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Things to know before signing a lease

Key information to help you understand aspects of the lease

Signing a lease is a significant financial commitment and the longer the lease, the longer the commitment. No matter how long the lease is, it’s important for both lessors and lessees to understand their rights and obligations before signing a lease.

What is a retail lease?

A retail lease is a legally binding contract between the lessor and lessee for the use of the premises where the lessee conducts their retail business. A retail lease cannot override the requirements of the Retail Leases Act 1994 (NSW). The lease must be provided to a potential lessee at the negotiating stage by the lessor.

The Act will relate to your premises if it is less than 1,000 square metres in size, sells and supplies goods and services, is a type of retail business listed in Schedule1 of the Act, and the length of the lease is between six months and 25 years. Even if your type of business is not listed in Schedule 1, it may be covered by the Act if the premises you are leasing is in a shopping centre.

To find out if your business type is listed in the Act, go to Retail Leases Act 1994 (NSW).

When does a lease start?

A lease typically starts when both parties sign it. However, a lease can start even if an agreement has not been signed, if:

  • the lessee takes possession of the premises; or
  • the lessee begins to pay rent.

If the lessee accepts the keys to the premises, this may be enough to start the lease – both parties should be careful to note whether handing over the keys is meant to start the lease or not (such as for a pre-lease inspection).

What should the lease include?

While there is no standard lease as such, a lease should include:

  • The lease (start/end dates)
  • How the rent is calculated
  • Any agreed securities (e.g. cash bond, third party guarantee, or bank guarantee)
  • Who is responsible for the costs of installing fixtures and fittings in the premises (the fit-out)
  • Who repairs and who maintains the premises and equipment
  • If there is an to renew or extend the lease
  • A description of the premises and the address
  • If and how the rent can be changed
  • The type of business the premises can be used for (i.e. the permitted use)
  • Any the lessee must pay (e.g. land tax, cleaning, security, council rates, water/utility charges, etc)
  • Core trading hours (when the premises must be open for business) - if applicable
  • Any ‘ ’ provisions

Make sure that your lease includes the specific things relevant to your particular premises. Disputes often occur over small issues due to a lack of clarity in the lease. Importantly, no lease can override the Act which itself sets out certain base requirements.

Does the lease need to be registered?

Lessors must register a retail lease with a term of more than three years. This must be done within three months of the lease being signed by both parties via the NSW Land Registry Services. Visit the NSW Land Registry Services' Lease of Premises Checklist page.

For guidance on registering the lease, see the Commission's registering your lease page.

What is ‘permitted use’?

Permitted use usually describes the type of business that the lessee is allowed to run from the premises under the lease. Before signing the lease, the lessee should check with the local council that the premises can be used for that particular business and what permits may be required from the council and any other authorities. Without these approvals in writing you may not be able to run your business from the premises.

If you are taking over a lease (e.g. when buying a business), you should ensure the same approvals are in place. Some examples of permitted use are:

  • For a hairdresser – consider, does it also include beauty treatments?
  • For a takeaway shop – consider, can meals be served on re-usable plates? Can the type of takeaway food be changed?

Negotiating rent and trying to understand ‘market rent’

The rent payable under a lease is negotiated between the lessor and lessee. There are a variety of ways that the rent payable under the lease may be structured. For example, the lease may require base rent payments with outgoings paid on top of this, or base rent with based on a percentage of sales turnover (percentage rent or turnover rent). Whatever rent is agreed, this must be outlined in the lease.

‘Market rent’ is rent which is likely to be paid for comparable premises based on things such as size, location, use and the lease term. To help understand ‘market rent’ for the premises, lessees may consider consulting other lessees in the same complex, lessees in neighbouring premises, independent real estate agents, relevant industry associations, specialist retail advisors, commercial valuers or private lease negotiators.

You can also review historical real estate listings online or access historical leases from NSW Land Registry Services with whom all leases greater than three years should be registered. There are also a range of re-sellers of this information. Consider also any incentives beingoffered by the lessor and how this affects the overall cost of the lease.

Lease incentives

It is common for lessors to provide incentives to lessees to enter into retail leases. Incentives can be provided in different ways, but the most common are:

  • a rent-free period;
  • a rent reduction/abatement over a part or whole of the lease term;
  • the lessor contributes to the lessee’s fit-out;
  • the lessor pays outgoings;
  • a combination of the above.

These arrangements may be outlined in a deed or agreement which is separate to the lease. If you are comparing leases of various premises, be mindful that these ‘side arrangements’ may be considered confidential so you may not be able to know whether there are any incentives attached to other comparable premises. This means you may not be able to determine the ‘true’ or ‘effective’ rent of other comparable premises.

Can you afford the rent?

A business plan should help lessees know whether they can afford to rent the premises. Don’t forget that the rent itself is only one aspect of the costs of a lease. There are many other costs that need to be considered including fit-out, outgoings, insurance and make-good requirements. For more information see ‘Understanding the Costs of Leasing’. Even if rent is considered reasonable compared to other premises, the focus should be on whether the overall costs of the lease align with the business plan.

If you need help with your business plan, the services offered by Business Connect are a great starting point. Visit the Business Connect website or call 1300 134 359.

Rent review

Most leases will provide that the rent can be reviewed on a regular basis, usually every 12 months. The lease will also stipulate the method that is to be used for a rent review. Some common methods are:

  • a set percentage increase;
  • Consumer Price Index (CPI) – The lease should detail which CPI measure is to be used (e.g. the CPI published by the Australian Bureau of Statistics and whether it is monthly or yearly CPI);
  • market review;
  • any other agreed formulae or method.

Relocation or demolition clauses

Make sure the rent reflects the risk of any potential impact on your business if the lease includes a relocation or demolition clause. Note that any relocation to a new premises may result in an increase in rent if the new premises has higher commercial value, unless you negotiate for your lease to say otherwise.

