November 3, 2016

The Landlord and a Retail Shop Lease

The Retail Shop Leases Act 1994 brought about significant changes to the leasing of retail shops.

The changes made by the Act are still impacting on Landlords – there are still those who find difficulty with certain aspects of the Act.

So here are a few points that keep coming up for discussion:

1. So who pays for the lease to be prepared?

After 12 years from the commencement of the Act this is still a frequently asked question. If it is not asked then when I advise a client that the Landlord pays for the lease to be prepared, invariably the response is “Why should I have to pay?’

The plain and simple fact is that the Act requires the Landlord to pay. End of discussion.

Landlords should also keep in mind that the relevant section of the Act also requires the Landlord to pay for the cost of an extension of the lease. So if the lease has an option period/s and the Tenant exercises the option, the cost of drawing documents to confirm the extension of the lease term is the responsibility of the Landlord.

Does this sound fair? Well it probably depends on whether or not you are the Landlord or the Tenant. The Act is clear in its terms as to who pays so we can just move on from that point.

The usual concern is that when the Landlord comes to see me and gives me instructions to prepare a lease or an extension of the term, he has already agreed terms with the Tenant and generally has forgotten to take into account the costs of preparation of the lease or extension document.

So Landlord – always remember, you wear the cost of the lease preparation – if you want to recover that cost then you will need to work the cost into the rental to be paid. Once rental is agreed then you have probably lost the opportunity to recover the costs of preparing the lease unless you have taken that cost into account.

2. What are retail shop premises?

A retail shopping centre is generally premises having 5 or more shop premises used wholly or predominantly for carrying on retail businesses, are owned by the one person or have the one person as lessor or head-lessor and so on. A clear example of this is a Stocklands shopping centre.

For the smaller investor who has a smaller building or complex it all comes down to the business, goods or services for which the premises are used. The particular uses are set out under various headings in the Schedule to the Retail Shop Leases Regulations.
The list is extensive so as a Landlord you should be familiar with the uses set out in the Schedule.

For example, a restaurant in a stand-alone building will be caught under the Act.

3. So what does the Tenant pay for?

The Tenant is required to pay for the costs of a survey plan if the Tenant wishes to have the lease registered, the costs of any mortgagee consent and the cost of registration of the lease in the Titles Office, if the lease is to be registered.

If the Tenant wants to transfer the lease to another tenant, then this cost is borne by the Tenant.

Obviously the Tenant pays the rental, outgoings and any other charges.

If you are liable for Land Tax then keep in mind that the Act does exclude any requirement for the Tenant to pay or contribute to Land Tax.

The message here!

It might be exciting to have a potential Tenant on the hook – especially if the property has not been tenanted for some time.

Always keep in mind the costs which are associated with a new Tenant, the agent’s commission and the legal fees in preparing the new lease.

Foot note:
In practice I find that the split is about 50/50. The very astute Landlord has either factored the costs of the lease establishment into the letting equation one way or another. That might be that the cost has been included or the Landlord takes the view that in the overall context, the cost of the lease establishment is not a significant factor. This often depends on how hard the Tenant bargained.