Buying & Selling Businesses
Here is a link to a government website to help you if you want to buy or sell a business.
What is a Lease?
A lease is a legal agreement between a landlord (or ‘lessor’) and tenant (or ‘lessee’) for use of the tenant’s business premises.
When does a lease commence?
A lease generally commences when both parties have signed it. After the lease is signed, neither party can end it without the other’s consent.
However, a lease is valid even if a lease has not been signed if the tenant :
- takes possession of the premises; or
- begins to pay rent
It is good business practice not to pay rent or open for business until the lease has been signed.
What should be included in a lease?
A lease should include:
- the start and end date;
- a description of the premises;
- how much the rent is;
- by how much the rent can be changed;
- the type of business;
- outgoings the tenant must pay;
- what bond, security or guarantee is required;
- who is to repair and maintain the property and equipment;
- core trading hours (when the premises must be open for business).
RETAIL LEASES ACT 1994 LEASES
What is the Lease Period?
A lease with fair terms and a long lease period is an asset for both the landlord and tenant.
The lease period is the length of time the tenant rents the premises. It includes the lease period and possibly an option to renew or extend the period.
Schedule 1 of the Retail Leases Act 1994 (“the Act”) lists categories of businesses to which the Act applies.
What is permitted use?
“Permitted use” is the type of business that can be run from the premises.
Before signing the lease, the tenant must ensure that the council permits the premises to be used for the type of business they intend to commence. The tenant must seek the landlord’s and the council’s consent if they intend to use the premises to run a type business that is not permitted.
The description of the permitted use of the premises in the lease and the landlord’s disclosure statement should be broad enough to allow the tenant to expand and sell the business.
When you buy a business and will take over a lease, you should not rely on assurances from the vendor and the landlord that your intended use of the premises is permitted. To avoid disputes, you should confirm this by making enquiries with the council.
Shopping Centre Leases
The Act defines a ‘shopping centre’ as a cluster of shops:
- owned by the same person where at least five shops are used for retail business; and
- regarded or promoted as a centre, mall, court or arcade.
Issues when commencing a lease in a shopping centre include:
- the tenant may require the landlord’s consent to disclose turnover information;
- the tenant may be required to contribute to the cost of advertising and promoting the shopping centre;
- the tenant can not be required to promote or advertise their business;
- the tenant can not be prevented from conducting business outside the centre;
- the landlord can not change the centre’s core trading hours without the written agreement of a majority of shops.
What are some costs of Leasing?
The landlord pays for preparation of the lease unless the tenant asks for changes after they have returned the tenant’s disclosure statement to the landlord.
The tenant pays transfer duty and fees for registering the lease. The Act requires that leases with a period of over three years (including an option) must be registered.
The tenant is usually responsible for the cost of installing fixtures and fittings (‘the fitout’). Shopping centres usually specify standards of construction for fitouts.
Tenants may also be responsible for some/all of the landlord’s costs of preparing the shop for the fitout (‘landlord’s works’). The landlord’s disclosure statement must state whether the tenant pays these costs. The tenant must agree in writing to the maximum cost of landlord’s works before commencing the lease.
The tenant should ensure that they:
- know what expenses they will incur in preparing the shop to trade and
- follow the fitout standard specified by the lease.
The tenant should:
- check whether the landlord has nominated them as the principal contractor for any fitout works; and
- become familiar with their occupational health and safety responsibilities.
Payment of Rent
Rent is one of the tenant’s biggest ongoing costs and is normally paid monthly in advance.
If the lease says the tenant will keep actively trading in the lease period, they:
- can not close the premises;
- must use the premises only for the permitted use; and
- must pay the rent despite any financial problems.
If the tenant does not pay the rent on time, the landlord may lock them out or end the lease without notice.
Changing the Rent
The lease states when and how rent can be changed.
