What is a Lease?
A lease is a legal agreement between a landlord (also known as the lessor) and tenant (also known as the lessee) for the use of the shop where the tenant conducts their business.
A lease typically commences when both parties sign it.
However, a lease is valid without an agreement having been signed if the tenant :
- takes possession of the premises; or
- begins to pay rent.
Good business practice is for a tenant to pay rent or open for business only after signing the lease. After the lease is signed, neither party can end it without the other’s consent.
A lease should include:
- the start and end date
- a description of the shop
- how much the rent is
- by how much the rent can be changed
- the type of business
- outgoings the tenant must pay
- what bond, other security or guarantee is required
- who repairs and maintains the property and equipment
- core trading hours (when shops must be open for business).
The Lease Period
The lease period is the length of time the tenant rents the shop. The lease includes:
- the lease period and
- possibly an option to renew or extend the lease.
A lease with fair terms and a long lease period is a valuable asset for the landlord and for the tenant.
A Retail Leases Act lease runs for a minimum of five years including the original term and any options. If the tenant and the landlord agree to a shorter lease period, a section 16 certificate must be served on the landlord within six months of the start of the lease.
Permitted use describes the type of business the tenant can run from the shop.
Before the tenant signs the lease, they must ensure that the shop can be used for the business they want to run. The shop can only be used for another type of business with the landlord and council’s consent.
The lease and the landlord’s disclosure statement should describe the shop’s permitted use sufficiently broadly that the tenant can expand and/or sell the business.
If you are taking over a lease as part of buying a business, reliance on assurances from the vendor and landlord that approvals are in place is not sufficient. To avoid disputes and financial loss, enquiries should be made to confirm this with the council.
Shopping Centre Leases
The Retail Leases 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.
Some special issues when commencing a lease in a shopping centre are:
- turnover information the tenant agrees to provide under the lease must be kept confidential and generally needs consent to be disclosed;
- the tenant may be required to contribute to the cost of advertising and promotion of 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 agreement in writing of a majority of shops.
The Costs of Leasing
The landlord pays for preparing the lease unless the tenant asks for changes after the tenant’s disclosure statement has been returned to the landlord.
The tenant pays transfer duty on the lease and registration fees. Leases with a period of over three years (including an option) should be registered to protect the tenant’s interests.
The tenant is usually responsible for the cost of installing fixtures and fittings (called the fitout). In a shopping centre there a standard of construction is usually required for fitouts.
The tenant may also be responsible for some or all of the landlord’s costs of preparing the shop for the fitout (called 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 beginning the lease.
- Ensure that you know what expenses you will incur in preparing the shop to trade and that you follow the fitout standard specified by the lease.
- Check whether the landlord has nominated you as the principal contractor for any fitout works and familiarise yourself with the accompanying occupational health and safety responsibilities.
Rent is normally paid monthly in advance and is one of the tenant’s biggest ongoing costs.
If a tenant signs a lease saying that they will keep actively trading in the lease period, they can not close the shop, must use the shop only for the permitted use, and must pay rent regardless of any financial problems.
- If you do not pay the rent on time, the landlord may lock you out or end the lease without notice.
Changing the Rent
The lease states when and how rent can be changed.
Outgoings are expenses of the landlord the tenant has agreed to pay under the lease.
The Retail Leases Act says that outgoings must be:
- directly and reasonably related to the shop 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 promise to pay the landlord if you break the lease)
- a bank guarantee (a promise by the tenant’s bank to pay the landlord an amount up to an agreed limit 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, the landlord must deposit the bond with the NSW Government retail bond scheme within 20 business days after receiving it. The scheme holds the bond in trust and invests it 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
- it is for a specified amount (unlike most third party guarantees)
- it can not without your agreement be called on before the lease ends (unlike most third party and bank guarantees)
- legal procedures for paying out bond money at the end of the lease and for disputes can help minimise costs.
How can we help you?
If you plan to enter into or assign a retail lease for premises such as a shop, for a reasonable fixed fee we will represent and advise you as the tenant and deal with the landlord on your behalf. This includes:
- checking whether the period of the lease plus any options and the type and size of the shop require that the lease is in the form set out in the Retail Leases Act
- asking 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 (such as opening hours, lessee’s/assignee’s and lessor’s/assignor’s disclosure statements, penalties for breaches of the terms of the lease, interest rates for late rent, the number and length of options, minimum required notice to the lessor if you wish to take up an option etc.).
If the lease is a Retail Leases Act lease, there must be a landlord’s disclosure statement. You should consider taking financial advice to ensure that you understand it.
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
- centre traffic count
- details of fitout construction standards, and
- when leases for major tenants end.
We check that the landlord’s disclosure statement includes all the agreements reached during negotiation and any promises made 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 the details of them.
You should tell us and we will write in the tenant’s disclosure statement anything the landlord has said about the premises that is important, such as:
- the level of passing trade
- the tenancy mix
- any works they intend doing;
- your right to be the only retailer selling particular products or services..
We ensure that the tenant’s disclosure statement notes all the verbal commitments the landlord or their agent made to you.
We ensure that the tenant’s disclosure statement is served on the landlord within seven days after you have received the landlord’s disclosure statement
We negotiate with the landlord as required (e.g. ground rules for rent increases, interest rates, number and period of options), witnessing your signature and facilitating registration of the lease with NSW Land Registry Services.
Note: Shops leased from the Rail Corporation New South Wales and at the Kingsford Smith Airport have special rules under the Act.