Five items to consider before signing a retail shop lease
Leases are extensively long documents and the retail legislation disclosure obligations can be administratively burdensome. Here we set out 5 key items for consideration when reviewing a retail shop lease.
Are you permitted to operate your business under the permitted use in the lease?
A retail shop lease will provide for a specific permitted use. Usually the lease will prohibit you using the premises in any way which is not captured by that permitted use. For example, if the permitted use is a ‘café’ but you are also selling branded mechanise like t-shirts then you may actually be breaching your lease by operating the retail merchandise side of your business.
From a Landlord perspective, these restrictions are in place for a couple of quite valid reasons:
- the Landlord invests time and money in developing a strategy for the tenancy mix in its Centre; and
- occasionally Landlord’s grant an exclusive use to other Tenants in the Centre. These restrictions ensure that a Landlord won’t be placed in breach of that exclusivity clause.
Review your permitted use carefully and ensure that it accurately captures the full breadth of your business activities. Somewhat related to permitted use are the local laws. The local laws will sometimes require council consent to specific business activities. If your business activities do require the consent of council, it’s your obligation to obtain it. See our article “A Critical Question: Is your premises fit for purpose? ” for more information.
Does the lease contain an option term?
An option to renew means that you can choose to have an additional lease term after the initial expiry date.
The inclusion of an option term can be particularly relevant for retail tenancies where their location and foot traffic is relevant to the success of their business. Without an option to renew you have no guarantee that the Landlord will offer you a further lease term. For a lot of Tenants, an unplanned move causes a decrease in gross sales and ultimately calls for further financial investment to re-build the customer base.
Is there an exit strategy?
The nature of our businesses are ever evolving. This is particularly true in retail. The retail industry is currently going through an evolution as a result of the online shopping phenomenon. We are seeing chain retailers who are failing and going into liquidation. Most recently it was the legendary Australian brand, Bardot.
This shouldn’t make you fearful, but it should impress on you the importance of a property strategy that can cater for an early exit from your lease. Ensure that you, your Tenant Representative or your Solicitor review the terms of your lease for potential early exit strategies. The provisions of particular importance will be the assignment and subletting options. You need to ensure that the process for each are fair, reasonable and not administratively onerous.
Occasionally, you will also be able to negotiate an early termination tied to the gross sales occurring from the premises within a certain period of the lease.
If you are receiving a Landlord incentive or fitout contribution make sure that you review the clawback terms carefully. In most instances, Landlord’s will require that Tenants pay back a pro-rata amount if they cease to occupy the premises. Whilst the enforceability of a clawback provision is questionable, you want to get the drafting right. This means you need to ensure that the lease / incentive deed reflects the optimal practical application, rather than kicking any potential dispute regarding enforcement down the road.
Is there a proposed redevelopment of the Centre?
Reviewing the terms of the lease and the Lessor Disclosure Statement is a critical, particularly when looking for an indication that the Landlord may be considering a redevelopment of the Centre. Redevelopments can cause significant disruption and under the terms of your lease your Landlord can potentially give you a relocation or a demolition notice. As a consequence of the relocation notice, will be required to relocate to another location in the Centre (note, the premises must be comparable). Obviously this can cause interruptions to your business, down time and loss of foot traffic.
Whilst the retail legislation provides Tenant’s with some protection, business interruption disputes are complicated and often costly. In contrast, it is far more cost effective to address any potential re-development impacts during the initial negotiation and lease drafting.
Did all parties comply with their disclosure obligations?
The retail legislation requires the Landlord to provide you with a Lessor Disclosure Statement 7 days before you enter into a retail shop lease. You are equally required to provide a Lessee Disclosure Statement. You must ensure that you understand the information contained within and that it mirrors:
- the heads of agreement;
- any representations or statements made to you; and
- the draft lease / documents.
The meaning of ‘enter into the lease’ does not necessary mean the date that you sign the lease. This is because if you enter into possession of the premises before the lease execution date, then you must receive/provide the disclosure statement 7 days before the date of possession.
See our article ‘How a Lessee Disclosure Statement can result in Landlord Leasing Disputes’ for further information regarding the importance of your statement.
Our Tenant Representatives will be happy to review your lease prior to execution. Alternatively, if you have a quick query, our consultants are always available to provide you with some free guidance. You can call us on (07) 3359 8273 or book an appointment online.