When negotiating a new lease, parties should consider the proposed use of the premises and whether the lease needs to be a retail lease or a commercial lease. The difference between the two is subtle but important.

Retail leases in NSW invoke the Retail Leases Act 1994 (NSW) (“the Retail Leases Act”) which imposes obligations on retail landlords and offers protection to retail tenants. For example, if a landlord proposes a retail lease which contains clauses that are inconsistent with the Retail Leases Act, those clauses are void and cannot be enforced. By contrast, for commercial leases the parties’ rights and obligations will generally default to what is negotiated and set out in the lease.

In this article we outline these key differences and inform both retail landlords and tenants of their obligations under the Retail Leases Act.

Use of premises

Retail businesses which fall under the purvue of the Retail Leases Act include various types of shops, stores, café’s, restaurants, takeaway outlets, grocery shops, butchers, bakeries, beauticians, travel agencies, and any businesses in a retail shopping centre. As of 1 January 2023, small bars (maximum capacity 120 people) and gymnasiums and fitness centres (including yoga, barre, pilates and dance studios) are also treated as retail businesses.

There are certain exclusions such as:

• where the maximum term of lease including option periods exceeds 25 years;
• shops with a lettable area of 1,000 square metres or more (for example large retail outlets);
• shops where the tenant is carrying on business on behalf of the landlord;
• excluded uses such as ATMs, car parking, self-storage units, storage of goods.

Commercial premises will cover most other uses such as commercial offices, industrial sites, medical clinics and doctor’s offices, warehouses and storage facilities, parking lots and hard stands- basically any non-residential use that is excluded from the Retail Leases Act.

Landlord Obligations/Tenant Protections

The Retail Leases Act imposes a range of obligations on the parties, and the purpose for this is namely to protect retail tenants.

Commercial leases do not typically contain such protections.

The list of protections in a Retail Lease includes:

1. Limitation on legal fees payable by Tenant

• The Retail Leases Act prohibits landlords from charging tenants any legal fees to prepare the lease or any costs to obtain mortgagee’s consent. Landlords can still recover some costs, such as registration fees and any legal fees to vary the lease if the variation has been requested by the tenant.
• For commercial leases, it is a matter for negotiation but typically commercial tenants pay the landlord’s legal fees and mortgagee’s consent costs.

2. Disclosure Statement

• The Retail Leases Act requires landlords to give tenants a disclosure statement in the prescribed form at least seven days before the lease is entered into. This disclosure statement should outline the key terms of lease, including any estimates of the rent, outgoings and other costs payable by the tenant under the lease.
• Failure to give proper disclosure is an offence and may also entitle the tenant to terminate the lease.
• For commercial leases, no such disclosure is required by law and tenants need to ensure they are undertaking their own due diligence.

3. Outgoings and other charges

• The Retail Leases Act limits the outgoings and charges which are payable by the tenant, for example:
  • land tax can only be charged on a single holding basis;
  • capital costs, depreciation, landlord’s interest and borrowing expenses are not recoverable from the tenant;
  • contributions to capital costs is specifically excluded; and
  • a landlord cannot recover outgoings that were not disclosed in the lessor’s disclosure statement.
• For commercial leases it is a matter for negotiation, but typically tenants aren’t responsible for capital costs or the cost of structural works.

4. Rent Reviews

• Under the Retail Leases Act:
  • Rent reviews cannot occur more frequently than once every 12 months;
  • “Ratchet clauses” (which prevent rent from going down after a rent review) are void.
  • Clauses which provide the rent to be “the greater of” two specified rates are void.
• For commercial leases it is a matter for negotiation, but clauses such as these are common.

5. Security

• The Retail Leases Act dictates how the tenant’s security bond or bank guarantee is dealt with, for example:
  • Bank guarantees must be returned within 2 months after the tenant has completely performed its obligations under the lease. Failure to do so is na offence;
  • Security bonds must be deposited with the New South Wales Government’s Retail Bond Scheme within 20 business days of receiving it.

6. Notice of lessor’s intentions at the end of the lease.

• If a lease doesn’t have an option to renew, the Retail Leases Act requires landlords to give not less than 6 months notice to tenants as to whether they propose to offer a renewal or extension of the lease.
• Typically, commercial leases do not require landlords to give such a notice.

    7. Lease registration

• The Retail Leases Act requires landlords to register leases for a term exceeding 3 years within 3 months after the tenant has handed over a signed copy. Failure to do so is an offence.
• A commercial lease for a term exceeding 3 years must also be registered in order to pass a legal interest to the lessee, but the landlord isn’t guilty of an offence if they fail to register the lease.

8. Specific Clauses written into a Retail Lease:

• The Retail Leases Act inserts provisions into a retail lease or overrides the lease’s existing provision which deal with:
  • Provision of estimates and statements of outgoings;
  • Adjustments of contributions to outgoings based on actual expenditure properly and reasonably incurred;
  • The determination of current market rent;
  • The opportunity for the lessee to have current market review determined early;
  • Relocation;
  • Demolition;
  • Sinking funds for major repairs and maintenance;
  • Marketing plan for advertising and promotion;
  • Six-monthly and annual advertising and promotion expenditure statement to be given to lessees.
• Commercial leases can exclude some implied covenants, and the lease itself outlines the whole agreement between the parties.

 Key Takeaway

There is a significant difference between retail leases and commercial leases in terms of the power balance between landlords and tenants. Parties should be very clear whether the leasing arrangement is of a commercial and retail nature and, if it is a retail lease, ensure they are complying with the Retail Leases Act.

Our team is well versed in the area of leasing. If you require any assistance with negotiating a new lease, variation or transfer of an existing lease, or subleasing or licencing arrangements please reach out.