Key Differences Between Commercial and Retail Leases in NSW

A standard commercial Lease involves businesses which are not selling goods and services from the location. Instead, they generally operate businesses such as offices, storage, industrial sites, or warehouses. While a retail lease is regulated specifically by the Retail Leases Act 1994 (NSW) (the Act), this is not the case for standard commercial leases.

A standard commercial lease is regulated by the Conveyancing Act 1919 (NSW), the Real Property Act 1900 (NSW), and the “common law”, which often means there is more freedom in how the lease can be structured. Tenants need to carefully consider the terms and negotiate accordingly.

Typical features of a standard commercial lease include:

• They are quite flexible;
• No mandatory disclosure rules, unless specified in the lease itself;
• Greater flexibility to negotiate key aspects such as rent review methods and outgoings;
• More specific clauses to reflect specific uses for the premises; and
• A stronger focus on the concept of “make-good” at the end of the lease as well as responsibilities for maintenance and repairs.

However, these leases are generally not regulated like retail leases and have fewer protections for the tenant.

Retail leases involve premises that are used as a shop for selling goods or services to the public. For example;

• Retail shops,
• Cafes,
• Specified fitness centres,
• Specified bars
• Department stores, and
• Travel agencies.

These premises typically are located in shopping centres, and protected by legislation in each state.

In New South Wales (NSW), the Act provides a range of protection for the tenant.

The Act specifically excludes certain shops and leases, such as;

• Shops with a lettable area of 1,000 square metres or more,
• Any shop operating inside a cinema, bowling alley, or skating rink,
• Premises used for any one or more of the items listed in Schedule 1A of the Act,
• Premises described by the regulations as exempt from the Act, or
• Leases for a term of 25 years or more.

• The lease is deemed to have provisions of the Act in it. The Act overrides the lease to the extent of any inconsistencies.
• Landlords are required to provide tenants with a Disclosure Statement at least 7 days before the lease commences, illustrating key terms such as rent, outgoings and other associated costs.
• The landlord cannot pass on items such as legal fees for the lease preparation or obtaining mortgagee consent to the tenant.
• Landlords cannot recover outgoings which are not provided in the Disclosure Statement.
• The Act also limits outgoings and charges. For example;
  • Capital costs, depreciation, and landlord interest and borrowing expenses are not recoverable; and
  • Land tax can only be passed onto the tenant on a “single holding basis”.
• Dispute resolution: Standard commercial leases can have provisions that are harsh on tenants for dispute resolution and favour the landlord. Part 8 of the Act stipulates that if a dispute arises, mediations are to be conducted via the Retail Tenancy Unit. This is a compulsory step in the litigation process. In the event the dispute is not resolved, it is dealt with via a hearing at the NSW Civil and Administrative Tribunal.
• The Act addresses limitations on adjustments to rent (e.g. “ratchet clauses” or clauses preventing reductions in rent are void) and the procedures for assignments of the lease. Standard commercial leases rely on the agreement. Therefore, if this information is not included, there may not be scope to renew or assign the lease in future.
• Penalties can apply for contraventions of the Act.

On 1 January 2023, the scope of businesses captured by Act expanded. Now, small bars and fitness centres for example are also treated as retail business for the purpose of the Act. A comprehensive list is detailed in Schedule 1 of the Retail Lease Regulation 2022 (NSW).

Our property team at SWS lawyers is highly experienced in all aspects of commercial and retail leasing, and provide quality service.

If you require assistance with your property matters, please contact us.

This article was co-written by Lily Barnett, Lawyer.

This article is not legal advice.  It is intended to provide commentary and general information only.  Access to this article does not entitle you to rely on it as legal advice.  You should obtain formal legal advice specific to your own situation.  Please contact us if you require advice on matters covered by this article.