Retail Lease Drawbacks in NSW: How to Deal With It

Are you considering entering into a retail lease in NSW? Indeed, entering a lease agreement means a significant financial commitment for lessors and lessees. Therefore, the rights and obligations of both parties should be clearly understood and defined before signing. Moreover, before accepting and signing an agreement, you must consider the retail lease drawbacks in NSW which you may encounter.

Risks, obligations and pitfalls are certainly inherent in any agreement and the best way to manage and navigate these is to obtain independent legal advice. You should thoroughly review the terms and conditions of the lease and seek clarification on any ambiguous clauses before signing. Most retail lease offers can be attractive and tempting. However, ensure that the agreement provides protection for you and your business when you enter into it.

retail lease drawbacks in nsw

Australia's 2023 Retail Industry

Over the years, the retail sector has evidently become a diverse and thriving force in Australia’s economy. Compared to last year’s data, the country’s retail industry rose 4.2% as of May 2023, with a month-on-month increase estimated at 0.7%.

Nowadays, the retail sector plays a significantly crucial role in the community by providing access to a variety of goods and services. Aside from its economic contribution, the retail industry also plays a significant role in job creation. In fact, it is Australia’s second-largest employment industry with 9.8% of workers employed in a retail business. The National Skills Commission also estimated that by 2026, employment in the retail industry will climb up to 55.1%.  Furthermore, with the rise of e-commerce and online shopping, the retail sector has also adapted and evolved to satisfy the ever-changing needs and preferences of consumers.

What is a Retail Lease?

A retail lease is a legally binding contract generally agreed between a lessor (landlord) and a lessee (tenant). It particularly allows the lessee the right to use the premises to conduct retail business. Furthermore, it is commonly used for shops, cafes, restaurants, and other businesses that operate in a retail setting. The lease terms and conditions typically include the following such as duration, rent amount, maintenance responsibilities, and any restrictions or obligations imposed on the lessee. It also provides both parties with clear, concrete, and transparent guidelines and protection in the business relationship.

Retail businesses must comply with the Retail Act 1994, which provides the rights, obligations, protections, and regulations for both lessors and lessees. Furthermore, the Act sets out the legal requirements that both parties should recognise. The Act also covers various business matters including rent reviews, dispute resolution processes, and disclosure requirements. This is to ensure that fair and transparent dealings within the retail industry are certainly observed. Moreover, to align with the changing retail landscape, amendments to the Act were implemented in 2017.

Retail Shop Explained

A retail shop refers to any premises that are wholly or predominantly used for carrying out the purposes set out in Schedule 1 of the Retail Leases Act 1994. Schedule 1 also specifies that the purposes include selling goods, providing services, or both. In addition, even if a shop is not located in a retail shopping centre, it may still fall under the definition if it meets the criteria outlined in the Act.

In NSW, a shop that is less than 1,000 square metres and sells goods or supplies services, with a lease term of six months and less than 25 years is automatically covered by the Act.

Lease Registration

The lessor must register a retail lease with a term of over three years to the NSW Land Registry Services to be enforceable. Both parties must complete the registration within threee months of signing the lease. It also requires a lease registration fee. The lessor must pay the mortgagee’s consent fee (if it has a mortgage registered on the title of the property) whilst the lease registration fee at the NSW Land Registry is payable by the lessee. Registration of the lease is required for lease terms (including option terms) of 3 years or greater.

This registration protects both the lessor and the lessee. Recognising the terms and conditions in the lease provides security of tenure. Also, that they can uphold it against disputes or legal issues or claims by 3rd parties. Additionally, registering the lease helps establish a clear record of ownership and occupancy rights. This is beneficial for further property transactions or future potential buyers.

retail-lease-drawbacks-in-nsw-how-to-deal-with-it

Retail Lease Drawbacks in NSW

Indeed, starting a retail business can be an exciting time for anyone. However, before entering into a lease agreement, keep in mind the following potential retail lease drawbacks:

Rent Review

Most retail leases in NSW have provisions for further periodic rent reviews. This is when the lessor assesses and potentially increases the amount of the agreed rent. The adjustment can be based on various factors, such as market value, consumer price index, and even turnover.

