There are many things to consider when buying or setting up your business. One of the most daunting and unfamiliar aspects of this process can be negotiating and understanding your lease. This article is prepared to assist the tenant but may also help a landlord understand the negotiations from the perspective of the tenant.
If a business is a retail business (whether providing goods or services), the lease will be subject to the Retail Leases Act 2003 (Vic) (“the Act”). It is important that you determine whether the lease is a retail lease before signing as the Act will affect your rights and responsibilities. By way of example, under a retail lease:
(a) the landlord must provide a disclosure document;
(b) the tenant cannot be required to meet the cost of land tax;
(c) the tenant has a right to assign the lease (provided that the proposed new tenant meets certain requirements);
(d) the tenant cannot be required to pay the landlord’s costs for negotiating and entering into the lease;
(e) a guarantor can be relieved from ongoing responsibilities after the assignment of the lease but only if the correct procedure is followed; and
(f) any security deposit must be maintained by the landlord in an interest bearing account, with the accrued interest being held by the landlord as additional payments of the security deposit, and returned to the tenant at the end of the lease agreement unless the landlord is entitled to keep it as a payment.
While lease agreements are typically drafted to advantage the landlord, you can seek to negotiate changes to the proposed lease. However, your ability to negotiate the lease terms will depend on your ability to know what issues to look for and how to spot “deal breakers” before you sign. Below are 12 issues to look out for before entering into a retail lease.
1. Disclosure statement
Have you been provided with a disclosure statement? A disclosure statement sets out the key details of the lease which may affect the viability of the premises for your needs including estimated outgoings expenses, permitted trading hours, and whether or not there are plans for demolition of the premises or road works close by which would interrupt the flow of customers to the premises.
You should not sign a retail lease unless you have received a disclosure statement and understood its terms.
2. Title search
Is the landlord really the landlord? You should conduct a title search on the premises to confirm that the landlord is its true owner and is entitled to enter into a lease with you.
The title search will also reveal if the property is subject to a mortgage. This is important as the mortgagor must consent to the lease before it can be entered into safely.
3. Planning considerations
Has a planning search been done? Local councils divide areas into different kinds of “zones”. These zones can restrict the kinds of businesses that a premises can be used for. A planning search will reveal whether the zoning of the property allows for the type of business you intend to operate or if that particular use is forbidden or only allowed if a permit is granted.
It is essential that the zoning of the property allows for the permitted use as specified in the lease. Leases often contain a term which states that you have satisfied yourself that the premises suit your needs. The effect of this is that if you enter into a lease and later discover that you cannot operate your business in that zone, you will still be bound by the lease and must keep paying rent even though you cannot operate the business.
4. Business structures
Will you enter into the lease personally or will you use a company to enter into the lease? If you use a company then it is likely that the landlord will require a personal guarantee from you as a director of that company.
Providing a personal guarantee should not be done without careful consideration as your personal assets (e.g. your home) could be at risk if you breach the lease. You should seek legal advice on what structure you will use to operate your business and how best to isolate your personal assets from creditors of your business (including your landlord). Using the correct business structure will protect your personal assets and may have significant tax advantages. These structures should be in place before you enter a lease.
5. Term of the lease
What is the term of the lease and are there further “options” (i.e. rights to renew the lease after the current lease ends)? The Act provides that a tenant must be given a minimum term (including any options) of 5 years.
You should consider the number and length of further terms in the context of your long-term plans for your business and how attractive your business will be to a potential purchaser if you chose to sell it in the future. For example, if you enter into a lease for 5 years with no further terms you may struggle to sell the business once you are half way through the term as the purchaser will have no certainty that the landlord will enter into another lease on similar terms to allow them to continue with the business. Conversely if you enter into a lease with a number of further terms or options then any potential purchaser will have certainty as to the minimum period that they could operate the business from that premises for before they would have to negotiate a new lease with the landlord.
6. Incentives
Have you been offered a rent incentive or a rent-free period? If so, you should make sure that you understand the implications should you assign the lease before the end of the term.
Where a rent-free period applies, often a lease will require the tenant to pay back part or all of the value of the incentive if the lease is terminated or transferred before the end of the term. The same may apply if you have been given a fit-out contribution.
The tax implications of any incentives must also be considered prior to entering into a lease so that there are no “surprises” at the end of the term or when the lease is assigned should you sell the business.
