Retailers frequently enter commercial leases for their bricks and mortar premises. While retail lease terms will vary depending on the relevant state legislation and specific circumstances, there are several key terms of which you should be aware before entering a commercial lease. This article outlines some key terms in a commercial lease to help you understand your legal rights as a retail tenant.
1. Permitted Use
The permitted use describes how you are allowed to use the leased premises for the term of the lease. The premises cannot be used for any other purpose except for what is defined as the permitted use. Accordingly, retailers should seek to negotiate a broader permitted use in case they wish to expand their business activities in the future.
For example, if the permitted use is to sell juices, and you later decide to expand your business to sell drink bottles well, you may be in breach of your lease as the permitted use does not include selling ancillary items such as drink bottles.
Retail leases generally include the outgoings that must be paid by the retail tenant in addition to rent. These are costs related to running the building, including council rates, taxes, cleaning, electricity and water. Some leases can be negotiated to be a ‘gross’ amount which means that your rent would include your outgoings.
If you are paying outgoings in addition to the rent, the landlord is required to provide you with details of outgoings in a disclosure statement. This is a document which includes information about the proposed lease. In some states, you may not need to pay outgoings which have not been disclosed prior to entering the lease.
3. Legal costs
Retail leases should state whether the tenant or landlord bears the legal costs of the agreement. While the landlord usually covers the costs of preparing the lease, they may choose to pass on the costs to you and state this in the lease agreement. However, in some states, the landlord is prohibited from passing on the lease preparation costs. Retailers should ensure they are familiar with the applicable state legislation to avoid any misunderstanding. Where a lease is registered, the retail tenant will generally bear the cost of registration.
4. Assignment and subletting
Retail leases should set out the process for assigning or subletting your lease.
- Assignment occurs when you transfer your obligations under the lease such as paying rent and outgoings to a new tenant.
- Subletting occurs when you take on the role of a sublandlord and lease part or all of your premises to a new tenant.
You generally must receive your landlord’s consent prior to assigning or subletting your lease. Importantly, you will remain legally responsible under the lease upon assignment or subletting unless otherwise agreed. For example, if the new tenant fails to pay their rent under a sublease, you are still required to pay full rent to your landlord or else you will be in breach of your retail lease.
Indemnity terms will generally require you to cover the landlord’s costs of any loss or damage to the property which was within your control. Retailers may wish to negotiate a narrower indemnity term so that they are required to indemnify the landlord in fewer circumstances.
6. Make good
A make good obligation arises upon the expiry of your retail lease. Generally, a make good term will require you to return the premises to a specified condition such as:
- In a clean and tidy condition
- Where basic repairs have been undertaken
- In the same condition it was in when the lease was entered
- In a bare shell condition, where all fixtures and fittings have been removed
In some cases, make good clauses may be quite onerous and require a practical renovation to the premises.
Retail leases will vary depending on the circumstances but will generally include the following key terms:
- Permitted use of the premises
- Outgoings which must be paid by the retail tenant
- Whether the tenant or landlord bears the legal costs of the agreement
- Process of assigning the lease or subletting the premises
- Indemnity clause for loss or damage to the property within your control
- Make good clause regarding the condition of the premises upon expiry of lease