Industries
Legal and Regulatory
Issues of Retail Leases Part 1
With all retail businesses, rights in relation to use of the retail premises are an issue of critical concern to any business owner. Retail optometry is no different. In this article, we will consider the following areas:
- issues to be considered in negotiating a retail lease and,
- issues to be considered in negotiating a retail lease in a shopping centre.
ISSUES TO BE CONSIDERED IN NEGOTIATING A RETAIL LEASE
Most tenants of retail optometry premises throughout Australia will enjoy the benefit of retail tenancy legislation which, although different in each of the States and Territories, does afford certain protections to retail tenants (the retail tenancy legislation does not usually cover large premises, leases of a very short or a very long term and so on). The provisions of the retail tenancy legislation are important and require careful consideration. Many of the retail lease provisions are mandatory so that parties cannot contract out of such provisions. Core mandatory provisions designed to protect tenants include such matters as a minimum lease period or term (subject to certain exemptions), restrictions in relation to certain aspects of demolition and relocation clauses, restrictions in relation to restraints on assignment by tenants, methods for determining the payment of outgoings in shopping centres, and methods for determining the calculation of market rent.
However, there are many matters not specifically covered in the legislation which should be carefully considered at the time of negotiating a retail lease. These include:
- Term and options - In relation to the
term of the lease, care will need to be taken to ensure that, as far as
possible, the term of the lease reflects the balance of security tenure for a
sufficient period together with some commercial flexibility. Tenants should seek to achieve this balance
by a combination of original term and an option or options. The term of the lease and options should also
accommodate the term of any franchise agreement which is proposed or in place
in relation to the optometry practice.
Once the lease is entered into, particular note must be taken of the dates of exercise of the option as these are critical dates which are not, without agreement, capable of extension.
Some of the retail tenancy legislation permits a tenant, before deciding whether to exercise an option to renew the term of the lease to make an early request for a determination of the market rent for the first year of the renewed term (where the retail lease provides for a market review at the beginning of the renewed term) prior to the exercise of the option. If a request is made in accordance with the legislation, the time in which the tenant may exercise the option is effectively extended to a period after the market rental is determined. This helps the tenant make an informed decision whether to exercise the option. This is an important issue which should be considered by tenants prior to the time when they are required to exercise their option.
Where a tenant does not have a statutory right to seek a prior market rental determination, the tenant should still consider whether it is prudent to exercise an option to renew without knowing what rental will apply at the beginning of the renewed term. The tenant may want to approach the landlord before exercising the option to agree the rental that applies from the beginning of the renewed term. The landlord may also want some certainty both as to the tenancy and the rental and may be willing to negotiate.
- Outgoings - there are some protections
in the retail tenancy legislation in relation to the outgoings which are
charged to a tenant, but these principally relate to shopping centres. Where there is an agreement to pay outgoings
or a proportion of outgoings, the nature and extent of the outgoings which are
to be paid should be carefully considered and agreed with the landlord. In some cases, an agreement may be made in
relation to the payment of increases only over a base year and it is important
that the base year and amount be clarified.
After the lease has been negotiated, the disclosure documents issued by
the landlord should set out a breakdown of the outgoings and the amount payable
by the tenant in relation to the premises and this information should be reviewed.
- Contribution to fit out - if a
contribution to the cost of the fit out is payable by the landlord, care should
be taken in relation to how this is to be structured - is it to be paid by
reimbursement to the tenant after the tenant has paid contractors or can it be
utilised in relation to payment of contractor's invoices directly, and does it
include GST and so on. In addition, the
provisions of the lease or agreement to lease in relation to the contribution
to fit out should be reviewed to ensure that there is no right for the landlord
to seek a refund of the fit out contribution in the event of assignment or termination
of the lease.
- Draft lease document -a copy of the
lease should be obtained at the time that the lease is being negotiated and
that lease should be reviewed by a solicitor with retail leasing experience at
the time of the lease negotiations. This
will restrict the ability of the landlord to seek to recover legal costs from
the tenant.
- Use clause -the permitted use clause needs
to be sufficiently broad to enable some flexibility. Ideally it should provide for general retail
usage but this may be difficult to negotiate.
Use clauses which make reference to the trading name of the optometry
practice should be avoided as they are unnecessarily restrictive.
