Blog Retail leases v Commercial Leases

Retail leases v Commercial Leases

Retail leases and commercial leases both involve the letting of a property to a tenant for the purpose of allowing them to take exclusive possession of a premises, usually to carry on a business.  In NSW, retail leases are governed by a distinct set of legislation unlike commercial leases. Landlords under a retail lease are subject to more stringent regulations than landlords under commercial leases.   This reflects the assumption that in a retail lease context, the landlord will ordinarily have much more bargaining power than the tenant. 
 

What is a retail lease?

In New South Wales, retail leases are governed by the Retail Leases Act 1994 (NSW) (‘RLA’) and the Retail Leases Regulation 2022 (NSW) (‘RLR’).

The RLA defines ‘retail shop’ as premises that are used wholly or predominately for the carrying on of one or more prescribed businesses, or premises that are operated within a retail shopping centre. ‘A retail shop lease’ is defined as the lease of a premises for use as a retail shop. However, the definition specifically excluded shops that are over 1,000 square metres in size.

Any shop which either completely or predominately carries on a prescribed business is automatically considered to be a retail shop and is subject to the provisions of the RLA.

At its commencement, schedule 1 of the RLA included a comprehensive list of prescribed retail businesses, ranging from grocery shops to travel agencies

The Retail Lease Regulation (RLR)

The Retail Lease Regulation (RLR) came into force on 1 January 2023. The regulation replaced and expanded the list of prescribed businesses to include a wider variety of businesses such as gyms and fitness centres (including yoga, pilates and dance studios) and small bars with a maximum patron capacity of 120. The RLR does not operate retrospectively, leases entered into prior to 1 January 2023 for gyms, fitness centres and small bars are not currently bound by the RLR. However, when a lease is renewed a they are renewed today on the same terms.
 

What is a commercial lease?

Strictly speaking, all retail leases are commercial leases, but not all commercial leases are retail leases. 
 
The term ‘commercial lease’ is often used to refer to leases of a commercial nature that do not fall within the RLA. e.g., a lease of a floor in an office building to a law firm is unlikely to fall within the RLA, as the letting of an office building is not a prescribed business within the RLR. Similarly, the lease of a warehouse to a business for logistics purposes is unlikely to fall within the scope of the RLA and RLR.
 

Why does the distinction matter?

Under a commercial lease (i.e. one that is not governed by the RLA), the parties will have almost complete freedom of contract; they will more or less be entitled to agree to whatever terms they please, subject to the provisions of general property law statutes such as the Real Property Act 1900 (NSW) and the Conveyancing Act 1919 (NSW). In contrast, the RLA imposes numerous obligations on a landlord under a retail lease, for the benefit of the tenant. Such obligations cannot be contracted out of, even if both parties wish for them to not apply. One of the primary obligations imposed by the RLA is the requirement for the landlord to provide a lessor’s disclosure statement to the tenant at least 7 days before the lease is entered into. This statement must include details about the premises’ characteristics, fixtures, equipment and services to be provided by the landlord, and outgoings to be paid by the tenant. Broadly speaking, the landlord cannot rely on representations if they were not included in the disclosure statement. For example, the landlord cannot require the tenant to contribute to outgoings that were not disclosed in the statement.
 

What DO landlords NEED TO know?

The potential consequences of non-compliance by a landlord (or the lease itself) with the provisions of the RLA can be severe. e.g., if a landlord fails to provide the tenant with a lessor’s disclosure statement, the tenant will be entitled to terminate the lease within 6 months of entering it, and to claim its costs in entering the lease (such as fit-out costs) from the landlord. As a lease may fall within the definition of a retail shop lease despite the contrary intention of the parties, a prospective landlord should have a very clear understanding of whether the lease they are negotiating falls within the RLA. If a landlord is uncertain as to whether the prospective lease will be covered, it is prudent for them to err on the side of caution, proceed on the assumption that the lease will be subject to the RLA, and take reasonable steps to comply with the provisions of the RLA.
 

What DO tenants NEED TO know?

Whilst a tenant will be entitled to terminate a retail lease if the landlord fails to comply with its disclosure obligations under the RLA, unless and until the tenant exercises that right and validly brings the lease to an end, the lease will remain in effect.

Therefore, the tenant must ensure that they continue to abide by their lease obligations (such as their obligation to pay rent), unless and until they have validly terminated the lease. Failure to do so may put the tenant in breach of contract.