Before signing my retail lease

Date

What information must a landlord give me?

There are many things you need to think about before you sign a lease.

First, the landlord should provide you with a draft of the lease long before the time comes to sign it. This is so you can think about the rules and requirements described in the document and get advice. They might also provide a ‘disclosure statement’ that has details about the premises, what services the landlord pays for and what you might have to contribute. In some States and Territories, the landlord has to give you a copy

of the legislation or guidelines. Check with your State and Territory information resources if you are unsure. In all cases, make sure you get a draft of the lease to take away and think about.

What other matters should I think about?

Each retail lease tenant will have his or her own concerns. To find the answers to your questions you need to:

  • talk to the landlord or their agent
  • carefully read the material the landlord or the agent gives you
  • understand the proposed lease
  • talk to your local retail tenancy office, fair trading office, small or retail business association or get expert advice
  • take into account your State/Territory retail lease legislation.

On the following pages is a series of tables identifying the sorts of questions and issues you may want to think about.

Working through the tables might help you remember some of the other things that might affect your business success. Also remember that some of the questions may not apply to your situation.

Some of the tables also suggest an approach to reviewing your lease and identifying what the issues or problems might be, and what you may or may not be happy with.

Some of the issues behind the questions are covered by retail leasing legislation so, while the legislation may not answer the question, it can tell you what is not allowed.

Note

What kind of special advice might be needed? Council regulations, car parking, opening hours, taxation advice (GST, depreciation), trade practices/fair trading, regulations (e.g. health, fire, occupational health and safety) – just to name a few!

1. Do your market research - what is available in the market?

Make sure that you take the time to research the market in the area you are looking at. Find out what the average rents in the area are, how these might differ between different buildings or centres and how these might differ depending on the location of the premises in relation to the building For example, does a particular premises have a particularly good street frontage with a lot of passing pedestrian traffic? Talking

to a real estate agent about different areas might be a good start. Also talk to current tenants in the area and current tenants of the landlord.

Remember that doing your market research and knowing about the current market conditions can do a lot to strengthen your bargaining power when entering your first lease as well as when negotiating a lease renewal with your current landlord. Market research is an ongoing activity and something that you should continue to do through the life of your lease – although do not let this take priority over monitoring both your and the landlord’s compliance with your current lease.

The table below sets out some example questions to consider. You might think of some more specifically applicable to your business. You can also use the table to record any research you have undertaken.

Topic What have I found?
Rent
  • What is the average market rent for retail space in the area I am looking at?
  • What types of rent are being charged – simple annual rent or a combined annual rent plus a component of turnover rent?
Add comments on what you have found about rent.
Rent reviews
  • What is currently happening in the market with rent reviews?
  • Are landlords using a fixed percentage review (for example, a 5% increase each year), CPI review, market review or a combination?
  • What kind of review would be best for my business? The certainty of knowing next year’s rental amount (much like a fixed interest rate) or do I have enough financial flexibility to take a chance with a CPI or a market rent review (like a variable interest rate)?
Add comments on what you have found about rent reviews.
Term
  • What lease terms are being offered in the market?
  • Is there a particular landlord that is more willing to grant leases with an option?
Add comments on what you have found about lease terms.
Lease incentives
  • Are landlords currently providing incentives to encourage tenants to enter leases?
  • Common incentives can take the form of a ‘rent free period’ (to allow the tenant to fit out the premises and make preparations to commence trading before paying rent) or a contribution to the costs of fitting out the premises.
Add comments on what you have found about lease incentives.
Vacancy rates
  • What is the current vacancy rate in the area?
  • Does this landlord have a particularly high or low vacancy rate?
Add comments on what you have found about vacancy rates.
Add other questions specific to my business?  

2. Consider your business requirements - what does my business require?

These are things to think about before requesting and receiving a copy of the proposed lease.

Once you have a better understanding of what is available in the rental market, it is time to focus again on your business. Is the space you are looking at the right space for your business? As with anything, there

will be trade-offs you will have to consider, for example, the premises with the best street frontage and profile

might come at a higher rent than a premises that is tucked around the corner. If the premises is tucked around the corner, will you need rights in your lease to advertise outside of your premises, on other parts of the landlord’s building or land?

When considering the costs your business can afford, remember that this will be more than the rent payable under the lease. Other costs to consider include outgoings, costs for separate services (such as electricity (if separately metered), telephone and the like), required bond monies, cleaning costs, registration fees and costs in relation to requests for the landlord’s consent to any works or signage etc.

