INSIGHTS: Retail shop leases: your rights as a tenant

March 24, 2014

Any lease you enter into for premises in New South Wales that are to be used as a retail shop will likely be subject to the Retail Leases Act 1994. The Act governs many aspects of the relationship between the landlord and the tenant of leases that fall within the ambit of the Act (termed a ‘retail lease’). However, the Act does not deal with every issue that may arise.

As a tenant it is crucial to understand that if you enter into a lease, even if you did not read or understand the agreement, your financial obligation continues. It is therefore important that, prior to entering into a retail lease, you take appropriate financial and legal advice regarding the document and develop an awareness of the key provisions of the Act. This article will assist you by summarising some of your key rights under the Act.

Which retail shops are covered by the Act?

Most types of shops or retail operations are covered by the Act, from antique shops to beauticians, barbers and hairdressers, drycleaners, from optometrists to pharmacies, to name but a few. Some retail shops and leases involving retail shops are, however, excluded from the Act’s coverage (such as shops with a lettable area of 1,000 square metres or more and leases with a term of 25 years or more).

When does a retail lease commence?

A lease that does not fall within the terms of the Act will usually commence when the landlord and tenant intend it to commence. However, a retail lease starts before the lease is signed, if you start to pay rent or take possession of the shop even though a form of lease has not been signed.

If you didn’t get a Lessor’s Disclosure Statement, or there is a serious misrepresentation contained in the Lessor’s Disclosure Statement, this may give you the right to terminate the lease within the first six months, by giving notice in writing to the landlord.

What should the landlord and tenant do before a retail lease is entered into?

The Act requires landlords or their agents to make a copy of the proposed retail lease available to any prospective tenant in writing prior to the landlord advertising the premises as being for lease, so you can see the main terms of the retail lease from the beginning. Failure by the landlord to comply with this requirement is an offence under the Act.

The landlord must give you a Lessor’s Disclosure Statement about the lease terms and the retail lease premises together with a Retail Tenant’s Guide within certain timescales before the lease is entered into. As a tenant, you are similarly required to give a Lessee’s Disclosure Statement to the landlord within a certain time after receiving a Lessor’s Disclosure Statement (or within such further period as may be agreed). The form of the Lessor’s Disclosure Statement and Lessee’s Disclosure Statement is mandated by the Act and is available from the website of the Department of Fair Trading NSW. The Retail Tenant’s Guide is a document published by the Department of Fair Trading and is available from the same source.

Minimum term of lease under the Act

A retail lease is to be for at least five years, unless a solicitor or conveyancer explains how the Act works and you give the landlord a certificate under section 16 of the Act by which you elect to waive that minimum period in favour of a lesser term. Recent changes to the Act mean that a series of short-term leases (once the combined term is longer than 12 months) may give you the right to ask for a five-year retail lease.

What if there are misrepresentations between the parties prior to the lease being signed?

Either party (i.e. both the landlord and the tenant) can be made liable to the other for compensation for damage suffered as a result of a party entering into a retail lease as a result of false or misleading representations by the other party. For this reason, it is important that those on both sides of the transaction take care that the statements and representations they make, and the content of the Lessor’s and Lessee’s Disclosure Statements are correct and true at the time they are made. Misrepresentations included in a Lessor’s Disclosure Statement can also, in some circumstances, entitle a tenant to terminate a retail lease within 6 months of the tenant entering into the lease.

What are my rights regarding fit-out costs and standards of construction?

It’s common for a landlord to agree to carry out works on a shop which will, in turn, enable the tenant to fit the shop out to his or her specific requirements. It’s also common for the tenant to agree to be liable for the costs of these works.

It’s important that the parties are very clear over the specification for the works which are required in order to avoid disputes over whether certain work was necessary or not, and to ensure the works do properly enable the tenant’s fit out. Helpfully for tenants, the Act requires that the maximum amount of the costs of these works (or a basis or formula for those costs) is agreed in writing by the lessor and lessee before the lease is entered into. The Act also provides help for tenants in that the tenant will not be liable to pay more than the maximum agreed in writing for the works.

It’s also worth being aware that if a prospective landlord of a retail shop in a retail shopping centre requires a particular standard of construction for fit-outs being carried out by a tenant, then the relevant standard must be contained in a ‘tenancy fit-out statement’ to accompany either the Lessor’s Disclosure Statement or the retail lease. The tenant will not generally be liable to carry out a fit-out to any standard of construction which is not specified and disclosed in this way.

Is my landlord entitled to ‘key money’?

Key money is defined as a ‘premium, non-repayable bond or otherwise… or any benefit in connection with the granting, renewal, extension or assignment of a lease’. The Act prohibits landlords of retail leases from asking for or accepting key money and contract or lease terms that specify the payment of key money by you to the landlord are void.

Can my landlord ask for a bond or bank guarantee?

