Article by Emma Post. Gold Coast Based Property Lawyer at Robbins Watson Solicitors.
Entering into a commercial lease is a big decision and one that warrants careful consideration.
There are two different types of commercial Leases in Queensland – standard commercial leases and retail shop leases. Retail shop leases are governed by the Retail Shop Leases Act 1994 (Qld) (“the Act”).
In this blog post we will focus on retail shop leases and why it is so important to have a solicitor review your retail shop lease before signing.
So, how do I know if I’m entering into a Retail Shop Lease?
Generally speaking, you will be dealing with a Retail Shop Lease if the premises is used wholly or predominately for selling goods or services to customers or if your business is located in a retail shopping centre (where 5 or more retail shops are located).
Some examples of retail businesses are bakeries, clothing stores, cafes, restaurants, florists, fruit shops, jewellers, grocery stores, hair and beauty salons, and pharmacies, just to name a few.
There are some exceptions to these rules – for example, leases for premises with a floor area greater than 1,000m2 and leases of common areas in retail shopping centres for ATM’s and vending machines are not considered retail shop leases.
What are the benefits of a Retail Shop Lease vs. a Commercial Lease?
The key benefit of a retail shop lease is that tenants are afforded a number of protections under the Act which would otherwise not be applicable under a standard commercial lease. The Act also requires that the parties undertake a rigorous disclosure period and, in most cases, requires tenants to obtain independent legal and financial advice in relation to the lease documents before entering into the retail shop lease.
These protections include the following:-
Disclosure
The landlord must provide any prospective tenant with a disclosure statement at least 7 days prior to entering into the lease.
Outgoings
The Landlord cannot pass land tax charges or sinking fund contributions onto the tenant.
Costs
The landlord cannot pass its legal costs of preparing the lease on to the tenant. Similarly, the landlord cannot recover from tenants their costs associated with obtaining the consent of their mortgagee in relation to registration of the lease.
Rent Review
The landlord is limited in the way rent reviews can be carried out. For example, rent can only be reviewed once per year, except within the first year of the lease term. Rent can also only be reviewed on one basis per year – for example, rent must be reviewed in accordance with current market rent OR a fixed percentage of the base rent, not both on a “whichever is higher” basis as you typically find in a standard commercial lease.
What must the Landlord provide to you before entering into a Retail Shop Lease?
As discussed, at least seven days before a tenant enters into a retail shop lease the landlord must provide the tenant with a draft copy of the lease and a lessor disclosure statement.
The lessor disclosure statement provides key disclosures about the premises to the tenant, including the term of lease and option to renew, annual base rent, how rent is to be reviewed, total estimated outgoings and tenant’s contribution, tenant’s car parking spaces, trading hours, and exclusivity of tenant’s permitted use. The statement also provides details of the retail shopping centre, if applicable.
The benefit of receiving a lessor disclosure statement is that tenants will have all the information up front before they enter into the lease, so that they can make a fully informed decision as to whether the premises is right for their business.
What are some things you should consider before entering into a Retail Shop Lease?
Once the lease documents have been received from the landlord, it is important to consider the following:-
Term of lease and option to renew – consider the commencement and expiry date of the lease and whether you want the option to extend the lease after the lease expires – the landlord isn’t obliged to grant a new lease so security of tenure is important especially where you plan to establish a long term business at that particular premise.
Rent – consider the base rent amount and how rent is to be increased. Tenants must ensure that they have capacity to make repayments and that they are taking into consideration rental increases. It is also prudent to consider whether the landlord offers any incentives such as a fit-out contribution or abatement of rent for the first few weeks or months.
Outgoings – consider what outgoings are payable and how they are apportioned.
Trading hours – specific trading hours may be imposed on tenants and tenants may not be able to open early or trade late, for example.
Security Bonds and Guarantees – consider what type of security and personal guarantees you are required to provide under the lease. Security bonds are usually upwards of an amount equal to 3 months’ rent + GST + outgoings and you may be able to provide this security by way of bank guarantee instead of cash. Personal guarantees are also often required by the directors of the tenant company. Providing a personal guarantee is a big decision and it is important that you are fully aware of the risks involved in doing so. Our team at Robbins Watson specialises in Queensland retail shop lease reviews.
Insurances – consider what type of insurances are required under the lease. Landlords may require tenants to take out business interruption insurance, which can be costly.
Redecorating – landlords often require that the tenant redecorate the premises at set times during the lease term, which can include re-painting and re-covering floors. Tenants need to consider the costs and trading impacts of such requirements before the lease commences.
Maintenance obligations – consider what the tenant will be responsible for in terms of maintaining the premises. Often landlords will require tenants to maintain air conditioning units and fire safety equipment which can be costly. This is again something that tenants need to consider the costs of before the lease commences.
Car parking – tenants will generally not be granted any exclusive use car parking rights. If the tenant requires car parking in order to effectively operate their business, then this ought to be negotiated at the outset.
The suitability of the premises for your business – consider the location and size of the premises and any town planning and approvals issues, which will be the tenant’s responsibility.
Subletting – consider whether you will be able to sublet part of the premises and what the landlord’s requirements are for subletting.
Demolition and Relocation – landlords will generally reserve the right to redevelop or deal with common areas. The lease documents should be carefully reviewed so that tenants are aware of the landlord’s rights to redevelop the premises and relocate the tenant to a similar premises within the complex, as this could of course have an impact on the tenant’s business.
Assignment of Lease – consider whether the landlord allows you to assign the lease to someone else and what they’re requirements are for consenting to an assignment of the lease. While this may not seem important now, if you sell your business you will most likely also need to assign your interest in the lease to the purchaser to enable them to continue operating the business at the same premises.
First Right of Refusal – in some cases tenants may wish to purchase the premise from the landlord if the opportunity were to arise. This is something that the tenant should consider when negotiating the terms of the lease to ensure a first right of refusal clause is included in the lease.
So… do you need a Solicitor to review my Retail Shop Lease before signing?
As discussed, the Act requires tenants to obtain independent legal advice in relation to the lease documents before entering into the lease.
Aside from this being a requirement, obtaining independent legal advice will ensure that you are fully aware of your rights and obligations under the lease and the Act.
Our team of expert property and commercial lawyers at Robbins Watson are well versed in reviewing and negotiating terms of retail shop leases and can assist you in identifying key issues relevant to your specific business needs.
By Emma Post
Emma is a Property Law and Commercial Solicitor at Robbins Watson Solicitors, a Gold Coast based law firm with expertise in commercial and retail leasing.
Get in touch with us on 07 5576 9999 to discover how our team of expert property and commercial lawyers can simplify what is often a complex process. Alternatively, you can book a consultation with one of our Gold Coast Leasing Lawyers or submit an online enquiry here.