FAQs on Retail Leases

What is a retail lease?

A retail lease is a type of commercial lease relating to retail premises. Retail leases are governed by the Retail Leases Act 2003 (Vic) ("the Act"), although there are some exceptions.

What are retail premises?

Retail premises are defined under the Act as business premises wholly or predominantly used for selling, hiring or providing goods or services to the public.

What are some examples of retail premises?

Some examples are:

retail shops for the sale of merchandise;
bars, cafes and restaurants;
petrol stations, car showrooms and car rental outlets;
gymnasiums and fitness centres;
equipment hire shops;
post offices and banks;
hotels and bed and breakfasts;
hairdressers and beauty salons;
medical and counselling suites;
accounting and law firms; and
architects and surveyors offices.

Are there any leases where the Act does not apply?

The Act does not apply to leases where:

the rent and prescribed outgoings and other costs payable by the tenant under the lease exceed AUD1,000,000 per year;
the tenant is a listed corporation or a subsidiary of a listed corporation;
the term is less than one year unless consecutively renewed; or
an exemption from the Act has been granted by the Minister.

There are also categories of leases which have been excluded by the Minister from being regulated by the Act. These are:

the commercial premises exemption;
the 15 year lease exemption;
the barristers’ chambers exemption;
the Melbourne markets exemption; and
the premises used for certain community and charitable purposes exemption.

What terms and conditions should I negotiate before signing a retail lease?

As a general guide, the main terms and conditions that both landlord and tenant should negotiate and mutually agree to before signing the lease include those regarding:

the term of the lease and any options to renew;
the amount and payment of the rent and any methods to review and adjust the rent (e.g. whether based on a fixed percentage or amount or a certain figure pegged to the consumer price index);
the amount and payment of operating expenses, outgoings and other costs (e.g. whether payable by the tenant, the landlord or both);
the amount, payment and return of the security deposit;
the permitted use of the premises and facilities;
the permits, approvals, registrations and other licences needed for the business or the lease (if any); and
the rights and obligations of both landlord and tenant (e.g. on insurance, maintenance, repairs, reinstatement, relocation, assignment and termination).

What documents must the landlord give to the tenant in a new retail lease?

According to the Act, the landlord must give to the tenant:

a copy of the proposed lease, as soon as the parties start negotiations on the lease and at least seven days before the tenant signs the lease;
the Victorian Small Business Commissioner Information Brochure on retail leases, as soon as the parties start negotiations on the lease;
a disclosure statement, at least seven days before the tenant signs the lease; and
the fully signed lease (or a photocopy of it), within 28 days after the tenant signs and returns the lease.

What is the disclosure statement?

The Act requires the landlord to furnish a document known as the disclosure statement to the tenant. The disclosure statement broadly describes the key features of the lease. The intention is to let the parties be aware at the outset of what is expected of them under the lease. Some of the salient points to be set out in the disclosure statement include the following:

the term of the lease and whether there are any options to renew;
the amounts payable by the tenant including the rent, operating expenses, outgoings and other costs and whether there are any methods to review and adjust the rent (e.g. whether based on a fixed percentage or amount or a certain figure pegged to the consumer price index);
the permitted use of the premises;
whether the landlord has any proposals for the premises (e.g. whether for relocation or demolition of the premises);
whether the tenant has any fit out requirements; and
whether the tenant has any additional obligations.

Depending on the circumstances, different time periods apply as to when the disclosure statement must be given to the tenant. These are as follows:

for a new retail lease, it must be given at least seven days before the tenant signs the lease;
for a renewed retail lease:
- where the renewal is by exercise of option, it must be given at least 21 days before the prior lease comes to an end; and
- where the renewal is by agreement, it must be given no later than 14 days after the parties have agreed to renew the prior lease.

The tenant has remedies such as terminating the lease if any information in the disclosure statement is misleading, false or materially incomplete.

What if the landlord does not give the tenant the disclosure statement?

The tenant can notify the landlord that the disclosure statement has not been given and can withhold payment of the rent until the day on which the landlord gives the disclosure statement. Furthermore, if the lease is entered into without the disclosure statement being given, the tenant will have the right to serve notice on the landlord to terminate the lease. Any notice to the landlord about the non-receipt of the disclosure statement or the termination of the lease must be given within the time limits prescribed by the Act.

What if the landlord does not give the tenant the fully signed lease (or a photocopy of it)?

If the lease is entered into without the fully signed lease (or a photocopy of it) being given, the tenant will have the right to serve notice on the landlord to terminate the lease. Any notice to the landlord about the termination of the lease must be given within the time limits prescribed by the Act.

Can the tenant sign a retail lease if the tenant has not yet obtained the relevant permits and licences required to run the tenant’s business?

