Retail Leases Act 2003 (Vic) | Retail lease reviews | Assignments | Renewals | Outgoings | Make-good | Disputes
A retail lease is a significant legal and financial commitment. Whether you are opening a new business, buying an existing business, renewing a lease or leasing premises to a retail tenant, the terms of the lease can have a substantial impact on the business and the parties' rights and obligations.
In Victoria, retail leases are regulated by the Retail Leases Act 2003 (Vic) (Retail Leases Act) and the Retail Leases Regulations 2023.
The legislation imposes important obligations on landlords and protections for tenants. The lease itself is also critical and should be reviewed carefully before it is signed.
This guide explains the key issues landlords and tenants should consider when dealing with a retail lease in Victoria.
1. What is a retail lease?
A retail lease is a lease of premises to which the Retail Leases Act applies.
Broadly, the Act applies to premises used wholly or predominantly for the sale or hire of goods or the provision of retail services, subject to the legislation's exclusions and requirements.
Whether a lease is a retail lease is not determined simply by what the parties call the document. The use of the premises and the relevant statutory requirements need to be considered.
This distinction is important because the Retail Leases Act provides statutory rights and obligations concerning matters including:
- disclosure;
- minimum lease terms;
- rent reviews;
- outgoings;
- repairs and maintenance;
- assignment;
- renewal;
- security; and
- dispute resolution.
A lease described as a "commercial lease" may still be subject to the Retail Leases Act. Our article Am I a Commercial or Retail Tenant? looks at this question in more detail.
2. Does the Retail Leases Act 2003 apply?
Determining whether the Retail Leases Act applies should be one of the first steps when reviewing a Victorian retail lease.
The Act does not apply to every commercial premises. The position depends on matters including:
- the use of the premises;
- the business being conducted;
- the permitted use under the lease;
- applicable statutory thresholds;
- prescribed uses; and
- statutory exclusions.
The Retail Leases Regulations 2023 also contain requirements relevant to the operation of the Act.
The application of the Act can materially affect the parties' rights. For example, statutory provisions may regulate outgoings, repairs, assignment, disclosure and renewal.
Minimum lease term
The Retail Leases Act generally provides for a minimum five-year term, including options, subject to the statutory procedure allowing a tenant to request a shorter term.
The tenant should understand the proposed term and any options before signing the lease, particularly where the business is being established or acquired.
3. Disclosure statements
Disclosure is an important part of entering into a Victorian retail lease.
For a new retail lease, the landlord generally needs to provide the tenant with the relevant disclosure statement, proposed lease and the prescribed VSBC information brochure within the statutory timeframe.
The disclosure statement provides important information about the proposed tenancy, including matters such as:
- rent;
- outgoings;
- term;
- options;
- permitted use;
- incentives;
- fit-out requirements; and
- other occupancy costs.
Compare the disclosure statement with the lease
A tenant should not simply receive the disclosure statement and put it aside.
The disclosure statement should be compared against:
- the lease;
- any heads of agreement;
- the agreed commercial terms; and
- representations made during negotiations.
If there are inconsistencies, they should be identified and addressed before the lease is signed.
The disclosure requirements can also be important when a retail lease is assigned or renewed.
4. Rent
Rent is usually the largest single occupancy cost under a retail lease, but it is not necessarily the tenant's total cost of occupying the premises.
A lease may involve:
- base rent;
- rent reviews;
- outgoings;
- GST;
- promotional or marketing costs;
- utilities;
- insurance; and
- other permitted costs.
The starting rent should be checked against the commercial terms agreed between the parties and the disclosure statement.
Rent incentives
Where a landlord provides an incentive, the lease should clearly identify:
- the amount or value of the incentive;
- when it applies;
- whether conditions apply;
- whether it must be repaid following a default or early termination; and
- how it affects the rent payable.
A tenant should understand the real cost of the lease over the full term rather than focusing only on the initial rent.
5. Rent reviews
Rent review provisions can have a significant financial effect over the life of a retail lease.
Common mechanisms include:
- fixed percentage increases;
- CPI increases;
- fixed dollar increases; and
- market rent reviews.
The lease should clearly identify when each review occurs and how the revised rent is calculated. For a recent appellate development, see Rent review caps survive: Court of Appeal draws the line.
Market rent reviews
Market rent reviews can be more complex than fixed or CPI increases.
Where a market rent review applies on renewal, the Retail Leases Act contains specific provisions concerning the process, including circumstances in which an early rent review may be available.
The lease should also be checked to determine:
- who determines market rent;
- what assumptions apply;
- whether a specialist valuer is involved;
- what happens if the parties cannot agree; and
- when the revised rent takes effect.
A rent review should be dealt with early rather than waiting until the commencement date of the renewed term.
6. Outgoings
Outgoings are costs associated with the premises or property that may be payable by the tenant under the lease.
Depending on the circumstances, these can include:
- council rates;
- water charges;
- owners corporation costs;
- insurance;
- cleaning;
- security;
- repairs and maintenance; and
- other property expenses.
Retail lease outgoings are subject to specific statutory requirements.
