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What is The Difference Between a Retail Lease and a Commercial Lease?

What is The Difference Between a Retail Lease and a Commercial Lease?

What is a lease?

A lease is a legally binding contract between a lessor and lessee for the lease of a premises for a fixed period of time and upon agreed terms. A lease does not need to be in writing but a written record of what is agreed will obviously minimise disputes between the lessor and lessee.

A lease usually sets out the key terms agreed between the parties such as the premises being lease, rental payable, the term of the lease and who is responsible for the costs associated with the lease and repairs and maintenance of the premises.

A lease with a term of more than 3 years is usually documented by written agreement using the Queensland Land Registry Form 7 Lease. A lease in this form is capable of being registered upon the title of the premises. Registration of a lease protects a lessee’s proprietary rights.

Some key phrases

  • Lessor also known as Landlord is a person or entity that owns real property and leases such property.
  • Lessee also known as Tenant is a person or entity that leases a property from a lessor.
  • Guarantor is usually a third party who guarantees to the lessor the performance by the lessee of its obligations under the lease. Where a lessee is a company, the guarantor is usually the lessee’s directors and/or shareholders.
  • Term means the duration or length of the lease. The term usually commences on the commencement date and expires on the expiry date. The term may be subject to option periods that extend the initial term of the lease.
  • Options means an agreement between the lessor and the lessee to the extend the term of the lease for a further term or an additional period of time. Generally, an option is exercisable by the lessee and extends the expiry date of the lease to an agreed date in the future. A lease may contain more than 1 option.
  • Rent Reviews usually occur during the term of the lease and in most cases annually on the anniversary of the commencement date. A rent review is simply that, a review of the rent to either increase or decrease the rent payable by the lessee under the lease. There are a number of different types of rent reviews, these include fixed increase, fixed percentage increase, consumer price index review and market review.
  • Gross Lease is a type of lease where the lessee pays rental (and usually utilities and consumable costs) and the lessor pays for all costs in respect of the property such as rates and land tax.
  • Net Lease is a type of lease where the lessee pays rental plus utilities, consumables and all costs in respect of the property such as rates and land tax.

What is a Commercial Lease

A commercial lease in Queensland is regulated by common law, the Property Law Act 1974 (Qld), the Land Act 1994 (Qld) and the Land Title Act 1994 (Qld).

A commercial lease is usually a lease of premises where the permitted use does not include the sale of goods or services and is for premises such as warehouses, industrial lots, office space etc.

What is a Retail Lease

A retail lease in Queensland is regulated by the same legislation as a commercial lease but it is also regulated by the Retail Shop Leases Act 2009 (Qld) (“RSLA”). The RSLA affords lessee’s additional protections and was introduced to address the perceived imbalance of negotiating power between lessors and lessees by introducing minimum standards for retail leases.

Generally, a retail lease is a lease of premises where the permitted use is the sale of goods or services or the premises is located within a shopping centre. The RSLA sets out what exactly makes a lease a retail lease.

Main differences between a Retail Lease and a Commercial Lease

The main differences between a retail lease and a commercial lease are:

  1. Costs – under a retail lease, the lessor is not allowed to seek to recover a number of costs including legal costs for the preparation of the lease, mortgagee consent costs and land tax.
  1. Disclosure – the RSLA imposes obligations on both the lessee and lessor which do not apply to commercial leases and one of these obligations is in respect of disclosure. Before entering into a retail lease the lessor and lessee must make certain disclosures to each other. Such disclosures must be in a specific form and there are strict timelines of when such disclosures are to be made. Where disclosure has not been done correctly, a party may have rights under the RSLA which include termination and a claim for damages.
  1. RSLA – the RSLA

Short leases – commercial tenancy agreement

Short term leases are generally documented in a less formal manner than retail and commercial leases. The Real Estate Institute of Queensland offers a precedent to use for leases for a term of less than 3 years.

Conclusion

Your lease will be one of the most fundamental contracts you sign when conducting a business and you should ensure you completely understand the terms of the lease before signing it. We recommend you seek legal advice prior to signing a lease so you understand your legal and financial obligations from the outset.

 

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