- Rental increases - all leases will
contain mechanisms for review of the base rent, and will usually be a fixed
percentage/CPI/market or a combination depending on the lease term and
options. The combination of these review
mechanisms should be carefully considered.
As a general rule, provision for a market review at least every 5 or 7
years will bring some balance to the lease, especially when a long lease term
is being negotiated. Most retail tenancy
legislation prohibits leases containing ratchet clauses (that is, a clause that
prohibits the rent from falling below the previous rent) or mechanisms where a
landlord of retail premises can, in any given year, choose a review mechanism
which gives a higher rental amount. The
issue of market reviews is typically a vexed one in retail leases - a
reflection of this, and an attempt to resolve the difficulties inherent in the
process, is the establishment under certain retail tenancy legislation of the
roles of specialist retail valuers in the event of the parties being unable to
agree.
- Agreed terms - a tenant will usually
agree the key commercial terms either with the landlord direct, but more often
than not, the landlord's agent. At this
time the tenant will be asked to sign an offer and pay a deposit. Prospective tenants need to be wary of
signing offers without having them reviewed, especially if the disclosure
document and draft lease have been supplied.
A prospective tenant should also carefully check the terms of any offer
against the lease to make sure that the lease reflects the commercial terms
that have been agreed.
ISSUES TO BE CONSIDERED IN NEGOTIATING A RETAIL LEASE IN A SHOPPING CENTRE
Protection of the business from competition
This particularly applies in a shopping centre setting and in circumstances where further expansion of the shopping centre is contemplated or where there is to be consolidation of a number of centres under single management. This can have disastrous financial consequences for an established business. Optometrists need to consider negotiating to seek exclusivity with the landlord precluding another retail optometry practice operating within the centre or within a part of the centre (or an amalgamated centre). If this is not successful, an optometrist should seek to negotiate a first right of refusal entitling the optometrist to be offered a lease in priority to all others if another optometry practice is going to be permitted at that centre. In large centres these kinds of provisions are notoriously difficult to negotiate.
Demolition and relocation clauses
Care needs to be taken in relation to clauses in a lease permitting a landlord to terminate the lease in the event of demolition or substantial repair or renovation to the building or centre in which the premises are located (demolition clauses). Whilst there are protections in the retail tenancy legislation in relation to notice and genuine intention to carry out the works, such clauses can create real problems for optometry tenants, and can diminish the value of the optometry practice (by reason of the fact that the goodwill in the business is reduced because of questionable security of tenure). In addition to this must be added the cost of relocation and fitting out alternative premises - generally, the only compensation which a landlord must pay upon the exercise of a termination right upon demolition is the cost of fitting out the original premises where such a fit out was required by the landlord. As for relocation clauses, again whilst there are certain statutory protections allowing the recovery of some relocation costs, the tenant may find that the new position within the centre is not as commercially viable as the original position. This is not a matter for which, under retail tenancy legislation generally, the landlord is required to compensate the relocated tenant. Every effort should be made to negotiate the removal of these clauses from the lease, or at the very least, for these provisions to be amended so that the right to terminate cannot be exercised before an agreed date and if exercised, only in a certain manner, ensuring that the relocation is not prejudicial to the tenant's commercial position.
Disclosure statement
Most retail tenancy legislation provides for written disclosures by both the landlord and the tenant of certain critical information, especially, in the case of a tenant, of the statements and representations made by the landlord at the time that the tenant agrees to lease the premises. A tenant may have been induced to enter into a commitment to lease the premises by representations in relation to other proposed occupants of the centre, especially key tenants, proposed facilities within the centre, traffic flows and so on. It is critical that any disclosure documents which are executed by the tenant include all such representations. Tenants should also be aware that if a landlord fails to provide disclosure documentation in accordance with the relevant retail tenancy legislation, or in making disclosure is misleading or deceptive, the tenant will have certain rights under that legislation, including the right to terminate the lease within a certain time after commencement. Again, tenants should carefully check any disclosure document against the terms of the lease and any offer or agreement to lease.
If you would like further information regarding leasing related matters, please contact the Laura Dhana or Brent Wilson on 1800 617 624 or This email address is being protected from spam bots, you need Javascript enabled to view it .