The lease should clearly identify the outgoings for which the tenant is responsible, and the landlord must comply with the statutory requirements concerning estimates and statements of outgoings.
Land tax
Land tax is a particularly important issue in Victorian retail leasing.
The Retail Leases Act generally prevents a landlord from recovering land tax from a retail tenant as an outgoing.
This is one example of why determining whether the Retail Leases Act applies is important before agreeing to the financial terms of a lease.
Capital costs
Capital expenditure and other significant property costs also require careful consideration.
A tenant should not assume that every cost described as an "outgoing" can automatically be recovered from it. The lease and the Retail Leases Act should be considered together.
7. Repairs and maintenance
Repairs and maintenance are common sources of retail leasing disputes.
Section 52 of the Retail Leases Act contains important provisions concerning the landlord's repair obligations.
The starting position is generally that the landlord is responsible for maintaining the premises in the condition required by the legislation, subject to the statutory provisions and circumstances such as damage caused by the tenant.
The lease should be reviewed to determine responsibility for:
- the building structure;
- roof;
- walls;
- plumbing;
- electrical systems;
- air-conditioning;
- fixtures and fittings;
- plant and equipment; and
- damage caused by the tenant.
Air-conditioning and plant
Air-conditioning can be a particular source of disagreement.
It is important to establish:
- who owns the equipment;
- whether it forms part of the premises;
- what the disclosure statement says;
- who is responsible for servicing;
- who is responsible for repairs; and
- whether damage has been caused by the tenant.
A lease provision dealing with repairs should be considered in light of the Retail Leases Act rather than simply accepted at face value.
8. Make-good
A make-good obligation determines what the tenant must do to the premises at the end of the lease.
Depending on the lease, this may include:
- removing fit-out;
- removing signage;
- repairing damage;
- reinstating walls;
- repairing flooring;
- removing fixtures; and
- returning the premises to an agreed condition.
Make-good costs can be substantial.
Consider make-good at the beginning
A tenant should understand the make-good obligation before signing the lease.
Consider:
- what must be removed;
- what can remain;
- what must be repaired;
- the required condition at the end of the lease;
- whether a condition report exists; and
- whether photographs have been taken.
A detailed record of the condition of the premises at the beginning of the lease can be valuable when the lease ends. More on this in our make-good guide.
9. Assignment
An assignment commonly occurs when a tenant sells its business and the purchaser takes over the existing lease.
The Retail Leases Act contains specific provisions regulating assignments and landlord consent.
The outgoing tenant will generally need to make a written request and provide relevant information concerning the proposed incoming tenant.
Depending on the circumstances, the landlord may consider matters including:
- the incoming tenant's financial resources;
- business experience;
- proposed use;
- compliance with the lease; and
- information provided about the proposed transaction.
Assignment when selling a business
The business sale agreement and lease assignment should be considered together.
A purchaser should understand:
- the remaining lease term;
- renewal options;
- current and future rent;
- outgoings;
- security requirements;
- guarantees;
- permitted use;
- make-good obligations; and
- any existing defaults.
A seller should also understand whether it remains liable following the assignment.
For many business sales, the ability to transfer the lease is a critical part of the transaction. See commercial lease assignment and buying or selling a business.
10. Subleasing
A sublease is different from an assignment.
With an assignment, the tenant transfers its interest in the lease.
With a sublease, the original tenant generally remains responsible to the landlord under the head lease while granting another party rights to occupy the premises.
A sublease should therefore be carefully considered against the terms of the head lease.
It should address matters including:
- rent;
- outgoings;
- term;
- permitted use;
- security;
- repairs;
- insurance;
- make-good;
- access;
- default; and
- termination.
Landlord consent may also be required.
The original tenant should remember that granting a sublease does not generally remove its obligations under the head lease. See commercial subleases.
11. Renewal options
A renewal option can be one of the most valuable provisions in a retail lease.
An option may give the tenant a contractual right to continue occupying the premises for a further term, subject to the terms of the lease and legislation.
Check the option date
A tenant should identify:
- the date the option must be exercised;
- how it must be exercised;
- the required notice;
- rent during the renewed term;
- rent review provisions; and
- any conditions attached to the option.
Missing an option date can have serious consequences.
The Retail Leases Act also contains statutory requirements concerning notices given by landlords about renewal options and circumstances where the option period may be extended.
Market rent on renewal
Where the lease provides for a market rent review on renewal, statutory provisions may allow the tenant to obtain an early determination of market rent and, in certain circumstances, a cooling-off period after exercising the option.
The applicable requirements and timeframes should be checked carefully.
12. Defaults
A default occurs when a party fails to comply with an obligation under the lease.
Common tenant defaults include:
- unpaid rent;
- unpaid outgoings;
- unauthorised use;
- unauthorised assignment;
- failure to maintain the premises;
- failure to maintain insurance; and
- other breaches of the lease.
The appropriate response depends on the nature of the breach, the lease, the Retail Leases Act and other applicable legislation.
Default notices
A landlord should take care before issuing a default or termination notice.