The table below sets out some example questions to consider. Again, you might have more questions that are specific to your business.

Topic My comments
My Business plan
  • Look at my business plan. What does it tell me about the right location? Do the premises meet my requirements, e.g. traffic, growth?
  • What can I afford? Remember that the rent is only one part of the costs payable under a lease.
Add comments on what you have found about you business plan.
Licences
  • Do I need any licenses or permits to run my retail business?
Add comments on what you have found about licenses.
The space
  • Does the space suit my business?
  • Can I use this space for my intended purpose?
  • Is there any zoning or other requirement that could stop me using the space for my intended use?
  • Do I need to change things like pipes, wiring or surfaces to meet regulations?
  • What types of customers will I target? What types of customers frequent the area?
Add comments on what you have found about the space.
Physical condition of the space
  • Are there any checks I should make about the premises to be sure they are safe for me and my employees, e.g. if they are ‘very old’ or dilapidated. What about asbestos?
  • Does the landlord need to agree in writing to do any works before the tenant takes possession?
Add comments on what you have found about the physical condition of the space.
Term
  • How long should my lease be for? In other words, how long do I need to be there to recover my costs and make a profit?
  • Is there a minimum term that I am entitled to under legislation? (Note that a landlord can require a waiver of a minimum term in some jurisdictions.)
  • From my market research, is it likely that I will be able to obtain my desired term?
Add comments on what you have found about term of lease.
Fit out
  • What fit out will I need and can I afford it?
  • Is the space right for any pre-designed fit out?
  • Do I have to get permission and approvals to do any fit out or change to the premises?
  • From my market research, are there likely to be fit out incentives available?
Add comments on what you have found about the fit out.
Add other questions specific to my business?

3. Receiving and reviewing a lease

You should always have a solicitor review the general terms and conditions of the lease before you sign it, to make sure that it is a balanced and fair agreement. However, you can also review the lease for yourself as well. You need to be sure that you understand and are happy with each of the terms and conditions of the lease. Once you have reviewed the lease for yourself, you will know what you do have a good

understanding of and will be able to narrow down the questions that you need to ask someone else to assist with.

The two tables below provide a useful structure to begin reviewing the lease to help you decide if it meets your needs. The tables separate out:

A The core lease details – these are the main commercial terms of the lease and are the best starting point when reviewing a lease.

B The other terms and conditions of the lease – these terms and conditions make up the balance of the lease document and govern the general relationship between the parties.

The tables give you an opportunity to identify the relevant lease clause that deal with the particular topic and to note any concerns/questions that you might have.

Don’t forget to read the definitions section for all the defined terms within the lease – usually these are the capitalised terms throughout the document. Defined terms can contain a lot of detail and can significantly affect the meaning of a clause.

