In brief - Small businesses should be familiar with lease terms and rights under the Retail Leases Act
Shopping centre redevelopment may bring benefits for small business traders but prior to entering into a retail lease, retail tenants should consider the impact of relocation and demolition clauses, ensure that they are consistent with sections 34A and 35 of the Retail Leases Act 1994 (NSW)
, and understand the circumstances under which either party may terminate the lease.
Retail Leases Act may provide some protection to small businesses facing redevelopment
Shopping centre makeovers and redevelopment projects are all the trend and small business traders may face relocation or even an end to their lease to allow for redevelopment of centres into larger more modern shopping complexes.
Redevelopment can be a win for incoming small business owners, as well as existing businesses if there is an increase in foot traffic and customer dollars. However, the process can be disruptive so you should be aware of what may happen when negotiating the terms of your new lease.
Existing retail tenants who are subject to the Retail Leases Act should familiarise themselves with their rights under the Act.
Relocation may result in rent increase, inappropriate shop size and poor placement
A relocation clause in a retail lease allows the lessor to move you to a different location in the centre. The new premises may not always be suitable though.
The new location could be in a poor spot for your type of customer or the new premises may be an inappropriate size.
Even with a mandatory adjustment by the lessor of the rent to account for any difference in the commercial values of the existing shop and proposed new shop, it may not leave you in an equivalent position.
Any relocation provisions must not be inconsistent with section 34A
of the Act. The lessor must provide you with a minimum of three months' written notice, and for the relocation notice to be valid it must include details of:
- the proposed redevelopment that shows it is a genuine proposal that will be carried out within a reasonable time after relocation of your business and that it cannot be carried out practicably without vacant possession of your shop
- the premises you are to be relocated to
Before signing your lease, if relocation is on the cards, you may wish to negotiate a right to trade in the existing premises for a fixed amount of time and/or a right of first refusal for a prime position in any new development in connection with a proposed relocation.
If you agree to the relocation, the lessor must bear the costs of that relocation, including the costs of dismantling fittings and equipment, replacing and re-installing fittings and equipment, and any legal costs.
But beware that the relocation to a new premises may result in an increase in rent if the new premises has higher commercial value. The lease must otherwise be on the same terms as the existing lease.
The best commercial decision may be to reject the relocation and terminate the existing lease by giving written notice. It will always depend on your individual circumstances.
Lessor must provide sufficient notice of lease termination for demolition
A lessor can terminate a lease for the purpose of demolishing the building in which your shop is located, if the lease permits such termination and the provision is consistent with section 35
of the Act.
For an effective termination, the lessor will have to provide a minimum of six months' notice (or three months if the term of the lease is 12 months or less) and sufficient details of the proposed demolition that show the demolition will take place within a reasonable time after the lease is terminated.
If for any reason the demolition of the building is not carried out within a reasonably practicable time after the termination date, the lessor may be liable to pay you reasonable compensation for any damages. The lessor will also have to pay for the fit out of the shop.
Keep in mind that demolition includes acts which are less destructive such as substantial repair, renovation or reconstruction of the building. However, repair or renovation to only one or two shops in a large centre will not meet the threshold of substantial repair unless the premises itself constituted the whole of the building.
To minimise the impact of the disruption, you can opt to leave before the end of the six months by giving the lessor not less than seven days' written notice.
Retail tenants should negotiate scope of relocation and demolition clauses prior to entering lease
When entering into a lease it is important to be familiar with its terms. If the lease does contain a relocation or demolition clause, check that the provisions are consistent with sections 34A and 35 of the Act.
The Act may provide you with some protection, but to minimise any potential loss you should negotiate the scope of the provisions with the lessor before entering into any lease.
This is commentary published by Colin Biggers & Paisley for general information purposes only. This should not be relied on as specific advice. You should seek your own legal and other advice for any question, or for any specific situation or proposal, before making any final decision. The content also is subject to change. A person listed may not be admitted as a lawyer in all States and Territories. © Colin Biggers & Paisley, Australia 2020.