The notice may need to identify:
- the relevant breach;
- the contractual or statutory basis;
- what must be done to remedy it;
- the applicable timeframe; and
- the consequences of failing to comply.
A tenant who receives a default notice should obtain advice promptly, particularly where termination or re-entry is threatened. See default notices.
13. Termination
A retail lease may end through:
- expiry of the fixed term;
- failure to exercise an option;
- valid termination following a default;
- surrender by agreement; or
- another mechanism provided by the lease or legislation.
Early termination
A tenant generally cannot simply leave a retail lease early because the business is no longer profitable.
An early exit may instead require:
- landlord agreement;
- an assignment;
- a surrender;
- another contractual right; or
- a statutory right.
Deed of surrender
Where the parties agree to end a lease early, a deed of surrender can record the agreed terms.
It may deal with:
- the surrender date;
- rent and outgoings;
- make-good;
- fit-out;
- security deposits;
- bank guarantees;
- legal costs;
- releases; and
- any continuing obligations.
The parties should ensure that the agreement clearly deals with all outstanding liabilities.
14. VCAT disputes
Retail leasing disputes can concern substantial financial and commercial issues.
Common disputes include:
- rent reviews;
- outgoings;
- repairs;
- maintenance;
- assignment;
- make-good;
- defaults;
- termination;
- disclosure;
- compensation; and
- security deposits.
Victorian Small Business Commission
The Victorian Small Business Commission (VSBC) provides dispute resolution services for retail leasing disputes.
In many cases, the parties must first engage in the relevant VSBC dispute resolution process before a matter can proceed to VCAT.
VCAT
Where a dispute proceeds to VCAT, the Tribunal may determine disputes and make orders concerning matters within its jurisdiction.
Urgent legal advice may be required where a party is facing:
- threatened termination;
- re-entry;
- possession proceedings;
- an injunction application;
- an imminent lease deadline; or
- another urgent enforcement issue.
Retail leasing disputes should be approached strategically, particularly where the business or premises are commercially important. See lease disputes.
15. Getting a retail lease reviewed
A retail lease should ideally be reviewed before it is signed.
A proper review is not simply a search for unusual clauses. It should consider the lease as a whole, the Retail Leases Act and the commercial circumstances of the transaction.
Key issues include:
- Premises — What exactly is being leased? Are car parks, storage or other areas included?
- Permitted use — Does the lease permit the intended business? Are licences or approvals required?
- Rent and outgoings — What is the starting rent? How does rent increase? What outgoings are payable?
- Term and options — How long is the lease? When must options be exercised? What happens on renewal?
- Repairs and maintenance — Who is responsible for the building, services, plant and equipment?
- Assignment — Can the lease be transferred if the business is sold? What landlord consent is required?
- Make-good — What must the tenant do when the lease ends?
- Security — Is a bank guarantee, bond or personal guarantee required?
- Default and termination — What constitutes a breach? What rights does the landlord have if there is a default?
- Landlord rights — Does the lease contain relocation, demolition or redevelopment provisions?
- Disclosure — Does the lease reflect the disclosure statement and agreed commercial terms?
Before signing a retail lease
Before committing to a Victorian retail lease, consider the following:
- 1. Confirm whether the Retail Leases Act applies. The statutory protections and obligations can materially affect the lease.
- 2. Review the disclosure statement. Check it against the lease and the terms negotiated with the landlord.
- 3. Check the permitted use. Make sure the lease permits the business you intend to operate.
- 4. Calculate the total occupancy cost. Consider rent, outgoings, GST, insurance, utilities, fit-out, security and other costs.
- 5. Review the rent review mechanism. Understand how the rent may change over the full term.
- 6. Understand the make-good obligation. Consider the likely cost of complying with it before signing.
- 7. Record the option dates. Do not assume the landlord will remind you when an option is approaching.
- 8. Consider the future sale of the business. If you may sell the business, understand the assignment provisions from the outset.
- 9. Check repairs and maintenance. Identify responsibility for the building, services, plant and equipment.
- 10. Obtain legal advice. A lawyer experienced in Victorian retail leasing can identify statutory issues, commercial risks and provisions that may warrant negotiation before the lease is signed.
Retail lease lawyers in Melbourne
Abbots Legal advises landlords and tenants on Victorian retail leases and commercial leasing matters.
Our retail leasing services include:
- retail lease reviews;
- commercial lease reviews;
- lease negotiations;
- lease assignments;
- lease transfers;
- subleases;
- lease renewals and options;
- rent review issues;
- outgoings;
- make-good obligations;
- repairs and maintenance;
- landlord consent;
- defaults and termination;
- deeds of surrender; and
- retail leasing disputes.
If you have been given a retail lease for your business, are negotiating a new lease, renewing an existing lease or selling a business and need to transfer its lease, Abbots Legal can advise you on the legal and commercial issues involved. Start with a retail lease review or see all our leasing services.
Abbots Legal
Richmond, Melbourne, Victoria
This guide is general information only and does not constitute legal advice. Retail leasing law is subject to legislation, regulations and case law that may change. The application of the Retail Leases Act 2003 (Vic) should be considered in light of the particular lease, premises, business and circumstances.