It is not advisable. If the lease must be signed before the permits and licences have been obtained, clauses should be included in the lease to state that the lease is conditional upon the permits and licences being granted.

If the landlord has mortgaged the premises, must the bank or other financial institution consent to a retail lease of the premises?

By and large, the lease of the premises will require the consent of the bank or other financial institution. The landlord should provide evidence of such consent. The risk of not having such consent is that the bank or other financial institution may be entitled to treat the lease as improper and to evict the tenant. From the landlord's perspective, it is also prudent to get such consent as the mortgage customarily makes it an event of default if the landlord deals with the premises without such consent.

Is there a minimum term for a retail lease?

Under the Act, the minimum term is five years. This requirement can be waived if the tenant wishes to lease for a shorter term, and the landlord does not object. To obtain a certificate confirming the waiver, the tenant will have to apply to the Victorian Small Business Commissioner.

Must the landlord grant the tenant a rent free period for the tenant to fit out the premises in a retail lease?

Any rent free periods will be as discussed and agreed to between the parties. The landlord may allow a rent free period for the tenant to fit out the premises, as an incentive for entering into the lease. Alternatively, the landlord may agree to undertake some fitting out works or contribute to the costs of the fitting out costs.

How is the rent decided in a retail lease?

For a new retail lease, the rent is initially established by negotiation between the parties. For an existing retail lease, the rent is determined by the rent review clauses in the lease. The lease may provide that at any time during the lease, the landlord can review and revise the rent (e.g. by increasing it based on a fixed percentage or amount or a certain figure pegged to the consumer price index). The lease may also provide that upon renewal of the lease, the rent is to be reviewed and revised in accordance with the current market rent.

What is the security deposit in a retail lease?

The security deposit is an amount of money that the landlord may require the tenant to pay at the beginning of the lease. The Act does not make it compulsory for any security deposit to be imposed. But the landlord will often seek the security deposit as a protection because it assists in ensuring the tenant's performance of the tenant’s obligations under the lease. The amount of the security deposit is negotiated between the parties, although it is commonly the equivalent of one or two months’ rent.

Can the tenant provide a bank guarantee instead of the security deposit?

Yes, if the landlord agrees, the tenant may do so. Where money is paid by the tenant for the security deposit, the landlord must place it in an interest bearing account and account to the tenant for the interest earned, in order to comply with the Act. Such interest can be dealt with by the landlord as money paid by the tenant to form part of the security deposit.

What can the security deposit be used for?

The lease should state clearly what the security deposit can be used for. For instance, it may say that the landlord is allowed to use it to remedy any breach of the tenant’s obligations under the lease, or to pay for any cleaning, repairs or reinstatements when the lease ends.

When can the tenant get back the security deposit?

As soon as practicable after the lease ends, the landlord must return the security deposit including any accrued interest to the tenant. This is subject to the tenant having performed all of the tenant’s obligations under the lease.

What are outgoings in a retail lease?

Outgoings are the landlord’s expenses associated with the premises. Usually, the tenant will have to contribute to and pay for outgoings under the lease. Some examples of outgoings are:

utility services, including electricity, gas, oil, water and energy management systems;
rates, taxes, levies, premiums, charges and fees, including council rates and charges, water, sewerage and drainage rates and charges, body corporate and strata levies, administration costs, audit fees and management fees (except for land tax which must be borne by the landlord);
building management services, including temperature control, insurance, pest control and ventilation;
hygiene services, including cleaning, garbage collection and disposal and waste disposal;
security services, including caretaking, emergency systems and fire protection equipment;
amenity facilities, including gardening and landscaping and public address and music systems;
communication facilities, including telephones and post boxes;
customer facilities, including car parking, lifts, escalators and child minding;
information services, including customer traffic flow and other building intelligence information, information directories and signages;
maintenance and repairs services; and
marketing, advertising and promotional services.

What information regarding outgoings must the landlord give the tenant?

Preliminary information regarding outgoings will be found in the copy of the proposed lease and the disclosure statement that the landlord must give the tenant during the negotiation stage. In addition, the landlord is required by the Act to give the tenant:

a written itemised estimate of outgoings before the lease is signed;
a written itemised estimate of outgoings for each accounting period of the landlord, at least one month before the start of that accounting period; and
a written statement of outgoings for each accounting period of the landlord, within three months after the end of that accounting period. The statement must be audited, unless the outgoings pertain only to GST, utilities rates and charges, council rates and charges, and insurance, and the statement is accompanied by copies of assessments, invoices, receipts and other evidence of payment of the outgoings by the landlord.

What if the landlord does not give the tenant the written itemised estimate of outgoings?

