WHAT’S THE DIFFERENCE BETWEEN A RETAIL AND COMMERCIAL LEASE?

Did you know there’s a big difference between a retail lease and a commercial lease? If you didn’t, you’re not alone. But what is the difference? And why is there a difference? And do you need a retail lease with your specific tenant?

In this article, we will answer these questions and more.

Background – The Retail Leases Act

A commercial lease, as opposed to a retail lease, has no dedicated piece of legislation saying what you can and cannot put in that lease. Of course, there is always common law. Other legislation (such as the Real Property Act) might also have some influence on a commercial lease. But as for a specific piece of legislation that was created to control commercial leases, there isn’t one.

Retail leases, however, have The Retail Leases Act 1994 (Let’s call this the RLA). This piece of legislation came into effect in 1994 and has some rules around what we can and cannot do when it comes to retail leases.

Where does The Retail Leases Act cover?

If you clicked the link above, you will have noticed you landed on the NSW Legislation Site. Other states have their own, similar, retail lease acts. For this article, we’ll be talking about NSW.

What Types of Uses Count As “Retail”?

According to the RLA, a business is considered a “retail shop” if it ticks either of the following boxes:

  1. If it’s in a shopping centre, regardless of the use of the property. Or;
  2. If it’s on this exhaustive list of possible retail uses.

From “Aged care product shops” to “Writing materials shops”, this list is long. And when deciding if a particular tenant counts as a Retail Shop, there is no substitute for reading the list in full.

On top of these qualifiers, there are a few exceptions. For example, The RLA doesn’t apply to:

  • Shops that have a lettable area of 1,000 square metres or more,
  • Shops that are used wholly or predominantly for the carrying on of a business by the lessee on behalf of the lessor
  • Cinemas, bowling alleys or skating rinks
  • Any premises in an office tower that forms part of a retail shopping centre,
  • Leases for a term of 25 years or more

This is just a summary of the exceptions.

If you already have a commercial lease with your tenant and you think you should have a retail lease, don’t panic! First, speak to your lawyer. In general, however, having a commercial lease on a retail property is not illegal. It just means that the tenant is still protected by The Retail Leases Act and that, possibly, some of the clauses in your lease will be invalid.

The Difference Between Commercial and Retail Leases

To fully explain the Retail Leases Act would take more paper than The Act itself. So here are a few key points to keep in mind:

  1. Retail leases must have a minimum term of 5 years. Commercial leases can be any length. Tenant’s can waive their rights to a minimum 5 year term under certain conditions.
  2. For a retail lease, the landlord must give to the tenant this disclosure statement, at least 7 days before entering into the lease. If this doesn’t happen, the tenant has 6 months from the start date to pull out of the lease. This is unlike a commercial lease which is binding from day one.
  3. In a retail lease, you cannot have a rent increase determined by the higher of two different calculations. For example “The rent will increase by CPI or 5%, whichever is higher”. This is common in a commercial lease, but would not be allowed in a retail lease.

The RLA goes on to cover lots of aspects of the lease including turnover-rent, i.e. rent based on the turnover of the shop, a common practice in shopping centres; outgoings; market reviews; relocation; demolition clauses, and much more.

Why do we have a Retail Leases Act?

Why have The Retail Leases Act at all? Commercial properties seem to get on fine without some government legislation telling them what to do.

In 90% of cases, The RLA does not have a dramatic effect on a lease negotiation; this is certainly true of the kinds of properties we manage here at Nutshell. Where it does come into play is in large shopping centres. Large shopping centre operations have, or at least had, a bad reputation for taking advantage of their less sophisticated tenants. The Retail Leases Act is there to protect these tenants.

If you have a question about your retail investment, we’d love to help. Get in touch here.



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