Retail Lease v Commercial Lease (Victoria)

Do you own and operate a business from a leased property? Are you a commercial landlord? Do you know whether your lease is a Retail or Commercial Lease? Do not worry if you are unsure, most small business owners are unaware of the differences between the two.

We outline some of the key differences between a Commercial and Retail Lease[1].

It is important to understand these differences if you are a landlord or a tenant as the rights, obligations and protections are very different for both types of leases.

Commercial Lease

Commercial leases will usually apply to large scale operations such as a business or premises that is used for warehousing or storage or a commercial building without retail activity.

Commercial leases are not governed by any specific legislation, they vary greatly from premises to premises, landlord to landlord and managing agent to managing agent. Consequently, the lease may be very one sided (more often than not, favouring the landlord) and your liability under the lease will greatly depend on you (or your solicitor’s) ability to negotiate favourable terms.

The provisions in a commercial lease will ordinarily address such matters as:

  • How and when rent is to be paid;
  • How and when a rental review occurs;
  • Maintenance and repairs of the property; and
  • The mechanism for dealing with breaches and termination.

Retail Lease

A retail lease is usually granted for premises where the permitted use of the premises is predominantly for the sale and supply of goods and/or services.

Unlike their commercial counterpart, retail leases are structured and are regulated (in Victoria) by the Retail Leases Act (Vic) 2003 (“the Act”). In comparison to a commercial lease, the Act harmonises the playing field between the landlord and tenant in the following ways:

  • Mandatory disclosure requirements. The Act imposes an obligation on the Landlord to provide the tenant with a Disclosure Statement (and continuous disclosure) in relation to the rented premises. The disclosure statement confirms to the tenant the premises being rented, what is included, incidentals such as allocated car parking and an estimate of outgoings associated with the lease. This in turn creates an added level of certainty and protection for the tenant;
  • Restriction on attempts to claim/recover certain expenses. The Act prevents a landlord from recovering from the tenant expenses such as land tax, and capital improvements undertaken or capital costs incurred by the landlord; and
  • The Act overrides inconsistent leases. The Act shields tenant’s in that it prevents the landlord from circumventing its provisions and failing to address all requirements. Where a lease fails to address an issue or is inconsistent with the Act, the Act prevails and any inconsistent clause of the lease is substituted by the relevant section in the Act.

Misclassification of a Lease

The issue of whether a lease of a premises is commercial or retail had, until 2017, been a contested issue and the subject of debate between landlords and tenants.

It has always been advantageous for a landlord to enter into a “commercial” i.e., non-retail lease. Under a commercial lease the landlord would, amongst other things, be entitled to recover from the tenant expenses such as:

  • The legal costs of preparation and negotiation of the lease (where this provision was not removed prior entering into the agreement);
  • Land tax in respect of the premises;
  • The landlord’s rental obligations under any head lease;
  • Management fees; and
  • Capital costs.

A 2017 Supreme Court of Victoria[2] decision assisted in determining whether a lease for a premises is a retail or commercial lease. In that case, the tenant was operating a cold storage business from the rented premises, and a dispute arose between the landlord and tenant regarding the tenant’s liability to pay land tax and outgoings exceeding $160,000.00. The matter was ligated in the Victorian Civil and Administrative Tribunal where it was found that the lease in relation to the premises was commercial, and therefore the tenant was liable for the outgoings including land tax.

The matter was subsequently appealed to the Supreme Court of Victoria where it was determined that the lease in respect of the premises was in fact a retail lease and therefore the tenant was afforded the protection of the Retail Leases Act (Vic) 2003. In making its decision, the court applied what is now known as “the ultimate consumer test” i.e. is the person acquiring the good or service the ultimate consumer of that good or service. On application of that test it was determined that the service provided by the tenant was a retail service as the ultimate consumers were those providing their goods to be placed in cold storage.

If you think your lease has been misclassified and require assistance, please contact us to provide advice on your individual circumstances.

Please note the above is intended to be commentary and general information only. Commentary and general information should not be relied upon or substituted as legal advice. Formal legal advice should always be obtained. We have significant experience and expertise in leasing. If you would like to get legal advice on your specific situation then please contact our office.

Each state has its own lease related legislation and we can provide advice on interstate leases. We have extensive experience in handling property, commercial and litigation matters.

Speak to a commercial lease lawyer today on 1300 907 335 or complete an online enquiry form and we will be in contact with you promptly.

 

1. Please note each State and Territory has its lease related legislation. This article is intended for Victorian residents. We are able to advise on interstate leases. For a confidential discussion please contact our office on (03) 8397 500
2. CB Cold Storage Pty Ltd v IMCC Group (Australia) Pty Ltd [2017] VSCA 178

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