Most business owners do not think of it but a lease is really a business relationship between you as a business owner and the landlord. A lease is integral to your business as it governs the operation of the premises from where you will operate. Whether you control a small or a large business or are located in a large shopping centre or a small strip of shops the terms of the lease need to be tailored specifically to a retail shop
In Queensland, retail shops are governed by the provisions of the Retail Shop Leases Act 1994 (Act), this act is in place to help protect retail shop owners. This is necessary as often there is a great power imbalance between the landlord (often a large shopping centre company like Westfield) and a tenant (who are often small businesses without much business experience or ‘clout’). The Act provides a range of protections and require small retail businesses (defined as a business that has less than 5 retail shops) to obtain legal and financial advice in relation to the lease before they enter into the lease.
The biggest problems that I have seen in retail shop leases are:
- Incorrectly classifying the lease as a commercial lease when it is in fact a retail shop lease;
- Using the incorrect type of lease;
- Tenants misunderstanding their obligations at the end of the contract;
- Not taking into account an important aspect of the property; and
- Car parking.
In Queensland retail shop leases are governed by the Act. Often a landlord will want to have a lease in place that is a commercial based so that they can avoid the requirements of the Act. However this can end up causing more problems for the landlord in the future.
The Act sets out a number of requirements for a retail shop lease that are not necessarily required for a non-retail shop lease including:
- That the lessor must provide:
- A lessor disclosure statement: this is a statement that is in a mandatory form that sets out a lot of information that a tenant will require for the lease;
- Where the tenant pays outgoings: an audited statement of outgoings for the premises.
- That the lessee must provide:
- A lessee disclosure statement: this is a short statement in a mandatory form that sets out information for the landlord about the tenant; and
- Where they are not a large business (as I said above with 5 retail shops) evidence that they have obtained legal and financial advice.
- That the lease cannot contain certain provisions including:
- Ratchet clauses: these are clauses that provide that on a rent review that rent cannot be reduced; and
- A clause that attempts to contract out of the requirements of the Act.
The Act sets out very clearly that if it is classified as retail, it must match these circumstances:
- The business must conduct the qualities of retail and sales (whether wholly or predominantly). The Act and its associated regulations provides a long list of businesses that are retail, therefore if the type of business is one of these then it will be a retail shop; or
- Where a business is part of a retail shopping centre. This is defined as a centre where there are 5 or more retail shops in the centre and they centre has a common landlord.
Where a retail lease is not used for a retail business the landlord can have fines imposed upon them and the tenant will have certain rights to terminate the lease in those circumstances.
Using the incorrect type of lease
There is also a difference between a lease for a shopping centre and a lease for a standalone or other type of building. Often shopping centre leases will deal with a variety of different issues such as common property, use of car parks, lifts and escalators that are unique to the centre. For a standalone building these will often not apply. If there is no applicable service (i.e. an escalator) the right type of lease should be used so that there is no confusion or arguments from either side.
Given the importance of the lease document it is important that the correct lease type is used to avoid any confusion. This is especially the case when you have a lease that is 5 or 10 years as a longer lease means a longer relationship between you and your landlord. Any uneccesary misunderstandings or conflicts can strain that relationship.
Tenants not understanding all of their obligations at the end of the lease
This is an issue that I see time and time again when leases come to an end. A tenant has not read the lease obligations properly, or has forgotten what the lease says. They come to the end of the lease and do not perform the required work to finish the contract. Whilst it is always prudent for a landlord or managing agent to remind a tenant of their obligations at the end of a lease this does not always occur.
Generally speaking, most retail shop leases require that the tenant will put the premises back to the state it was at the beginning. Often this means that any fit out has to be completely removed and all of the services such as electricity need to be sufficiently ‘locked away’ so that they are not a hazard to the premises. Where you take on a lease for a premises that has an existing fit out it is crucial that you take photos of the state of the premises when you enter into the lease, especially where there is any damage to prove to the landlord that these were not caused by you.
If you are not sure of your obligations in this regard you need to review your lease as it will spell out your obligations at the end of the lease in full.
Not taking into account an important aspect of the property
Often when acting for a tenant we are not aware of an important aspect of the property, such as a right of access that is required to get to the premises.
It is critically important when you are signing up that you ensure that all of the matters relating to access, services and public advertising are thought through to ensure that you get the premises you want.
Where you have a lease for a premises you need to ensure that you have sufficient car parking for your staff and your customers or clients. This is especially the case with a retail shop lease, given the importance of the retail shop to the operation of the business.
Too often I see clients not consider this problem until it is too late. They have entered into a lease and then their customers and clients find it difficult to visit their business as they do not have sufficient car parking. A worst case scenario is a lot of car parking in the area but that space is owned by another tenant and they cannot use it for their business purposes.
This article does not address every aspect of a lease but it is designed to give you an idea about the common mistakes that tenants and landlords make when entering into retail shop leases. Taking the approach that everything will work out is dangerous and can cause significant problems for your business going into the future. It is important that you discuss all of these issues with your agent and make sure that the advice that you are getting is correct. When you have the physical lease you need to ensure that it is properly reviewed by your solicitor to make sure that it addresses all of your concerns (and other aspects that you have not considered) properly.
The solicitors at Streten Masons Lawyers have extensive experience in advising retail shop owners on these aspects and can assist you in your retail shop lease. Please contact us today on (07) 3667 8966 discuss how we can assist you further.