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  • Kyard Business Law

Is your lease a retail lease?

You may have heard or seen the terms “retail” and “commercial” lease. Whether you’re a tenant or a landlord, it’s essential that you understand the difference between these terms as different rules apply to retail leases than other commercial leases and these affect your rights and obligations.


In Victoria, a retail lease is a lease governed by the Retail Leases Act 2003 (Vic) (“the Act”). Determining whether a lease is a retail lease can be difficult and requires analysis of the unique circumstances in each instance. Below are the factors which are used to determine whether the Act applies.


What does the lease say?

Your lease may expressly say that it is a retail lease or is not a retail lease. However, this isn’t 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 retail leases act does not apply when in fact the Act does apply and vice versa.


Who are your customers?

The first step in determining whether you have 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, the business activity 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. Where this is the case, the Act provides that a premises is a 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 your customers are the ultimate consumer of your products, you are operating a retail premises and the Act may apply to your lease.

The fact that you’re operating a retail premises is not in of itself determinative of whether a lease is a retail lease as the Act allows for a number of exceptions to its application. However, it is essential to determine this matter from the outset as the Act cannot apply where this precondition is not met.


How long is your lease?

Is your lease for a term of less than one year? If so, the Act will generally not apply to your lease. However, if your lease is renewed or you continue to occupy the premises after the end of the term (“holding over”), the Act will apply from the first anniversary of the date you entered into 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.


Licenses

Another distinction to look out for is whether your contract is expressed to be a licence or a lease. If the agreement is a licence, the Act will not apply. Licences and leases can look very similar if you’re not familiar with the distinction between the two, but the rights granted under the agreements are different. The key distinction between a lease and a licence is that a licence grants you non-exclusive possession of the assigned area, whereas a lease grants you exclusive possession of the premises. This means that under a licence you cannot control or restrict public access to the area. Licences are also often easier to terminate than leases.


A common example of licences granted to retail traders are “pop-up” stalls in common areas of shopping centres. If you have a permanent fit out in a walkway of a shopping centre, it’s likely that you have a lease, but this should be confirmed before signing. Conversely, an agreement establishing right to operate a stall in a marketplace is often expressed as a licence even if the arrangement is intended to be ongoing rather than short term.


Although uncommon, a lease may be expressed as a long-term licence in the contract to avoid the application of the Act. You should seek advice to ensure that your rights under the Act are protected where available to you.


Who is the 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.


Lease 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 you take 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 you are not; or

  • did not engage in retail activity, but your business does,

you will not have a retail lease for that term. This is the date for assessment of whether the Act applies is the date of commencement 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’re 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 level 3 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 assessing whether you hold a retail lease and your 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 your particular circumstances. Anyone considering entering into a retail or commercial lease should seek independent legal advice before signing.

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