A The core lease details
Topic Lease clause My concerns/ questions
Premises
  • How are the premises described in the lease? Is there a plan? • Does it state an area in square metres?
  • Does the premises extend to only the internal wall or does it include the external walls?
  • Are there particular fittings that are provided as part of the premises?
  • Is rent per square metre or for the whole space?
Add the clause wording or reference number here. Add comments on what you have found about the premises.
Term
  • What period is the lease for?
  • Are you granted an option at the end of the lease?
Add the clause wording or reference number here. Add comments on what you have found about the terms of lease.
Purpose / Use
  • What uses are allowed by the lease?
  • Is this broad enough for my business? Does it factor in any potential changes I might make to the range of goods and services that I might provide over the course of the lease period?
  • Does it exclude me from offering particular services?
  • Remember that the permitted use in the lease will be the same use that a future buyer of your business or future assignee of the lease will be limited to using the premises for. Is the use broad enough not to unduly restrict who you can transfer the lease to during the term?
  • Note that the permitted use can generally be changed during the term but only with the landlord’s consent.
Add the clause wording or reference number here. Add comments on what you have found about the purpose or use.
Rent and rent reviews
  • What is the rent?
  • How often do I pay rent?
  • Does that fit my expected cashflow?
  • If I pay turnover rent, what is ‘counted’ in my turnover?
  • What can landlords do with the confidential information about my turnover that I give them?
  • Do I know what is meant by CPI and market rent reviews?
  • What is the usual way rent is reviewed?
  • When is the first review and how often can it be reviewed?
  • Remember! A 5% annual rent increase means you’ll be paying over 20% more rent in 5 years’ time. Is this in your business plan?
Add the clause wording or reference number here. Add comments on what you have found about the rent and rent reviews.
Outgoings
  • How is my outgoings contribution calculated? (See Dictionary)
  • What kinds of items are included within the definition of outgoings?
  • What type of disclosure and evidence of costs does the landlord have to provide me with?
  • Do I have the right to review outgoings?
Add the clause wording or reference number here. Add comments on what you have found about the outgoings.
Required security
  • Do I have to pay a security bond or security deposit? If yes, how much, to whom, is it safe? How can I lose it? How and when do I get it back at the end of my lease? Does the lease specify that the bond is deposited in an interest bearing account?
  • What is a bank guarantee, why is it used and will I have to give one? Will someone I sell to or let use part of the space have to give one and why?
  • If I sell my business will the guarantee end?
  • If I sell my business will all obligations under the lease end?
Add the clause wording or reference number here. Add comments on what you have found about the required security.
Insurance obligations
  • Will I have to take out any insurance? What type – public liability, building, glass, for my fittings, workers compensation? How much will it cost?
  • Does the landlord insure anything? If yes, will I pay only my fair share of that insurance?
  • Will I have to get consent from a landlord about things that might affect their insurance? Can it cost me more?
  • Note that it is usually prudent to take out insurance even if the lease doesn’t force you to.
Add the clause wording or reference number here. Add comments on what you have found about the insurance obligations.
Ability to deal with the lease
  • Does the lease allow me to assign my lease if I sell my business?
  • What costs do I need to pay to the landlord if the landlord’s consent is required?
Add the clause wording or reference number here. Add comments on what you have found about the ability to deal with the lease.
Make good
  • Do I have to remove the fit
    out at the end of the lease?
  • Do I need to repaint or recarpet the premises?
  • Do I have a written or photographic condition report?
Add the clause wording or reference number here. Add comments on what you have found about the make good portion of the lease.
Registration of the lease
  • Will the lease be registered?
Add the clause wording or reference number here. Add comments on what you have found about the registration of the lease.
B The other terms and conditions of a lease
Topic Lease clause My concerns/ questions
Access
  • What hours do I need to open, to prepare for trading and to close up?
  • Is this going to be a problem?
  • If I move into a retail centre can I be forced to stay open when I would want to close?
  • Can the hours be changed without my approval?
Add relevant lease clause Add your concerns or questions about access.
  • Fit out
  • Can I be forced to carry out a fit out by the landlord or manager?
  • Who will:
    • own the fit out (and therefore be able to depreciate it)?
    • pay for it? When?
    • maintain it? To what standard?
    • upgrade it? How often? Even if I don’t want to?
Add relevant lease clause Add your concerns or questions about fit out.
Relocation
  • Can I be forced to relocate?
Add relevant lease clause Add your concerns or questions about relocation.
Other expenses
  • Who pays for preparing the lease?
  • What else do I have to pay for and am I paying my fair share? For example:
    • signs,
    • permissions,
    • changing the lease,
    • stamp duty,
    • legal costs,
    • management fees,
    • landlord’s outgoings,
    • promotion or advertising levies,
    • electricity, gas, cleaning, etc.
  • Who pays for fair wear and tear? Will my landlord fix that?
  • Do I have to pay GST on the rent or anything else? Can I claim a GST credit?
Add relevant lease clause Add your concerns or questions about other expenses.
Security of the space and stock
  • Who pays for security for my space and stock?
  • Interruption of my use.
  • What if I no longer need the space? Can I end the lease early? If so, do I have to pay any money?
  • What do I need to do if I want to sell the business or let someone else use the space?
  • Does the landlord promise me that I will be the only retailer of my type? What happens if I am not?
Add relevant lease clause Add your concerns or questions about security of the space and stock.
Landlords’ rights
  • Does a landlord have any special rights which will affect my use of the property?
  • When can a landlord bring a lease to an end without my agreement? What will it cost me if they do?
Add relevant lease clause Add your concerns or questions about Landlord’s rights.
Resolving problems
  • If we disagree during the lease is there a relatively quick, fair and cheap method for sorting out the problems? Do we have to follow that method? Is that process absolutely final?
Add relevant lease clause Add your concerns or questions about resolving problems.
Preconditions
  • Is there anything on the landlord’s part that prevents the lease from starting as soon as I sign it, e.g. mortgagee’s consent?
Add relevant lease clause Add your concerns or questions about the preconditions.
Centre rules
  • Are there any general rules that apply to me and other tenants in a retail centre? Are they reasonable? Do they apply fairly to all? How can they be changed?
Add relevant lease clause Add your concerns or questions about centre rules.
Restrictions on trading
  • Can my landlord try to limit the way I trade during the lease or afterwards (restraint of trade)?
Add relevant lease clause Add your concerns or questions about restrictions on trading.