The Act stipulates that the tenant does not have to pay for any outgoings until the written itemised estimate of outgoings is given.

Must the tenant pay for outgoings that have not been listed in a retail lease?

No, outgoings that have not been listed in the lease do not have to be paid for by the tenant. The Act enables the landlord to claim from the tenant only outgoings that have been specified in the lease, otherwise they remain the liability of the landlord.

Who is responsible for payment of land tax in a retail lease?

The landlord must pay land tax. The Act categorically prohibits the landlord from passing land tax on to the tenant.

Who is responsible for maintenance and repairs in a retail lease?

Under the Act, the landlord must keep in the same condition as when the lease was entered into:

the structure of the premises (e.g. the walls and roof);
the fixtures in the premises (e.g. the fixed items belonging to the landlord such as built in storage);
the plant and equipment at the premises (e.g. the air conditioning system); and
the appliances, fittings and fixtures relating to gas, electricity, water, drainage or other services (e.g. the powerboards, water pipes and hot water system).

However , the landlord is not liable if the maintenance or repair of the item arises through misuse by the tenant or if the tenant is entitled or required to remove the item at the end of the lease.

Typically, the tenant must keep the premises in a clean and tenantable condition, save for fair wear and tear.

Can the landlord relocate the tenant in a retail lease?

The landlord can relocate the tenant only if the lease has a relocation clause. Otherwise, the landlord cannot force the tenant to move. A relocation clause will often specify how a relocation is to operate. The Act also has provisions setting out at a minimum what the tenant is entitled to in a relocation, but these are not mandatory. The tenant is free to negotiate other arrangements with the landlord.

Can the tenant claim compensation from the landlord in a retail lease?

In certain situations as outlined in the Act, the tenant can seek reasonable compensation for loss or damage suffered because of interference from the landlord. Some of the scenarios are:

the landlord substantially inhibits access to the premises or alters the flow of customers to the premises;
the landlord unreasonably causes, or fails to take reasonable steps to prevent or stop, significant disruption to the tenant’s business at the premises;
the landlord fails to rectify as soon as practicable breakdowns in plant or equipment under the landlord’s care or maintenance; or
the landlord neglects adequately to clean, maintain or repair the building.

How do the unconscionable conduct provisions in the Act help me?

These provisions prevent both landlord and tenant from engaging in unconscionable conduct against the other. They set out the factors that may be taken into consideration when ascertaining whether there has been any unconscionable conduct and also clarify what sort of conduct will not be regarded as unconscionable. They are designed to safeguard both landlord and tenant from unfair behaviour or tactics by the other.

In a retail lease, when must the landlord provide the tenant with a notice if there is an option to renew?

Between 6 months and 12 months before the date of expiry of the option to renew, the landlord must give written notice to the tenant reminding the tenant of such date, as required by the Act. However, if the tenant has already exercised the option to renew before being notified of such date, the landlord is not required to give such written notice.

What happens if a retail lease is to be renewed at the current market rent and the parties cannot agree on the amount of the rent?

The normal procedure is for the landlord to present the tenant with the proposed amount. This can be negotiated by the tenant with the landlord. If the parties cannot agree on the amount, they can appoint a specialist retail valuer to determine the rent.

In a retail lease, when must the landlord provide the tenant with a notice if there is no option to renew?

Between 6 months and 12 months before the date of expiry of the lease, the landlord must give written notice to the tenant advising the tenant of the landlord’s intentions, as required by the Act. Such written notice must either offer the tenant a renewal of the lease on the terms and conditions as specified in such written notice, or inform the tenant that the landlord is not offering a renewal of the lease. If the landlord offers the tenant a renewal of the lease, it cannot be withdrawn for 60 days except with the consent of the tenant.

Is the landlord obliged to renew a retail lease if there is no option to renew?

Ordinarily, the landlord has no obligation. However, there is an exception under the Act, viz. when the tenant has been in continuous possession of the premises for less than five years and has not obtained a certificate confirming the waiver of the tenant’s right to a five year term. The landlord will then need to renew the lease until the tenant has been in continuous possession of the premises for five years.

Can the landlord charge the tenant a premium for renewing a retail lease?

Yes, as long as the premium is good consideration for the benefit received by the tenant, i.e. the value of the renewal of the lease. If the premium paid to the landlord is not in proportion to the benefit received by the tenant, then pursuant to the Act, it will be considered key money that is void and the tenant can seek to recover it from the landlord. If the premium (not being key money) is charged, it could attract stamp duty.

The above content is general in nature and is not intended to address your specific circumstances. We welcome the opportunity to have a chat with you and assist you with your legal issues or concerns. Talk with us and see the difference.

Updated June 2019.