Retail Lease vs Commercial Lease: What’s the Difference?

Authors: Nikita Chikohwa & Petro Kaloterakis, Progressive Legal

When looking for business premises, being able to understand the difference between a retail lease and a commercial lease is crucial. Both are fundamental in determining the rights and obligations of both landlords and tenants.

In this article we’ll explore the key features and differences between retail and commercial leases, helping you, as a business owner, make an informed decision. 

What is a commercial lease?

A commercial lease is an agreement between a landlord and a tenant for the rental of business premises that are not retail spaces.

This type of lease is typically used for offices, warehouses, factories, and industrial spaces. The distinction between a commercial lease and a retail lease depends on the use of the premises and if the business engages in buying or selling to the public.  

What are the key features of a commercial lease?

1. Flexibility

Commercial leases can be tailored to suit the specific needs of the business and the landlord. Terms can vary significantly from one lease to another.

2. Negotiability

Many terms of a commercial lease are negotiable, including rent, lease duration, and renewal options. Unlike retail leases where the landlord cannot charge the tenant for the legal costs of preparing a new lease, who pays the legal costs of a commercial lease is negotiable between the parties in a commercial lease. 

3. Minimal regulation

Compared to retail leases, commercial leases are subject to fewer regulations, providing more freedom for both parties to agree on terms.

4. Lease duration

Commercial leases often have longer durations to align with the needs of the business. Often business will seek a longer lease duration to ensure it’s continued operation and investment in the premises.  

5. Fit-out responsibilities

Tenants are usually responsible for the fit-out of the premises to suit their business needs.  

What is a retail lease?

Important differences between retail and commercial leases 

Regulatory framework

Retail leases are governed by the Retail Leases Act 1994, which outlines specific protections and obligations for both landlords and tenants. The act ensures fairness and transparency, especially for small businesses. 

Commercial leases, on the other hand, are less regulated. They are typically governed by general contract law and the Conveyancing Act 1919. This lack of specific regulation offers greater flexibility but also places more onus on the parties to negotiate fair terms. 

Disclosure requirements

The Retail Leases Act mandates that landlords provide a disclosure statement to tenants before the lease is signed. This statement must detail all essential terms, including rent, outgoings, and any known issues with the premises. This requirement aims to prevent disputes and ensure that tenants are fully informed before committing. 

There are no mandatory disclosure requirements for commercial leases. While it is good practice for landlords to disclose key information, it is not a legal requirement. This means tenants must conduct thorough due diligence to ensure they understand the lease terms and any potential issues. 

Minimum lease term

The Retail Leases Act sets a minimum lease term of five years to provide stability and predictability for retail tenants. However, tenants can opt for a shorter term if they obtain a certificate from a solicitor, ensuring they understand the implications of a shorter lease. 

There is no statutory minimum term for commercial leases. The lease duration is entirely negotiable, allowing for greater flexibility to match the specific needs and plans of the business and landlord. 

Rent reviews

The Retail Leases Act restricts how and when rent reviews can be conducted. Typically, rent reviews must be based on predetermined methods, such as market rent reviews, fixed increases, or CPI adjustments. This regulation prevents sudden, arbitrary rent hikes that could harm retail businesses. Where the rent review is based on current market value and the parties cannot agree on the rent, the Act provides for a specialist retail valuer to determine the rent.  

Rent reviews in commercial leases are more flexible and can be tailored to the specific agreement between the landlord and tenant. Common methods include fixed percentage increases, CPI adjustments, or market rent reviews. The lack of regulation means both parties must carefully negotiate and agree on fair review mechanisms. 

Tenant protections

Retail tenants enjoy comprehensive protections under the Retail Leases Act. These include the right to compensation if the landlord’s actions cause the tenant to lose business, protections against unfair eviction, and the ability to request lease assignments or subleases. 

Commercial tenants have fewer statutory protections and must rely more on the negotiated terms of their lease. While this allows for customised agreements, it also means that tenants must be vigilant in ensuring their rights are protected within the lease terms. 

When won’t retail leases apply in NSW?

According to the Retail Leases Act, there are specific circumstances where a retail lease won’t apply in NSW, even if the premises are used for retail purposes: 

• Shops with a lettable area of 1,000 square metres or more are excluded from the Act. 
• Businesses managed by the lessee on behalf of the lessor do not fall under the Act. 
• Shops operated within a cinema, bowling alley, or skating rink by the person who operates these facilities are also excluded. 
• Premises used solely for certain purposes, such as vending machines, storage lockers, private post boxes, public telephones, and public tables and seating, are not covered by the Act. 
• Leases with a term exceeding 25 years are not subject to the Act.

Relevant legislation across Australia

Understanding the relevant legislation can help you navigate the complexities of retail and commercial leases across Australia. Here’s a brief overview of legislation in other states: 

• Victoria: Retail Leases Act 2003 
• Queensland: Retail Shop Leases Act 1994 
• Western Australia: Commercial Tenancy (Retail Shops) Agreements Act 1985 
• South Australia: Retail and Commercial Leases Act 1995 
• Tasmania: Fair Trading (Code of Practice for Retail Tenancies) Regulations 1998

So, what type of lease is right for you?

Deciding whether a retail lease or a commercial lease is right for your business depends on several factors, including the nature of your business, future plans, and premises requirements. 

Nature of your business

If your business involves direct sales or services to the public, a retail lease is likely more suitable due to its specific protections. For businesses operating in non-retail environments like offices or warehouses, a commercial lease offers the necessary flexibility. 

Future plans

Consider your long-term business goals when choosing a lease. Retail leases provide stability with a minimum five-year term, making them suitable for businesses with long-term plans. On the other hand, commercial leases, with their negotiable terms, can accommodate rapid growth or frequent relocations. 

Premises requirements

Think about the specific requirements of your premises. Retail premises often require specific fit-outs to appeal to customers, making a retail lease beneficial. In contrast, commercial premises offer more basic, flexible spaces, ideal for specialised operational needs. 

Regulatory environment

Evaluate the regulatory environment as well. Retail leases in NSW are governed by the Retail Leases Act 1994, offering more tenant protections. Commercial leases, governed by general contract law, provide greater flexibility but require careful negotiation. 

Financial considerations

Financial considerations also play a crucial role. Retail leases may include additional costs related to compliance and fit-outs, while commercial leases can be more cost-effective due to their flexible terms. 

Choosing the right lease type ensures your business secures an agreement that supports long-term success and growth. Consulting with a legal professional can provide tailored advice for your specific situation. 

Key takeaways

Choosing between a retail lease and a commercial lease depends on the nature of your business and the specific needs of your premises.

Retail leases provide more regulatory protection for tenants, while commercial leases offer greater flexibility and negotiability. Understanding these differences and the relevant legislation can help you make the best decision for your business in NSW.

By being informed and prepared, you can secure lease agreements that support your long-term success and growth. Whether you’re opening a new retail store or securing an office space for your expanding business, the right lease can provide the foundation for your business to thrive.

If you need further assistance or detailed advice tailored to your specific situation, reach out to our experienced commercial lease lawyers at Progressive Legal on 1800 820 083 or by making an enquiry below.

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