Shopping centre leases

A shopping centre is defined in the Act as a cluster of premises:

  • which are owned by the same person or company/s on the same strata plan;
  • where at least five premises are used for retail business;
  • which are located in the one building or in two or more buildings that are either adjoining or separated only by common areas or other areas owned by the retail shops owner; and
  • which are regarded or promoted as a centre, mall, court or arcade.

There are many special issues to consider when leasing in a shopping centre including:

  • you may have to pay turnover rent in addition to the base rent. Turnover rent is usually a percentage of the actual turnover of the business conducted from the premises. If you are required to pay turnover rent, you do not have to report your online sales unless the sales “touch” the premises, such as pickup or delivery from the premises;
  • you may be required to contribute to the costs of advertising and promoting the shopping centre (marketing/promotional levies);
  • the centre’s core trading hours may change if a majority of premises agree to this in writing; and
  • you may be relocated, disrupted or the lease
    may be prematurely terminated in the event of a redevelopment, unless you negotiate for your lease to say otherwise.

If you are considering leasing in a shopping centre:

  • Visit the shopping centre’s website for further information about the centre.
  • Ask if the shopping centre is a signatory to the Reporting of Sales and Occupancy Costs Retail Industry Code of Practice (Sales Reporting Code). This Code encourages a mutual obligation arrangement that if a lessee provides turnover information to the lessor as part of the lease the lessee can request the lessor provide them with aggregate (anonymous) shopping centre data. To find out more go to Code of Practice – Reporting of Sales and Occupancy Costs.
  • Ask if the shopping centre is a signatory to the Casual Mall Licencing Code of Practice. Part 9 of the Disclosure Statement refers to this Code and other aspects of the shopping centre. To find out more, see Casual Mall Licensing Code of Practice page

Tips

  • Note that the terms ‘lessor’ and ‘landlord’ (usually the property owner) are interchangeable, as are the terms ‘lessee’ and ‘tenant’. This guide will use the terms ‘lessor’ and ‘lessee’ which are further defined in the Glossary.
     
  • Ensure the lease term is long enough to recover your fit-out investment, make a profit, and potentially sell the business if you wish. Consider negotiating for an “option” if you need or want a shorter lease term, with the ability to lock in a longer term if things work out.
     
  • When comparing premises, research ‘market rent’ by reviewing historical real estate listings and consulting with independent real estate agents, valuers, other retailers, relevant industry associations and specialist retail advisors. Consider also any incentives and how this affects the overall cost of the lease and your assessment of ‘market rent’.
     
  • Consider getting independent legal advice to make sure you understand the lease and the Disclosure Statement.
     
  • Ensure the lease and the Disclosure Statement describe the premises’ permitted use and that this description is broad enough so you can expand and/or sell the business if you wish.
     
  • Check council approvals (and any other necessary approvals) are in place for the business you intend to run at the premises.
     
  • Useful internet searches to get more information on ‘market rent’ include ‘lease data’, ‘lease information’ and ‘lease records’.
     
  • Consider getting independent advice on the likely costs of any fit-out (e.g. from a certified quantity surveyor), as particular construction requirements may well apply. Agree in writing (in the lease if possible) what fit-out items can stay and what must be removed, and how the premises will be ‘made good’ at the end of the lease.
     
  • Before signing a lease or the Disclosure Statement, taking possession of the premises or paying any monies you should consider getting independent legal, financial and business advice.
     
  • Write a report on the condition of the premises before the lease begins that both the lessor and lessee sign. This should include photos. If you are using and maintaining services provided by the lessor (e.g. air conditioning), check those services to ensure they are in good working order and note this in the condition report. You can download an example condition report on the NSW Fair Trading form page
     
  • If the premises is in a shopping centre, look for specific items that should be included in the Disclosure Statement, including:
     
    • the annual sales of the centre;
    • turnover for specialty shops per square metre, using at least three categories (food, non- food and services);
    • centre traffic count;
    • details of fit-out construction standards;
    • details of when the leases for major lessees end; and
    • any planned construction works at the shopping centre.
       
  • Be aware that premises leased from the Transport Asset Holding Entity of New South Wales and at the Sydney (Kingsford-Smith) Airport have special rules under the Act.

Key steps before signing the lease

  1. Read our guidance ‘Before you sign the lease’.
  2. Read the draft lease and get independent advice on anything you are unsure about and try to negotiate any aspects of the lease you are not happy with. The NSW Law Society’s free solicitor referral service can refer you to an appropriate solicitor. 
  3. Clearly understand the overall costs and risks of the lease for your business. Get independent advice if you are unsure. A great starting point for business support is the Business Connect service.
  4. Obtain the Retail Lease Disclosure Statement (with Part A signed by the lessor) at least seven days before you begin a new lease or renew a lease. There are two parts to the Disclosure Statement – one that the lessor signs (Part A, known as the Lessor’s Disclosure Statement) and one that the lessee signs (Part B, known as the Lessee’s Disclosure Statement). See a template Retail Lease Disclosure Statement.
  5. Carefully read the Disclosure Statement and our guidance ‘Information about Disclosure Statements’. Consider getting legal advice to ensure you understand it. Check that it includes all the agreements you reached during negotiations including whether the lessor expects to do any works that may disrupt your business. If you don’t understand or don’t agree with any parts of the Disclosure Statement discuss with the lessor and ensure any amendments are noted in the Statement following your discussions.
  6. Seven days after you receive the Lessor’s Disclosure Statement (Part A) you must provide the lessor with the Lessee’s Disclosure Statement (Part B).

 

Useful resources

 

If you have further questions, call us on 1300 795 534 or send us an online inquiry.  

 

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