There are many things to consider when entering into a lease. A lease is a legally binding contract between a lessor and lessee for the exclusive use of a property. There are many types of leases which are utilised in different situations. Examples of leases include residential tenancy agreements, retirement village leases, commercial leases and retail leases. It is important to know what type of lease is applicable to you as there are different legal requirements. For this article we will focus on commercial and retail leases. So what is the difference between a commercial lease and a retail lease?
A commercial lease is an agreement for the use of a commercial premises to conduct business on the property, for example an office or consulting rooms. A retail lease however, is the agreement to use the premises as a retail shop as defined under the Retail Leases Act 1994 (NSW) (“the Act”). A retail shop is:
- Any premises which are used or proposed to be used, wholly or predominantly, to carry out any of the businesses listed in Schedule 1 of the Act; or
- Any premises which are located in a retail shopping centre.
A retail shopping centre is a group of premises which:-
- Have at least five premises wholly or predominantly carrying out a listed business;
- Are owned by the same person or have the same lessor or comprise lots within a single strata plan;
- Are located in one or two buildings joined together or separated by a common area; and
- Would be promoted as a shopping centre, shopping mall, shopping court or shopping arcade.
A few examples of businesses listed in Schedule 1 of the Act include restaurants, gift shops, optometrists and bakeries.
When entering into a lease, several items should be negotiated between the lessor and lessee. These include:
- Rent – how much rent is payable in what instalments, whether there is a rent-free period and when the rental payments are due;
- Commencement and termination dates;
- Terms of the lease;
- Rent review by either a fixed amount or percentage, consumer price index or current market rent;
- Outgoings and whether they are payable by the lessor or lessee;
- Insurance required;
- Permitted use;
- Security – whether a bond or bank guarantee is required;
- Assignment of the lease or subletting the premises; and
- Any other negotiated special conditions.
It is also important to understand who is responsible for the condition and repair of the premises. The lessor is required to maintain the premises and the essential services to the premises in a state of good condition. The lessee is usually responsible to maintain the condition of the premises, however is not required to improve the premises, fix any structural defects or general fair wear and tear. If the lessee has caused any structural damage, the lessee must pay the lessor’s costs of fixing the damage.
Upon the expiry of the lease and if the lessee has not entered into a new lease, the lessee must return the premises in the same state and condition as at the commencing date and have removed any goods and fixtures that the lessee has fixed to the premises. Any damage caused by the removal must be made good by the lessee. These responsibilities however, can be negotiated between the lessor and the lessee and should be incorporated in the lease before being signed by both parties.
Retail leases are subject to greater regulations. The lessor is required to provide the lessee with a copy of the Retail Tenancy Guide and a Lessor’s Disclosure Statement at least 7 days before the commencement of the lease. This document outlines detailed information regarding the premises such as existing structures and fixtures in the premises, a breakdown of outgoings, any advertising and promotional costs and shopping centre details, if applicable. Expenses associated with the preparation of retail lease documents cannot be passed to the lessee.
The lessor must give notice to the lessee at the end of a retail lease, between 6 to 12 months before the expiry of the lease. The lessor must provide written notice of either offering or declining the lessee a renewal or extension of the lease. If the lessor does not provide this notice, the lease can be extended by a further 6 months from the date of the lessor’s notice, provided that the lessee requests this extension in writing.
Whether you are a lessor or lessee, it is important that you seek legal advice to ensure that you understand your rights and obligations in the lease before it is signed.
If you would like to discuss matters relating to your Lease, please contact our office on (02) 8076 4539 to speak with one of our lawyers.
This publication is intended only to provide a summary of the subject matter covered. It does not purport to be comprehensive or to render legal advice. The publication reflects the law at the date the publication was written, which may differ at the date the publication is being read. No reader should act on the basis of any matter contained in this publication without first obtaining specific professional advice.
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