Retail Leases Act: Laws and Obligations Of Tenant

This article describes a few matters that tenants of retail leases should be aware of. It is hoped that the information contained is useful for tenants when dealing with rental property and landlords.

Retail Leases Act Obligations

The Retail Leases Act (“the Act”) puts certain obligations on landlords that cannot be excluded from a lease of a retail premises. Most tenants that engage in “retail activity” are covered by the Act. The definition of “retail activity” is very broad so many businesses are covered. There are exceptions so you do need to seek legal advice if there are any questions as to whether or not the Act applies.

Disclosure Obligations

If a lease is covered by the Retail Leases Act a key landlord obligation is to provide a disclosure statement to a tenant prior to the commencement of a new lease. The disclosure statement contains key information about the lease in an easily readable form. If the landlord does not provide a disclosure statement or it contains errors this gives the tenant certain options including the right to withhold rent or terminate the lease but only in certain circumstances. You must get legal advice before taking any action. A key matter in determining if you are able to take action is if you are less “well off” then you would have otherwise been had the landlord provided the disclosure statement to you.

Mortgagee’s consent

You should request that the landlord advises its bank of the lease. The effect of this is that if the landlord defaults under their mortgage, the bank must honour the lease. If the bank is not notified of the lease they are under no obligation to recognise your lease and may force you to vacate your premises.

The landlord must obtain consent if you request it and pay for it (pursuant to the Act), you should insist that the landlord obtains their mortgagees consent or you are at serious risk should the landlord default on their mortgage.

Renewals and Variations

New Lease if options changed

This is a technical point, but if at a renewal of lease you add a new term to a lease you are actually commencing a new lease from the renewal date. This means that the landlord must comply with the requirements of the Retail Leases Act on new leases.

Disclosure Obligations

Different disclosure statements between a renewal of lease and a new lease. If you vary the lease by changing the terms you are technically entering into a new lease and the disclosure statement for a new lease should be provided. Many landlords do not this.

Rent Reviews

Permitted methods to increase rental

There are only three methods by which rental can be increased pursuant to the Retail Leases Act – percentage/fixed increase, CPI increase or a Market Review. Market reviews will generally occur at the commencement of each further term.

“Ratchet” clauses

A “ratchet” clause is one that states the rental shall not be decreased when a market review or CPI review occurs. These clauses are excluded under the Retail Leases Act, however some landlords still attempt to include them in leases.

Market Review Method

It is prescribed in the act how a market review works – if the tenant and landlord cannot agree on the new rental, they must jointly appoint a valuer, if the parties cannot agree on a valuer to appoint, the Small Business Commission should be requested to appoint one. The cost of the valuer is split between the two parties.

The valuer will then determine the rent, this is out of your hands. This can be expensive – $3,000 or so – but can be worth it depending on the market and the landlord’s attitude. If a landlord is insisting on a very large increase the money spent on a valuation may be worth it.

Landlord Repair and Maintenance Obligations

Repair Obligations

The landlord must maintain the premises including fixtures and fittings in the condition they were in when the lease was entered into, fair wear and tear excepted. If a landlord does not repair a premises:

  1. You can have urgent repairs done if the landlord or its agent do not arrange repairs in a timely manner and your business is affected.
  2. Landlord must pay for repairs.
  3. Apply to VCAT if the landlord will not attend to or pay for repairs.
  4. You are not liable to pay rent/reduce the rent you pay if premises are damaged and you are either partially or completely unable to operate your business.

Common Areas

If there are common areas shared with other tenants the landlord must keep the common areas in the same condition as at the commencement of the lease. This includes lifts and bathrooms.

Renewed terms

The landlord must continue to keep in repair as it should have been in previous term

Essential safety measures

These are obligations put on a building owner to comply with basic safety principals. The landlord must pay for these, e.g. fire extinguishers, handrails, air conditioning, car parks, doors.

Tenant Repair Obligations

You should check the lease carefully to see exactly what you are up for.

Make good provisions

At the end of the lease you may be obliged to return the premises to the state it was in prior to moving in. This can be expensive depending on your fit out so you must make sure you understand what your obligations are.

Repair damage

If you damaged the premises through your actions (or inactions) you must pay to repair the premises.

Maintain the premises

You may be required to repaint the premises, polish floorboards or otherwise maintain the premises.

Other matters to consider

  1. Personal guarantees
  2. Dramatically increase the risk that you face in your own capacity.

  3. Excessive security deposits
  4. Can make transfers of the lease very difficult when selling a business

  5. Sale of business
  6. Get advice before entering into a contract to sell your business.

    Final Points

    1. Retail Leases Act – Know your rights
    2. Renewals – must comply with the lease
    3. Repairs – landlord has obligations it cannot avoid and cannot charge you for
    4. Speak to your neighbors
    5. Always get legal advice

    Disclaimer: All information contained in this paper is of a general nature and is not legal advice. The information is only current as of the date of publication. You should not act on the information without first obtaining specific advice from a solicitor.

Will Elder

Will Elder

Will has developed a broad commercial practice in which he advises clients on business acquisition and sale, commercial agreements, commercial and retail leasing, and commercial litigation. Learn more about Will's legal experience.