A lease is a contractual agreement setting out the rights and obligations of each party to the contract. A lease is granted by a person or business to another person or business for a value in return for the right of occupation. This relationship is typically known as between the landlord and the tenant or lessor and lessee.
A commercial lease is a contractual agreement for the leasing of a commercial premises such as industrial sites or office spaces that do not carry on a business concerning retail activity.
Under a commercial lease, the extent of a tenant’s liability is largely dependent on their ability to negotiate their rights and obligations. This is different to a retail lease which is subject to highly regulated legislation.
The terms of a commercial lease include, but are not limited to:
- The period of the lease and any options for renewal;
- Rent, outgoings and the rent review methods;
- Bank guarantees and security deposits;
- Obligation for repairs and maintenance;
- The tenant’s capacity to carry out works on the premises to suit its needs;
- The tenant’s obligation to “make good” the premises at the end of the lease;
- Circumstances in which the landlord may access the premises;
- The rights of both parties if the landlord wants to renovate or redevelop the premises;
- Insurance; and
- A dispute resolution procedure for dealing with damage to the premises, breaches and grounds for termination.
A retail lease is a type of commercial lease entered into by a business operating a retail shop.
“Retail shops” are defined under section 3 the Retail Leases Act 1994 (NSW) (‘the Act’) as premises that are:
- Used or proposed to be used, wholly or predominantly in carrying on a business; and
- Used or proposed to be used for the carrying on of any business
In other words, the business premises is permitted to supply goods or services.
Such businesses include, but are not limited to, the following:
- Art galleries;
- Butcher shops;
- Candle shops;
- Costumes and formal wear hire shops;
- Department stores;
- Florist shops;
- Fruit and vegetable shop;
- Key cutting shops; and
The retail shops do not need to be in a retail shopping centre. A “retail shopping centre” is defined under section 3 of the Act as a cluster of premises which has the following attributes:
- At least five (5) premises are used wholly or predominately for the carrying on or one or more listed businesses;
- The premises are all owned by the same person or have the same lessor;
- The premises are located in one building or if in two buildings are connected or separated only by a common area owned by the owner; and
- The cluster of premises is promoted as a shopping centre.
Leases that do not fall under Retail Leases Act 1994 (NSW)
The Act does not apply to the following retail shop leases:
- Lease for a term of twenty-five (25) years or more;
- Leases entered into before the commencement of this section;
- Leases entered into under an option or agreement before the commencement of this section;
- Any other lease of a class or description prescribed by the regulations as exempt from this act.
Differences between Commercial and Retail leases
Unlike a commercial lease, the rights and obligations of tenants under a retail lease are prescribed in legislation. There is an assumption that a retail tenant or lessee has unequal bargaining power to its landlord or lessor.
There are three (3) key differences:
Under section 11 of the Act, the lessor is required to provide the lessee with a Disclosure Statement before entering in a lease. The statement is a summary of the commercial terms of the lease. Failure to disclose relevant information may allow the lessee the right to terminate the lease.
A lessor or lessee must not in connection with a retail shop lease engage in conduct that is unconscionable. The Tribunal has power to determine whether a lessor has contravened a subsection in the Act, affording the lessee with protection under the retail lease.
Under section 14 of the Act, the lessor cannot seek or accept the payment of lease preparation expenses in connection with the granting of a retail shop lease. If the lessor contravenes this section, they are guilty of an offence and liable to penalty not exceeding 100 penalty points. However, the lessor is not prevented from requiring payment from the prospective lessee where the preparation expenses were incurred in connection with making amendments at the request of the prospective lessee.
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