If the lease says that the rent is set at current market value and the tenant and landlord cannot agree what that is, the Act provides that the rent is determined by a specialist retail valuer appointed by the NSW Civil and Administrative Decisions Tribunal (‘NCAT’). The tenant and the landlord each pay half the valuer’s costs.
Payment of Outgoings
Outgoings are the landlord’s expenses that the tenant has agreed to pay under the lease.
The Act says that outgoings must be:
- directly and reasonably related to the premises being leased; and
- attributable to the operation, maintenance or repair of the building/shopping centre.
The landlord may ask the tenant for security when negotiating the lease, which may be:
- a cash bond;
- a third party guarantee (a third party promises to pay the landlord if the tenant breaks the lease); or
- a bank guarantee (a promise by the tenant’s bank to pay the landlord up to an agreed amount if the tenant breaks the lease). The tenant usually has to give the bank some security to obtain a bank guarantee.
If the tenant agrees to pay the landlord a cash bond as security, within 20 business days the landlord must deposit the bond with the NSW Government’s Retail Bond Scheme, which holds it in trust in a special account.
The advantages of giving the landlord a cash bond include:
- it is held by the NSW Government;
- there are no fees;
- unlike most third party guarantees, it is for a specified amount,
- unlike most third party and bank guarantees, it can not without your agreement be called on before the lease ends;
- there are legal procedures for paying out bond money at the end of the lease and for disputes, which can help minimise your costs.
Landlord’s Intended Works
Before you sign the lease the landlord must tell you in writing whether they intend to do any works that may disrupt your business.
The Act requires that you and the landlord give each other a disclosure statement using a specific form.
If you are unsure about the meaning or implications of any aspect of the landlord’s disclosure statement you should consider seeking legal and/or financial advice.
We check the landlord’s disclosure statement for:
- the annual sales of the centre;
- the turnover for specialty shops of your kind per square metre;
- the centre traffic count;
- fitout details;
- construction standards; and
- when the leases for major tenants end.
We check that the landlord’s disclosure statement includes:
- all the agreements reached during negotiation; and
- any promises made by the landlord
and if necessary request a new disclosure statement.
The tenant’s disclosure statement must say if:
- you have received the landlord’s disclosure statement;
- you have a draft lease;
- you have had professional advice about your lease obligations;
- you can meet your obligations; and
- the landlord has made any other agreements or representations to you and if so their details.
The tenant’s disclosure statement should note all the verbal commitments the landlord or their agent made to you. You should therefore pass on to us and we will write in the tenant’s disclosure statement all verbal commitments the landlord has said to you about the premises, such as:
- the level of passing trade;
- the tenancy mix;
- any works they expect to do that may disrupt your business;
- your right to be the only retailer selling particular products or services.
We ensure that:
- you receive a landlord’s disclosure statement at least seven days before you begin a new lease;
- the tenant’s disclosure statement is provided to the landlord within seven days after you have received the landlord’s disclosure statement.
What can a solicitor do for you?
If you plan to enter into or assign a retail lease for premises such as a shop, for a reasonable fixed fee for professional costs we will advise and represent you and deal with the landlord on your behalf. This includes:
- checking whether the type and size of the shop require that the lease complies with the Act;
- asking the landlord detailed questions about the impact on your business of any expected development of the building/shopping centre if the landlord’s disclosure statement contains insufficient detail;
- checking that your business is a type permitted in the premises;
- reviewing and explaining the terms of the proposed lease and associated documents (including opening hours, lessee’s/assignee’s and lessor’s/assignor’s disclosure statements, penalties for breaching terms of the lease, interest rates for late payment of rent, insurance required, whether the landlord requires a bond or a guarantee, the number and length of options, minimum required notice to the lessor if you wish to take up an option etc.).
We negotiate with the landlord as required (e.g. ground rules for rent increases, interest rates, number and period of options, period within which tenant can exercise option), witnessing your signature and facilitating registration of the lease with NSW Land Registry Services.