4. Negotiating the lease

Most landlords will have a preferred lease document that they will prepare and provide. However, this does not mean that these are the only terms and conditions that the landlord will agree to. You should feel comfortable with requesting amendments to the lease – your solicitor (or retail tenancy adviser (see relevant organisations at the back of this booklet)) will be able to assist in identifying what kinds of amendments you should ask for and what types of amendments are likely to be agreed to.

The below table identifies just a few example common clauses and the types of amendments that might be sought in relation to those clauses. It is very important though that ALL the clauses in the lease be reviewed

– not just the ones mentioned below.

Another good source of information is obtaining a copy of a lease previously granted by the landlord to another tenant. If the landlord’s leases are registered on title, you can obtain a copy from the relevant titles office (normally at a fee).

Clause and issue What to look out for and possible amendments
Option clauses
  • An option will generally have conditions that must be complied with in order for the tenant to be able to exercise the option when the relevant time comes.
  • It is important to review those conditions to ensure that the clause provides the tenant with a ‘real’ right to a further lease.
Often a condition will be included in relation to the tenant not having breached the lease during the previous term. Such a clause might be amended to require only that the tenant is not in breach of the lease at the time when the option is exercised (and only a breach that has been previously notified to the tenant). This protects the tenant from being ‘ambushed’ by the landlord claiming that the tenant has breached or is in breach of the lease and only raising this when the tenant tries to exercise the option.
Costs clauses
  • Where a tenant is required to pay the costs of the landlord in relation to a particular matter – for example when the tenant requests the landlord’s consent to an assignment of a lease – those costs should only be the reasonable costs of the landlord. Also, the landlord should provide you with evidence of those costs.
Clauses which simply require the tenant to pay the ‘costs’ of the landlord should be amended to include: • that those costs be ‘reasonable’; and • that the landlord be required to provide evidence of the costs before the tenant is required to pay for the costs.
Indemnity clauses
  • An indemnity is generally a promise to keep another party harmless from loss or damage it might suffer in relation to a particular matter.
  • Normally a landlord will seek an indemnity for problems that a tenant might cause that are outside the control of the landlord, for example, if someone is injured in the tenant’s shop.
It is important to closely review any indemnity clause, for example, an indemnity provided by a tenant to the landlord should exclude any damage, loss, injury or death t
hat is caused by the act, negligence or default of the landlord (i.e. anything that is the landlord’s fault).
Termination for breach rights
  • A lease will include a right for the landlord to terminate the lease if you are in breach of the lease. Such clauses should include an obligation for the landlord to issue you a notice bringing your attention to the breach and requiring you to fix or ‘remedy’ the breach within a particular time – before the landlord has the right to terminate the lease on the basis of the breach.
Review the notice requirements in relation to a right to terminate the lease. A notice giving a ‘14 day period’ to remedy a breach is a common approach. Landlords are often less willing to agree to a notice and ‘right to remedy’ process where for example, the breach is for the non-payment of rent (as opposed to, for example, being in breach of an obligation to be open for business between particular hours).
When renewing a lease, a helpful clause would relate to when the landlord must notify the tenant of the new rent. This is about being mindful that some clauses impact on other clauses e.g. option clauses and market rent review clauses. A lease might have a clause that allows a market rent review (mrr) at the commencement of an option term. It is important to review the mrr clause to ensure that it specifies how the new rent will be determined and when the landlord must notify the tenant of the new rent. If the mrr is due at the start of an option term, it is important to ensure that the tenant is notified of the new rent well before the beginning of the period for exercising the option. Otherwise the tenant could be in the position where they have committed to the further term without knowing whether their business can afford the new rent.

CASE STUDY

Environmental obligations in leases

Amie is given a draft lease which contains a clause which requires her to co-operate with the landlord to achieve and maintain the landlord’s environmental objectives. How will this impact on Amie’s business?

‘Green’ provisions are becoming increasingly common in leases but they do not always contain clear details as to what is required. Even if Amie does want to support environmental initiatives, she should ask additional questions before she signs the lease, such as:

What are the landlord’s environmental objectives? Who bears the cost if new equipment is required?

Will this limit the types of goods I can sell or the types of materials I can use?