Retail leasing: do your homework

In Victoria, retail leases are governed by the Retail Leases Act 2003 (Act)¹. A retail lease arises (subject to certain exceptions) when parties enter into a lease arrangement for a premises used wholly or predominantly for the retail sale or hire of goods or services for a term greater than 1 year.

Here are 3 important issues that all tenants and landlords should be aware of regarding retail leases.

1. Paper trail …

When a landlord enters into negotiations with a potential tenant about a lease, the landlord is required under the Act to promptly provide a copy of the following:

the proposed lease in writing; and
the information brochure about retail leases published by the Victorian Small Business Commissioner.

Additionally, at least 7 days before entering into the lease, the landlord must give the tenant a disclosure statement. The disclosure statement is an important document that gives the tenant an overview of the lease. If a tenant has not been given the disclosure statement before entering into the lease and it has notified the landlord in the required time period, the tenant is not liable to pay rent for the period starting from the day notice was provided until and including the day the disclosure statement is provided. The type of disclosure statement provided by the landlord will differ depending on whether the premises is located in a shopping centre or not. The relevant form of disclosure statements can be found at the Victorian Small Business Commissioner website.

2. Over and out!

As past disputes have shown, the recoupment of outgoings can be a hotly contested issue between landlords and tenants. Before entering into a lease, tenants should form a thorough understanding of the estimated outgoings expected to be paid based on the landlord’s disclosure statement and copy of the lease. If there is any confusion or uncertainty, making enquiries before finalising the lease is advisable. Under the Act, landlord’s outgoings can account for any of the following:

the expenses directly attributable to the operation, maintenance or repair of:
i. the building in which the premises are located;
ii. any other building or area owned by the landlord and used in association with the building in which the premises are located;
iii. in the case of premises in a retail shopping centre, any building in the centre or any areas used in association with a building in the centre;
rates, taxes (but not including land tax), levies, premiums or charges payable by the landlord as the owner or occupier of the building in which the premises are located or the land on which such a building is erected.

However, it is important to note that capital costs cannot be recovered by the landlord and where a premises is located in a shopping centre, the tenant is only obliged to pay the outgoings that benefit the premises.

3. Whose job is it anyway?

Another contentious issue is the obligations of landlords and tenants when it comes to repairs and maintenance. A well-executed lease should clearly set out the exact obligations of both parties and parties should have a thorough understanding of these obligations. The Act provides guidance as to these obligations and a number of VCAT decisions over the years have lent further assistance.

Landlords are responsible for maintaining the following in a condition that is consistent with the condition when the lease was first entered into:

structure of the premises;
fixtures in the premises;
plant and equipment in the premises;
appliances, fixtures and fitting that the landlord provided under the lease relating to gas, electricity, water, drainage and other services; and
Essential Safety Measures as per the Building Act 1993 (Vic) and Building Regulations such as emergency lifts, smoke alarms, fire protections and sprinkler systems.

Where a landlord fails to meet its responsibilities, the tenant may carry out the work needed and recover the cost from the landlord, or set-off the cost against rent. It is however important for tenants to note that a landlord’s repair and maintenance responsibilities are waived in the following situations:

the need for repairs arise out of the tenant’s misuse; and
the tenant is entitled or required to remove the item at the end of the lease.

As for tenants, their responsibilities include maintaining the premises in the same condition as at the start of the lease subject to fair wear and tear and ensuring the premises are clean and tidy.

The teacher says …

Leases can be complex arrangements. Nevertheless, doing the necessary homework will pay off in the long term. Many disputes can be avoided if parties take the time at the outset to develop an in-depth understanding of leasing provisions before entering a lease arrangement.

¹ QLD – Retail Shop Leases Act 1994; TAS – Fair Trading (Code of Practice for Retail Tenancies) Regulations 1998; SA – Retail & Commercial Leases Act 1995; WA – Commercial Tenancy (Retail Shops) Agreements Act 1985; NSW – Retail Leases Act 1994; ACT – Leases (Commercial and Retail) Act 2001; NT – Business Tenancies (Fair Dealings) Act 2003.

^{Clawing back lease incentives

Safety is free – for tenants}