For the lessor, the rent review is necessary to reflect the current value of the property. Whereas for the lessee, the review will require them to pay more as the lease runs. Hence, it is crucial for both parties to carefully negotiate and agree on the terms regarding rent reviews to avoid any financial strain or potential disputes between them.

Disruptions

Another retail lease drawbacks in NSW you may encounter are disruptions. Disruptions are any circumstance that may impede the operations of your business during the lease term. As a lessee, you must report immediately in writing whenever any disruption your business has encountered and its impact. This will enable the lessor to subsequently take appropriate action and find solutions to address the matter right away. Timely reporting of disruptions also helps in maintaining a good working relationship between you and the lessor.

retail-lease-drawbacks-in-nsw-how-to-deal-with-it

Outgoings

Outgoings are expenses the lessor incurred for the operation and maintenance of the premises that the lessee agreed to pay. This is considered as one of the retail lease drawbacks as these may include expenses such as taxes, insurance, security, cleaning, and utilities.

In addition, make sure the outgoings are included in the Disclosure Statement and all relevant information is provided and reasonable. It is also important to review the outgoings section of the Disclosure Statement thoroughly to understand your financial obligations as a lessee. Lastly, the lessor should communicate any updates or changes to the outgoings for transparency and prevent any surprises for the lessee.

Make Good Provisions

A “make good” provision means that the premises should be returned to their original state subject to fair wear and tear. This is an obligation a lessee should fulfill before the lease ends. This is also considered as one of retail lease drawbacks in NSW since failure to observe the provision constitutes inconvenience and may cause further disputes or penalties. However, depending on the extent of this clause, restoration may affect your business operation and cash flow.

Proper documentation of any change made to the premises during the lease can help you comply with this obligation. It is also recommended to inspect the premises carefully to identify areas that need to be addressed and fixed. Furthermore, will ensure a smooth transition and help you maintain a good relationship with your lessor.

transfer duty exemptions in nsw

Relocation and Demolition Clauses

Some retail leases contain clauses for relocation and demolition, which can have significant consequences for a business. Relocation clauses provide the lessor the right to move your business space to a different location within the same building. On the other hand, a demolition clause gives the lessor the right to end the lease if the property is demolished.

As a lessee, it is crucial to carefully understand and review these clauses before signing the lease. These situations can potentially disrupt your business operations and continuity and may also incur additional costs. For example, relocation could be inconvenient for your business and your customers as you need to inform them of your new location. In addition, a rent increase may occur after relocation, especially if the new premises have higher commercial value.

Termination

Termination of the lease can either be the end of the lease term or early termination due to a breach of the agreement by either party. Usually, when the lease term ends, there can be an option to renew or extend the lease.

On the other hand, most breach of the agreement is due to the lessee being unable to fulfill their obligations. For example, non-payment of rent or damage to property. These circumstances may certainly result in legal consequences and even penalties to compensate the aggrieved party.

Understanding Retail Lease Drawbacks in NSW with VC Lawyers

Understanding potential retail lease drawbacks in NSW is indeed necessary if you are planning to place your business in a physical location. Moreover, obtaining legal advice helps you know your rights and negotiate the terms of your lease better to avoid drawbacks.

Make informed decisions for your business with VC Lawyers.

VC Lawyers has a team of solicitors with extensive knowledge and experience in leases and the retail industry. We can provide invaluable insights and guidance to ensure significantly that your lease agreement meets your needs. Our team will also negotiate the best possible terms and conditions for you to mitigate any potential risk.

With VC Lawyers, you can be confident that you and your business are protected.

NB: This blog post is neither a legal advice nor intended to be such, and is only for general information. The same should not also be taken as a financial or commercial advice. The reader must personally consult their professional adviser/s on the contents of this blog post. VC Lawyers is not liable for any loss or damage, direct or consequential, as a result of the reader’s or a third person’s misconstruction of the wordings or use/misuse of the contents of this blog post.

Share with your Friends:

VC Lawyers is a member of the DBA Group of Companies.

© 2023 VC Lawyers. All Rights Reserved. Powered by Ideas and Concepts.

VC Lawyers is a member of the DBA Group of Companies.

Give us a call: 1300  078  362

Facebook-f Linkedin-in Instagram