Signing a lease is a major financial and legal commitment. It is at least as significant as buying a home and signing a mortgage. As with all financial commitments, it’s essential to diligently and meticulously consider the obligations you must meet as a lessee.
This guide will help you understand legal terminology and some of the statutory protections that are afforded to retail shop leases. It is not a substitute for having reviewed by an experienced business lawyer and obtaining recommendations as to what changes should be proposed to the landlord before signing up to the lease.
What Is a Retail Shop Lease?
A lease is a legally binding contract wherein the landlord allows the tenant (this is you, as the business owner) to occupy certain premises — subject to certain terms and conditions agreed upon by both parties.
A lease is a “retail shop lease” if the lease conducted on the premises meets either of these three conditions:
- it is in a Retail Shopping Centre, ie a single-level building where five or more retail shops are located such as shopping malls or arcades; or
- it is in a multi-level building on a floor that contains at least five retail shops; or
- It is used wholly or predominantly for carrying on a Retail Business as described in the schedule to the Regulations to the Retail Shop Leases Act (RSLA).
What businesses qualify the premises as a Retail Shop?
The regulations list each type of business that comes within the definition. Generally, if you are engaged in the business of selling goods directly to customers for their use or consumption, then you are very likely entering into a retail shop lease.
Examples of “retail shops” are restaurants, fashion boutiques, pet supply stores, convenience stores, bakeries, butchers, and similar retail businesses.
What premises can NOT be Retail Shops?
Some businesses you might expect to be regarded as retail for example: hairdressers; gyms; doctor’s surgery; real estate offices; travel agencies; and repair shops do NOT fall within the definition because they provide services rather than sell goods UNLESS the premises are located within a Retail Shopping Centre or are in a multi-level building on a floor that contains at least five retail shops.
Regardless of their use, leasing the following premises can not constitute a retail shop lease — and therefore, are not covered by the RSL Act:
- premises with a floor area greater than 1000 m2;
- premises not carrying on a retail shop business located in a centre where 25% or less of the total area is occupied by retail shops (eg where the majority of the occupants are professional or commercial offices);
- theme park and amusement park shops;
- premises providing entertainment, telecommunication, or leisure;
- premises used for storage (such as warehouses) or parking vehicles;
Is There a Minimum Term For A Retail Shop Lease?
No. Unlike other states which require a minimum of 5 years, there is no minimum term for leasing a retail shop in Queensland.
What protections apply to Retail Shop Leases?
The Retail Shop Leases Act 1994 (Qld) affords retail tenants a far higher degree of consumer protection by prohibiting some leasing practices that are otherwise permitted in commercial leases and by imposing landlord obligations. The protections include the following.
Lease preparation costs
A landlord is prohibited from compelling a tenant to reimburse it for the legal costs it incurs in relation to preparing a retail shop leases. Note that tenants can still be charged for lease registration costs, surveyors charges and if any costs are required in relation to obtaining the consent of the landlord’s mortgagee to the lease.
During the negotiation stage and at least 7 days before the tenant enters the retail shop lease, the RSLA requires the landlord to provide the prospective tenant with two documents:
- A draft of the lease, and
- Disclosure statement
A disclosure statement sets out the essential terms (rent, term, permitted use, rent increases, outgoings contributions, options to renew etc) of the prospective lease lease. The intention is to allow the tenant to quickly see whether there are any acceptable commercial terms that are proposed.
If such statement is either incomplete or contains false information or if it is given later than 7 days before the start of the lease – the tenant is allowed to terminate the lease within 6 months from the date it was entered in to.
Additionally, the tenant also has the right to seek compensation in case for any losses sustained as a result of any false information contained in the disclosure statement.
Key Money payments
Key money is a non-refundable benefit — usually cash — that a landlord asks the tenant to pay over and above rent and outgoings, in exchange for the grant of the lease. The RSLA prohibits such payments.