A bond is security held by the landlord in case of unpaid money or unperformed obligations during or at the end of the lease. Security is usually in the form of a cash bond or a bank guarantee and the landlord is within his or her rights under the Act to ask the lessee to provide such security.

If you give the landlord a cash bond, the landlord must lodge it with the NSW Retail Bond Scheme. If there is a dispute about the bond, the Retail Tenancy Unit holds the bond until the matter is resolved. With the bond dispute resolution process most matters are resolved quickly at no cost. There is a staged approach to dealing with disputes and at every stage the parties can choose to agree to the payment of the bond, or progress to the next stage.

Bank guarantees are often provided by tenants to landlords as an alternative security to a cash bond. Banks issue bank guarantees under which they guarantee to the landlord your performance of the terms of the lease. Usually, if the landlord requests the issuing bank to pay money under the guarantee, then the bank must do so, regardless of the merits of the landlord’s claims.

Can a retail lease accord a landlord a right to relocate my premises or terminate the retail lease early?

You should be particularly vigilant regarding clauses that permit the landlord to relocate your premises or to terminate the retail lease before the expiry of its term, usually because of the landlord’s renovation or demolition plans.

The Act permits a retail lease to contain a relocation clause, provided you are given at least three months’ notice in writing by the landlord about the move. The landlord will pay the reasonable costs of your relocation, which can be agreed or a quantity surveyor can work them out. If the proposed premises are unacceptable, you can inform the landlord in writing within a month and the retail lease will finish at the end of the notice period.

The Act also permits a retail lease to contain a demolition clause enabling the landlord to end the retail lease if they require the shop to be vacated for the works. The landlord must give at least six months’ notice that the lease will end because of demolition. During the six-month notice period you can end the lease with seven days’ written notice.

In our experience, the landlord’s exercise of their rights under such clauses can result in substantial financial loss for a tenant. You should not sign a lease without considering such clauses in detail and only then with the assistance of detailed financial and legal advice. We recommend that you immediately consult a lawyer if you should receive a notice from a landlord regarding an existing retail lease.

My landlord will not let me assign the lease—can he or she refuse consent?

A landlord can specify in the form of a retail lease that the landlord’s prior consent is required for you to assign a lease. However, a landlord is accorded only very limited grounds on which to refuse such consent, provided you comply with the procedure set out in the Act in applying for the landlord’s consent. The limited grounds on which the lessor can withhold his or her consent to the assignment of the lease are:

  • if the proposed assignee proposes a change of use to which the shop is put;
  • if the proposed assignee has financial resources or retailing skills that are inferior to the outgoing tenant; and/or
  • if the tenant has not complied with the Act’s set procedure for seeking consent to assignment.

If you follow the procedure set out in the Act in applying for the landlord’s consent to the assignment of the lease, then the landlord must either grant his or her consent or withhold his or her consent within 28 days of receiving the application and can only refuse consent on the basis specified above.

By following the correct procedure set out in the Act will also allow you as tenant and any guarantor to obtain statutory releases after the date of assignment of the lease to your assignee. Otherwise, you and any person who has provided a guarantee of your obligations under the retail lease, may remain liable to the landlord for any non-performance of the retail lease by the assignee for the remainder of the term of the retail lease.

My lease is coming to an end and I don’t know whether I will be offered another lease

If you have an option to renew your retail lease on the expiry of the existing term, then the landlord will, usually, be obliged to provide you with a new lease on the terms required by the option. If you have no option, then the landlord is not required to offer you a new retail lease nor are you required to accept a new retail lease.

However, the Act does require the landlord between 6 to 12 months before the end of a retail lease, to write to you and either:

  • offer a renewal or extension of the retail lease on terms specified in the notification (including terms as to rent), or
  • inform the you that the landlord does not propose to offer a renewal or extension of the retail lease.

 

The offer of renewal or extension can’t be revoked by the landlord for 1 month, and the landlord may agree to hold the offer open for a longer period of time while new lease terms are negotiated.

If the landlord fails to give the required ‘notice of his/her intentions’, then you can ask for an extension of the retail lease prior to the lease expiring. If the Act’s requirements are met in relation to this request then the retail lease will generally be extended (by operation of law) for 6 months from the date when the landlord gives the notice of intention required by the Act.

I believe my landlord has tried to mislead and deceive me several times—do I have any rights?

Potentially—yes. The Act states that neither landlords nor tenants ‘can engage in conduct which is, in all the circumstances, unconscionable’. It also provides that:

A party to a retail shop lease must not, in connection with the lease, engage in conduct that is misleading or deceptive to another party or that is likely to mislead or deceive another party to the lease.

If you feel that you have suffered loss or damage as a result of unconscionable conduct in contravention of the Act, it is open to you to lodge a claim against the other party in the Administrative Decisions Tribunal.

Contact Michael Bracken or Georgina Odell for advice on your retail shop lease.