide a copy of this Retail Tenant’s Guide to prospective Tenants for their information. Click here for more info.
What is a ‘retail shop’ under the Act
The definition of ‘retail shop’ under the Act has been further clarified with the recent amendments. As such, the Act now notes that a retail lease is required for a shop selling and supplying goods and services where the shop is less than 1,000 sqm and is used for a retail business.
This definition excludes ATMs, vending machines, internet booths, children’s rides, telephone boxes and storage areas (not within the shop).
Lessor’s Disclosure Statement
The Landlord is required to provide a Lessor’s Disclosure Statement at least 7 days prior to the commencement of the Lease.
The Disclosure Statement set out important details regarding the shop and the lease. If the shop is within a shopping centre than additional information is required.
Lessee’s Disclosure Statement
Once the Lessor’s Disclosure Statement has been received by the Tenant, the Tenant has 7 days to respond by providing the Lessee’s Disclosure Statement. The Lessee’s Disclosure Statement must state if:
• you have received the Lessor’s Disclosure Statement;
• you have a draft lease;
• you have obtained professional advice regarding the Tenant’s lease obligations; and
• whether the Landlord has made any other verbal agreements or representations to you and any relevant details. All agreements reached during negotiations must be set out in the Disclosure Statement. If not, the Tenant must notify the Landlord immediately and request a new Disclosure Statement.
The forms of the Lessor and Lessee Disclosure Statements can be obtained from the NSW Small Business Commissioner here.
It is advisable that prior to taking possession of the shop that the Landlord and Tenant undertake an inspection of the shop and complete a report regarding the condition of premises. This allows both parties to understand what the expectation is when the lease ends regarding the condition the premises should be left in. The NSW Small Business Commissioner provides an example report if the Landlord does not have a standard form.
The permitted use sets out the type of business the Tenant can operate from the shop. If the Tenant intends to use the shop for another use then the Landlord’s and Council’s consent will need to be obtained.
Minimum 5 year term
As of 1 July 2017 there is no longer a minimum 5 year term under a retail lease or a need to waive the Tenant’s right to minimum 5 year term.
Despite the term of the lease, the Landlord is required to provide a fully executed lease to the Tenant within 3 months of receipt from the Tenant.
Option to Renew
During the initial negotiations of the lease, the Landlord may offer or the Tenant may request that there be option to renew the lease at the end of the initial term.
If there is an option to renew under the lease, then a set period of time is stated during which the Tenant must notify the Landlord in writing of their intention to take up the option.
Outgoings are expenses relating to the shop that are in addition to the rent. The details of any outgoings that have been agreed between the parties should be set out in the Lessor’s Disclosure Statement.
The Landlord’s obligations in relation to outgoings is that estimates are to be provided prior to the end of the financial year, with audited statements to be provided within the first 3 months of the new financial year.
If the Landlord does not meet their obligations following a request for the information, then the Tenant cannot withhold payment of the outgoings until the required information is received.
Rent Review Methods
Rent can only be increased once every 12 months and typically occurs on the anniversary of the commencing date of the lease. There are several methods of rent review as set out below:
This is a percentage increase based on the rate of inflation. While the Landlord is required to give notice of the increase, by signing the lease you have agreed to the increase on this basis.
This is a set percentage as agreed between the Landlord and Tenant during negotiations of the lease. As above, if the Landlord fails to give notice of the increase you have agreed by signing the lease and are committed to paying the increased amount of rent going forward from the date as set out in the lease.
A rent review by market rent is most common upon the exercise of option to renew. This can be negotiated by the Tenant prior to commencement of the option to renew after requesting for an early determination of market rent.
The Landlord and Tenant can reach an agreement on the market rent, or they can appoint a valuer to determine the rent payable. If the parties cannot agree on a valuer, they can request that the NSW Small Business Commissioner appoint a specialist valuer.
Lease incentives are something that shopping centre Landlord’s may offer to encourage a new Tenant to take a lease.
Rent Free Period
A rent free period usually occurs at the beginning of the lease term. This type of incentive is typically given to allow the Tenant to set themselves up and commence trading. Rent free periods can be for a period of 1 to 3 months.
A fitout period also typically occurs at the beginning of the lease term, it may also occur prior to the lease commencing. It allows the Tenant time to install and set up the shop with the necessary fixtures and fittings without trying to operate a business or account for lost potential income while increased expenses are being incurred. During a fitout period a rent free period will typically apply.
