This article was written by Nancy Wang Principal Solicitor at W & G Lawyers.
Finding the right premises is one of the most exciting steps in starting or growing a small business. Once the draft lease arrives, many business owners ask us a practical question. What will it cost to get the lease done properly?
The answer often depends less on the rent and more on the type of lease you are signing. In Queensland, leases of shops used for retail businesses are covered by special retail leasing laws, while leases of offices, warehouses and factories generally are not. That one distinction may decide whether you pay the landlord’s legal costs, whether you need reports from a lawyer and an accountant before you sign, and what protection you have if something goes wrong. The form of the lease, and whether it should be registered on the title, can add further costs.
Here are five questions we suggest you work through before you sign anything.
1. Is your lease a retail shop lease or a commercial lease?
The heading on the document does not decide the question. A lease titled “commercial lease” may still be a retail shop lease, and the retail rules generally cannot be avoided by the wording of the lease. What matters is how the premises are used and where they are located.
Your lease is likely to be a retail shop lease if either of the following applies.
- Your premises will be used wholly or mainly for a business on the government’s list of retail businesses. The list is broad and includes cafés, restaurants, takeaway food outlets, clothing stores, pharmacies, hairdressers and beauty salons.
- Your premises are in a retail shopping centre, which broadly means a group of at least five retail shops under a common owner or landlord that is promoted as a shopping centre, mall or arcade. In a shopping centre, some businesses that are not on the list may also be covered.
There are exclusions. The most common is a shop with a floor area of more than 1,000 square metres. Offices, medical centres, real estate agencies and gyms are generally not on the list, although they may still be covered if they are in a retail shopping centre.
If your lease is not a retail shop lease, it is generally treated as a commercial lease. Your rights will then depend mainly on what the lease itself says, and the landlord has far more freedom to set the terms. The difference can have a real effect on your costs.
- Under a retail shop lease, the landlord generally cannot charge you for obtaining its bank’s consent, or for its legal costs of preparing the lease unless you ask for the final lease to be prepared and then do not sign it. Under a commercial lease, you may be asked to pay the landlord’s legal costs, which can be a significant upfront expense, although this is often negotiable.
- A retail landlord generally cannot pass land tax on to you, and must give you an annual estimate and audited statement of the outgoings you contribute to. Under a commercial lease, land tax and other outgoings may be recoverable from you if the lease allows it.
- In a retail lease, a market rent review generally cannot be drafted so that the rent can only go up. A commercial lease may contain this kind of clause.
- Most retail lease disputes go first to mediation with the Queensland Small Business Commissioner and then, if needed, to the Queensland Civil and Administrative Tribunal (QCAT). QCAT generally cannot hear commercial lease disputes, so these may end up in court, which is usually more expensive.
2. Is the lease on an REIQ standard form or a tailored lease?
Many agents use standard forms published by the Real Estate Institute of Queensland (REIQ). For retail premises there is a short-form REIQ retail shop tenancy agreement, which is generally designed for leases with a total term of three years or less, including any options, and is not intended to be registered. For offices, warehouses and other non-retail premises there is an REIQ commercial tenancy agreement. Shopping centres, larger landlords and longer leases more commonly use a tailored lease prepared by the landlord’s solicitors.
A standard form is familiar and usually quicker, and therefore cheaper, to review, although special conditions added by the landlord or agent can significantly change its standard terms. That is where problems often hide. A tailored lease is usually longer, is drafted with the landlord’s interests in mind and may take more time to review and negotiate.
The form should also suit the deal. If the total term including options is more than three years, for example a three-year lease with a three-year option, a short-form agreement may not be appropriate because you may need a lease that can be registered. Whichever form is used, check that it reflects everything the agent offered you. Promises about rent-free periods, outgoings or the landlord’s equipment may be difficult to enforce unless they are written into the lease.
3. Do you need a Form 11 and a Form 12?
If your lease is a retail shop lease, the answer is generally yes. Before you enter into a new retail shop lease, you must give the landlord two reports.
- A Financial Advice Report (Form 11), signed by a qualified accountant, confirming that you have received financial advice about the lease.
- A Legal Advice Report (Form 12), signed by an Australian lawyer, confirming that you have received legal advice about the lease.
The same reports are generally required if you take over an existing retail lease by assignment, for example when you buy an established business. Franchisees and large tenants that already lease a number of retail shops are generally exempt.
