Areas of Practice
Leasing – retail and commercial
Commercial leases, both retail and non-retail, can be complex, and it is important that landlords and tenants fully understand the rights and obligations that they create to avoid costly disputes. Our experienced solicitors can advise on the negotiation, drafting, execution and registration of a lease as well as on the exercise of options under the lease or the termination of a lease. We act for both landlords and tenants and deal with all types of retail and commercial properties.
When drafting or negotiating a commercial lease there are many issues to consider. Each lease is different but there are common issues arising out of agreements between landlords and tenants:
- How long is the lease for and are there any options to extend the lease or to purchase the premises;
- What are the costs – security bond; rent; outgoings; marketing, management or other fees and insurance requirements;
- Is there to be a security deposit or a bank guarantee;
- What obligations are there regarding rubbish removal, property maintenance, shop fit out or decoration;
- Has everything been disclosed that needs to be;
- What can the premises be used for;
- Can the lease be transferred or assigned to someone else (if the business is sold, for example);
- How and when does the lease end
These questions and many others are equally important for both landlords and tenants. Retail and commercial leasing matters feature strongly in Nash Allen Williams & Wotton’s property practice. We are instructed by a wide range of commercial clients including sole traders, partnerships, retailers, and companies.
In NSW, a retail lease is a type of commercial lease to which the Retail Leases Act 1994 applies. The Act nominates an exhaustive list of business which generally require a retail lease, as opposed to a commercial lease and you can have a look at the list here Schedule 1 of the Act. Generally speaking, if the type of business permitted to be carried on from the premises appears on the list, the lease will be a retail lease. Very typical examples include fast food and take away food shops, beauticians, hairdressers, tobacconist shops and newsagency shops
There are some exceptions when the Retail Leases Act will apply such as when the lettable area of the premise is 1,000 square metres or more. It is important to know if a retail lease is needed, since it places additional obligations on the landlord, with disclosure of information being key.
The Retail Leases Act 1994 (NSW) requires landlords to provide prospective tenants with a disclosure statement–in writing–at least seven days before the retail lease begins. Schedule 2 of the Act outlines the format this statement should take. It is largely a summary of the lease terms as negotiated, such as:
- term of the lease and any options to renew
- rent and the rent review method and frequency
- outgoings and other costs
- works, fit-out and refurbishment details
- permitted use and trading hours
Additionally, for shopping centres, the statement will also include the centre’s annual turnover, anchor tenants, floor plan and tenancy mix. Both the landlord and tenant need to sign the Disclosure Statement, but it is vital that parties read through it first to ensure all the relevant information is included, and that the terms are as originally negotiated.
It is possible to negotiate and sign a lease without the aid of a lawyer. But working with a lawyer can ensure that you not only sign the correct type of lease, but that all the terms of the lease are properly disclosed and clearly understood by both parties.
Location, cost (rent and other outgoings) and permitted use of the premises are key factors to consider when it comes to a commercial lease. Commercial buildings usually have no direct retail activity, and are primarily used for warehousing, storage, or office space.
The legislation (and the lessee protections) that apply to retail leases are absent with commercial leases, making negotiation and understanding of the terms and obligations under the lease vitally important. And unlike a retail lease, with a commercial lease the landlord may pass the lease preparation costs onto the tenant, though these matters can form part of the initial negotiations.
Seeing a solicitor is important when entering into any lease – but perhaps even more so when entering into a commercial lease as a tenant. Nash Allen Williams & Wotton solicitors will advise you and ensure that the lease terms are clearly understood.
Retail and Commercial Leasing FAQs
What should a Tenant Ask When Leasing Retail Space?
Ensure a disclosure statement is provided to you by the landlord or their managing agent. While the disclosure statement must include key information relating to the lease, it is usually compiled after initial negotiations. As part of your negotiations, you should also be asking the landlord about the security bond or bank guarantee they require, the rent and permitted use, whether there are costs such as marketing or management fees, the term (length) of the lease as well as any restrictions on use such as noise, afterhours access or minimum trading hours. You should also ask about lease incentives such as any rent-free period or early access to complete fit out and if any major redevelopment of the property is planned during your lease term (and any relevant options).
What Clauses Should You Look Out for in a Commercial (non-retail) Lease?
A Commercial Lease should typically include clauses for the payment of rent and other costs, rent increases and any options, and maintenance and repairs to the premises. However, you should look out for some clauses that could be disadvantageous to you and may require further negotiation:
- Ratchet Clause – this clause might prevent your rent from ever decreasing regardless of market conditions
- Clawback Clause – if your lease includes incentives then it might also include a penalty or clawback clause. This will allow your landlord to claim the incentive back from you if you default or terminate early
- Indemnity Clauses – while some indemnity clauses are fair, look out for any that specifically prevent the landlord from being held responsible for their own actions or negligence
- Redecoration Clauses – making good after vacating is standard in most leases, but pay attention to any specific requirements of the condition the space should be left in and factor in any associated costs
What Will a Landlord Require from Me Prior to Granting Me a Lease?
Every landlord will have their own requirements, but typically a proposed tenant would expect to be asked to provide the following to the landlord:
- Current identification
- A statement of the tenants’ assets and liabilities
- Bank statement(s) covering the previous six months
- CV showing relevant business or industry experience/ or experience carrying on a business of the kind proposed
- Details of previous commercial or retail leases including landlord or managing agent referees
- Satisfactory evidence of public liability insurance
Also, if the proposed tenant is a company, you should expect the landlord will require some promise that the company will perform its obligations under the lease. Usually, the personal guarantee of the Directors of the tenant company is sought.
What Sort of things Should I be Aware of or Consider if Asked to Provide a Personal Guarantee?
- What control do I have over the direction or performance of the company – complete control or something less than that?
- What, exactly, am I guaranteeing and to whom am I providing the guarantee?
- When does the guarantee expire or end?
- Is there a dollar limit on the amount I’m being asked to guarantee or am I being asked to provide an unlimited guarantee?
- Does the guarantee include a clause which gives a charge over any real estate that I own?
- Have I kept a record of any personal guarantees that I have given?
Of course, the circumstances of every lease is different and any person who is being asked to provide a personal guarantee for a company should seek independent legal advice before providing the guarantee.
What Are Outgoings?
Outgoings are the costs of operating and maintaining a commercial or retail building and are a cost over and above rent. They include rates and taxes, and other service charges. They are incurred by the landlord but are often passed on to tenants where legislation permits. Capital improvement costs should not be included with outgoings, but standard maintenance and repair costs often can be.