The Landlord may be required to undertake works, known as ‘Landlord’s works’ to prepare the shop for the new Tenant prior to the Tenant undertaking their fitout works. If this occurs then the Landlord may require the Tenant to contribute to some of these costs. These costs should be agreed prior to entering into the lease and be set out in the Lessor’s Disclosure Statement.
Any works undertaken by the Landlord will typically remain the property of the Landlord following the end of the lease, unless previously agreed between the parties.
What is required from the Tenant prior to the commencing date?
In addition to providing the Landlord with a signed lease and relevant registration fees (if requested), the Tenant must provide a Certificate of Currency satisfactory to the Landlord, along with a Bank Guarantee or cheque for the Retail Bond. Details of these items are set out below.
Insurance and Certificate of Currency
It is common practice among Landlords to require the Tenant to take out insurance policies for public liability, and in retail spaces plate glass. Under the lease the requirements of the Landlord will be set out to include the level of cover, generally speaking this is $20,000,000 for public liability and that the Landlord should be noted as an interested party. An example of this is a requirement that the insurance policy will not lapse without the landlord being given at least one month's prior written notice.
In order to meet the obligation under the lease, the Tenant is required to provide a Certificate of Currency for each policy prior to the commencing date, with updated Certificates of Currency to be provided upon request by the Landlord.
Bank Guarantee or Retail Bond
A bank guarantee or retail bond is provided by the Tenant to the Landlord at commencement of the lease. This is typically in the amount of 3 months rent. If the Tenant is providing a retail bond then the following Retail Bond Lodgement form should be used by the Tenant and Landlord when lodging the bond with the NSW Small Business Commissioner. The Landlord is required to lodge the Retail Bond with the Commissioner within 20 days of receipt.
The purpose of a bank guarantee or retail bond is to provide coverage to the Landlord in the event that a Tenant is in arrears under the lease or if the Tenant vacates the premises and does not satisfactorily complete the make good requirements under the lease. If the Landlord needs to make a claim on the retail bond paid then they are required to use the following Claim for Retail Bond Money form issued by the NSW Small Business Commissioner.
If the Landlord draws down (uses) the bank guarantee or retail bond during the term of the lease and the Tenant remains in occupation of the premises, then the Tenant will be required ‘top-up’ the bank guarantee or retail bond to the amount required under the lease. If the Tenant does not attend to the ‘top-up’ then the Tenant will be considered in breach of the lease.
At the end of the lease, provided the Tenant has fulfilled all of their obligations under the lease, then the Landlord is required to return the bank guarantee within 2 months.
After signed lease provided by Tenant
If a retail lease is for a term of 3 years or more (including any option to renew) then the lease must be lodged for registration within 3 months. There are exceptions to this time frame in mortgagee’s consent to the lease is required.
If the lease is not being registered, then the Landlord must returned the fully executed lease to the Tenant within 2 months after receipt from the Tenant.
The end of the lease
The make good requirements are set out in a retail lease and usually require that the Tenant returns the shop to the same condition it was in prior to the lease commencing, except for fair wear and tear. This is when the Condition Report the parties completed at the beginning of the lease becomes important. The existence of a completed condition report may result in less misunderstandings surrounding the original condition of the shop. It is advisable for the Tenant to discuss the make good requirements with the Landlord prior to the end of the lease to determine what works the Landlord expects.
It is also important to establish whether the Landlord will require the make good works to be completed by the end of the lease, or whether they will allow a period of time after the lease ends for the works to be completed.
Assignment of Lease
An assignment of lease occurs, most commonly, when a business is sold and the lease is transferred to the new business owner. An assignment of lease needs to be consented to by the Landlord. A request for assignment of lease must be made in writing to the Landlord along with details about the business and financial resources of the proposed assignee. Typically under a retail lease the Landlord cannot unreasonably withhold consent provided they are respectable, solvent and capable of meeting the Tenant’s obligations under the lease. The Landlord has 28 days under the Act to provide their response to the request for consent. If no response is received from the Landlord within 28 days then consent is assumed to be provided.
Once the Landlord provides consent a Deed of Assignment will be prepared, generally by the Landlord’s solicitor which will be signed by all parties, including the Landlord. The Deed will include a Transfer of Lease that is to be lodged with Land Registry Services to record the change of Tenant on the Certificate of Title for the property.
Under an assignment of lease the Tenant will be required to pay the Landlord’s legal and other costs related to providing the consent.
There is set process to be followed in relation to an assignment of lease under the Act and as such it is recommended that you obtain legal advice when undertaking this form of action.
The information provided above is not a comprehensive list of all matters that you may come across during a retail lease. If you need specific advice on a particular matter please contact our office.