These reports are not a mere formality. A lawyer can only sign the Legal Advice Report after advising you on the lease, so in practice the cost of the report is the cost of the lease review. Your accountant will charge separately for the Financial Advice Report, so contact them early. You will generally also need to complete your own lessee disclosure statement for the landlord.
If your lease is a commercial lease, Forms 11 and 12 are not required. Legal advice is still strongly recommended, because without the retail protections the wording of the lease will largely decide your rights.
4. Do you need the lease and the disclosure statement reviewed?
For a retail shop lease, the landlord must give you a disclosure statement and a copy of the proposed lease at least seven days before you sign. The disclosure statement sets out key information such as the rent and how it will be reviewed, the estimated outgoings, the landlord’s fixtures and equipment, and any works the landlord or you must carry out.
It is worth having both documents reviewed together and compared with the agent’s letter of offer. Differences are common. The outgoings may be higher than the figure the agent gave you, or the equipment list may not match what you saw at the inspection. These issues are far easier and cheaper to fix before you sign than after.
If the disclosure statement is not given on time, or is materially incomplete or misleading, you may be able to terminate the lease within six months and could be entitled to compensation. These remedies have limits, however, and pursuing them after the event is likely to cost far more than a review beforehand.
If you are under pressure to sign quickly, it may be possible to waive the seven-day waiting period. A waiver generally also requires a Legal Advice Report, so it should only be considered after advice.
For a commercial lease there is no disclosure statement, so ask the agent for information such as an outgoings estimate and make sure the important points are written into the lease.
A careful review will generally focus on the terms that affect your costs over the life of the lease.
- The rent, rent reviews and any rent-free period, including whether the incentive must be repaid if you leave early.
- The outgoings you must pay and whether increases are capped.
- Who must repair and replace plant and equipment such as air conditioning, cool rooms, grease traps and exhaust systems.
- The bank guarantee or deposit, and any personal guarantee from the directors.
- Your make-good obligations at the end of the lease, and your rights to assign the lease if you later sell the business.
If the review identifies terms that should be changed, negotiating with the landlord’s solicitors is a separate step. Its cost will depend on how the landlord responds and how many rounds of negotiation are needed.
5. Does the lease need to be registered?
Registration is not compulsory in Queensland, although it can be important. A registered lease is recorded on the title to the property, which generally protects you if the landlord sells or the landlord’s bank takes possession.
A lease with a total term of three years or less, including any options, generally has some protection without registration. A longer lease, such as a three-year lease with a three-year option, generally does not. If a lease of that length is not registered, a new owner or the landlord’s bank may not be bound by it. You could lose the premises and the fit-out you have paid for, and may be left with only a claim against the original landlord.
Registration has its own costs. These may include a Titles Queensland registration fee, the consent of the landlord’s mortgagee and, if you lease only part of a property, a plan of the leased area. For part of a building this is usually a sketch plan, while part of the land generally needs a survey plan prepared by a surveyor, which can add considerably to the cost.
Under a retail shop lease, the landlord generally cannot pass on its costs of obtaining its mortgagee’s consent, although the lease may require you to pay the registration and survey fees. Under a commercial lease these costs are a matter for negotiation and often fall on you. If registration is intended, the lease should be prepared in a registrable form from the start.
Budgeting for your lease
Before you sign, it is worth budgeting for the following, in addition to rent, outgoings and your fit-out.
- Your lawyer’s fees to review the lease and disclosure statement, advise you and sign the Legal Advice Report, plus any negotiation.
- Your accountant’s fee for the Financial Advice Report.
- The landlord’s legal costs, if your lease is a commercial lease and you agree to pay them.
- Registration costs, including any survey plan, if the lease is to be registered.
- A bank guarantee or deposit, often equal to a few months’ rent plus GST.
The Queensland Government is currently reviewing its retail shop leasing laws. No changes had been made at the time of writing, although the rules discussed in this article could change in future.
How W & G Lawyers can help
We can help you confirm whether your lease is a retail shop lease, review the lease and disclosure statement, advise you on the terms that matter to your business, prepare and sign your Legal Advice Report (Form 12), negotiate amendments with the landlord’s solicitors and arrange registration where appropriate. We can also give you a fee quote before you engage us, with any negotiation quoted as a separate stage.
The best time to contact us is as soon as you receive the draft lease, and before you sign anything or pay a deposit.
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Disclaimer
This article is general information only and does not constitute legal advice under Australian law. For advice specific to your situation, please contact W & G Lawyers. For further details, please click here to view our disclaimer.