7. Security deposit
Are you required to provide a bond or bank guarantee and are you in a position to do so? Bonds and bank guarantees are different and it is important to understand this distinction. A bond is a security deposit paid to the landlord and held for the duration of the lease. The bond may be refunded at the end of the lease or drawn down on in some circumstances to cover the landlord’s costs if you breach the lease. A bank guarantee is a certificate from a Bank given to the landlord, providing that the Bank will pay up to the specified amount to the Landlord if the guarantee is called in. If this occurs, you will owe a debt to the bank rather than the Landlord.
You should consider whether you have the capital available to provide a bond or whether that money would be better spent in the business and a bank guarantee would better suit your needs.
8. Demolition and renovation
Are there demolition or relocation clauses? You should look out for clauses which:
allow the landlord to terminate the lease if they decide to demolish the building or carry out substantial renovations; or
allow the landlord to move you to another, less attractive premises within a shopping complex should they decide to renovate the area around your premises; and
provide for adequate compensation for these events.
While it is possible that these clauses will never be used during the term of the lease, the fact that they are included may mean that the possibility of them becoming relevant is within the Landlord’s contemplation. You should consider whether you are happy with agreeing to such clauses and whether adequate compensation is provided for as if the demolition or renovation clauses are relied upon, you may end up with no premises or locked into another premises you would not have chosen.
9. Building rules
Are the premises subject to Owner’s Corporation rules or “building rules”? If so, these will effectively form part of the lease and you must review these before entering into the lease to determine if you are willing or able to comply with these rules.
10. Hours of access and operation
Does the lease or disclosure statement set required trading hours? Often leases require that trading only occur within set hours and may impose additional fees payable to the landlord should you wish to trade outside of these hours. Further, there may also be fees should you not be open for business during the prescribed hours.
11. “Make good” obligations
What are the make good obligations (ie obligations to restore the premise at the end of the lease to their condition at the start of the lease)? It is typical that you will be required to return the premises to the condition that it was in when you entered into the lease (i.e. remove all of your fit out and paint back to the original colours). For this reason, you should ensure that you take photographs of the premises before the commencement of the lease. You should also take photos of any damage to avoid any allegation that this was caused by you. The obligations are assumed by an assignee and this should be weighed up by you if you are taking on an assignment of lease. This presumption can sometimes be modified by the wording of the transfer of lease.
It is also likely that you will be required to repaint or resurface every few years. Have you factored these costs into your business plan? These costs could be more significant than the materials and labour if the exercise requires you to cease trading while the work is being done.
12. Insurance
Insurance is critical as most leases will require you to maintain a prescribed level of insurance over the premises. You must provide a copy of any draft lease that you are given to your insurance advisor so that you are adequately protected and make sure that the landlord’s interest is recorded on the policy.
Understanding these matters prior to entering into a lease may assist you to avoid disputes with your landlord in the future or may improve the value of your business. Seeking legal advice before entering into a retail lease can help you negotiate a better agreement and avoid unwelcome “surprises”. If you would like help in reviewing or negotiating a retail lease, please contact our office for further information.
This information was produced for discussion purposes only and is not intended to be a substitute for legal advice and does not consider your particular circumstances. Anyone considering entering into a retail lease should seek independent legal advice before signing.

You may have heard or seen the terms Residential”, “retail” and “commercial” leases. Whether you are a tenant or a landlord of business premises, you should understand the difference between these terms as different rules apply to retail leases than to commercial leases and these affect the rights and obligations of both the tenant and the landlord.
A retail lease is a lease governed by the Retail Leases Act 2003 (Vic) (“the Act”) which impacts on the relationship far more than other (more limited) legislation in Victoria. By way of examples, the Act imposes obligations of disclosure, limits the ways in which rent can be increased, implements a five year minimum term (with limited exceptions), changes and limits enforcement and dispute resolution processes and implies various provisions into the lease such as where the landlord wishes to relocate a tenant.
Determining whether a lease is a retail lease can be difficult and requires analysis of the unique circumstances in each instance. Below are factors which are used to determine whether the Act applies.
What does the lease say?
A lease may expressly say that it is a retail lease or is not a retail lease but this is not conclusive. Whether or not a lease is a retail lease is entirely dependent on its circumstances and this prevents tenants and landlords from agreeing to exclude the application of the Act under the lease contract. For this reason, a lease may state that the Act does not apply when in fact the Act does apply and vice versa.