Key money is different from a security deposit. A security deposit is always refundable — and is therefore allowed by law to be paid to the landlord, while key money is always non-refundable.
A retail lease is required to specify only one method of annual rent review eg: a fixed amount; a fixed percentage escalation; CPI increases; or a market review.
A ratchet rent review clause operates to prevent – on the occasion of a market review of rent eg at the time of exercise of an option – rent being decreased or limits the extent of any rental decrease applied.
A dual method rent review clause operates to allow the landlord to specify that on any rent review date, it can choose between two or more rent review methods OR specifies that rent will be reviewed upwards by whichever of two or more methods would result in the highest rent outcome.
Ratchet rent review and dual method rent reviewclauses allow landlords to maintain high rents despite downward movement in market conditions and are prohibited by the RSLA.
Option to Renew
An option to renew is a specific clause in the retail lease agreement that gives the tenant the right to choose whether to extend the lease.
If the tenant does not exercise an option to renew the lease, then the lease comes to an end at the expiration of the lease term or the landlord can compel the tenant to accept different terms should it wish to remain in occupation of the premises.
A typical option provision specifies that the tenant must give notice of intention to renew at least six months prior to the expiration of the original term and allows for the new rent to be determined after the option is exercised.
Where the RSLA applies, the situation is different. A Retail Shop Leases tenant can:
- call for a determination of the new rent 6 months prior to the expiration of the current term (in the case of leases of 12 months or less, 3 months prior); and
- decide within 21 days following the determination of that rent whether or not to exercise his option to renew the lease.
The landlord is also obliged to give the tenant written notice of a pending option renewal date at least 2 months before (and up to 6 months) before the last date of the current term of the lease.
Renewing lease if no option to renew
If there is no option to renew contained in a retail lease, the landlord is obliged at least 6 months prior to its expiration (in the case of leases of 12 months or less, 3 months prior) to notify the tenant in writing as to whether or not he intends to offer the tenant a new term of lease.
Failure to do so means that the Tenant is automatically entitled to a six-month renewal on request, if the request is made before the expiration of the lease term.
Disputes and Compensation
Under the RSLA, any disagreements or disputes that arise between the tenant and landlord can be resolved by a 2-step process:
- If the dispute is not settled during mediation, it shall be referred to of the Queensland Civil and Administrative Tribunal (QCAT)
A tenant may claim compensation for losses occasioned by the actions of a landlord, the landlord:
- substantially restricts access to the leased premises;
- substantially restricts customers from accessing the premises; or
- significantly disrupts the tenant’s business in any way.
Compensation for business disturbance
The landlord is liable to pay compensation to the tenant if, in relations to items that are its responsibility under the lease:
- it does not rectify breakdowns or building defects as soon as possible;
- it neglects the cleaning, repainting, or any other maintenance of the premises; or
- causes a tenant to before the end of the lease because of works relation to an extension, refurbishment or demolition of a shopping centre or building.
To claim compensation, the tenant is required to provide a notice to the landlord of any loss or damage incurred.
The RSLA also protects tenants by prohibiting the landlord from engaging in unconscionable conduct in relation to the leased shop. It does not specify particulars of conduct that is unconscionable but rather sets out circumstances in which such conduct might meet that description including where the landlord:
- demands the tenant to comply with unnecessary conditions.
- exerts unwarranted influence, pressure, or selfish tactics against the tenant.
- fails to disclose planned conduct that might be detrimental to the tenant.
- shows an unwillingness to negotiate.
- fails to act in good faith.
It is always prudent to have an experienced business lawyer examine commercial documents like leases, before you sign them. Often, your lawyer will be able to negotiate very beneficial changes to the terms that are proposed by a landlord. The lawyer will explain the intricate details of all the obligations you are obliged to meet in the circumstances in which you are obliged to observe the landlord’s requirements.
If you want to learn more about your obligations and rights under the Retail Shop Leases Act, contact QLD Business + Property Lawyers today.