Customers
The first step in determining whether a lease is a retail lease is to assess the meaning of “retail”. The Act does not define “retail”, but the Courts have interpreted “retail” as being concerned with businesses that service customers who are the “ultimate consumers” of the goods and services distributed from the premises. Where a business provides goods or services to another person for use by that person or by a business for use within that business and without on-selling the goods or services, it can be described as “retail” because the customer is the “ultimate consumer”. For example, if a hardware store sells paint to a person for private use, that is retail activity. Conversely, if that hardware store sells paint to a tradesperson for professional use, that is not retail activity.
A business can provide goods and services to both private individuals and businesses that have their own customers. Where this is the case, the Act provides that premises are retail premises where they are:
“wholly or predominantly [used] for…the sale or hire of goods by retail or the retail provision of services”.
This means that if most of the customers are the ultimate consumer of products, the tenant is operating retail premises and the Act may apply to the lease.
The fact that the tenant is or will be operating a retail business from the premises does not alone mean that the lease is a retail lease because the Act allows for a number of exceptions to its application but it is essential to determine this matter from the outset as the Act cannot apply where this precondition is not met.
Term of lease
Is the lease for a term of less than one year? If so, the Act will generally not apply to the lease.
On the other end of the spectrum, a lease for 15 years or more (not including any options for renewal) will not fall under the Act where that lease imposes significant obligations on the tenant to carry out or substantially pay for building, installation, repair or maintenance of:
• the structure of, or fixtures in, the Premises; or
• the plant or equipment at the Premises; or
• the appliances, fittings or fixtures relating to the gas, electricity, water, drainage or other services; or
without a right to substantially remove or retain those installations at the end of the lease.
Licence
Another distinction is whether the contract is expressed to be a licence or a lease. If the agreement is a licence, the Act will not apply. The documents for licences and leases can look very similar, but the rights granted under the agreements are in Law different. The key distinction between a lease and a licence is that a licence grants the tenant non-exclusive possession (ie the tenant can use the premises but does not have the right to stop other people using the premises). A lease grants the tenant exclusive possession (ie the tenant can deny access to anyone including the landlord) of the premises.
Licences are also often easier to terminate than leases and far less protected under general principles of law than leases. In essence, a licence is a contractual right only but a lease gives rights over the land as well as being a contract.
A common example of licences granted to retail traders are “pop-up” stalls in common areas of shopping centres or markets.
Tenant
The identity of the tenant may also affect the application of the Act. Where the tenant is a publicly listed corporation (either in Australia or elsewhere) or the subsidiary of a publicly listed corporation, the Act will not apply.
Maximum occupancy costs
A lease that imposes total occupancy costs of $1,000,000 (excl. GST) per annum will not be a retail lease. “Occupancy costs” include:
• Rent (other than rent calculated on a “turnover” basis); and
• All outgoings estimated by the Landlord under the lease (including advertising and marketing expenses).
Assignment
If the tenant takes over a lease part way through the term by assignment from a previous tenant on the same terms as that tenant, whether the Act applies depends on whether the previous tenant was entitled to rely on the application of the Act. For example if the previous tenant:
• was a publicly listed corporation, but the tenant is not; or
• did not engage in retail activity, but the business does,
then the incoming tenant will not have a retail lease for that term. The date for assessment of whether the Act applies is the date of commencement of the Lease and the Act treats an assignment of lease as a continuation of the original lease not an entry into a new one. Upon renewal of an assigned lease, a new lease is entered into and the Act may apply from that point if the relevant criteria are met.
If you are buying a business which involves taking over a lease, you should seek advice as to whether the Act will apply from the date of assignment.
Specific use exemptions
There are a number of specific kinds of premises or premises uses which are exempt from the Act even though they would otherwise qualify for application under the Act. These include (in addition to those exemptions already identified):
• Premises located above the third level 3 (including the ground floor) in any multi-storey building;
• Barristers’ Chambers;
• Leases relating to premises designated as “market land” under the Melbourne Market Authority Act 1977;
• Leases where a municipal council is the Landlord;
• Where the tenant is listed on the New Zealand stock exchange (or is a subsidiary of such an entity); and
• Some charitable and community purpose leases where the rent payable is less than $10,000 per annum.
If you would like advice on in relation to a commercial or retail lease and the rights in the context of the Act, please contact our office for assistance.
This information was produced for discussion purposes only and is not intended to be a substitute for legal advice and does not consider particular circumstances. Anyone considering entering into a retail of commercial lease should seek independent legal advice before signing. The relevant law is that of the State of Victoria as at 1 January 2020.