Leasing premises is often one of the largest ongoing commitments for a retail business.

While the commercial terms of a lease remain important, some Queensland retail premises are also governed by the Retail Shop Leases Act 1994 (Qld) (RSL Act).

The Act regulates matters including pre-lease disclosure, rent reviews, outgoings, assignments and certain rights and obligations during the lease.

Importantly, not every commercial lease is a retail shop lease.

What Is a Retail Shop Lease in Queensland?

Whether a lease is a retail shop lease does not simply depend on what the document is called.

Broadly, the RSL Act can apply to premises of less than 1,000 square metres used for a retail business, as well as certain non-retail businesses situated within a retail shopping centre, subject to exclusions in the legislation.

This distinction matters.

A lease that falls within the RSL Act is subject to statutory requirements that may not apply to an ordinary commercial lease.

The Queensland Small Business Commissioner notes that the Act provides retail tenants with protections relating to matters such as:

• disclosure before entering or renewing a lease;
• rent review provisions;
• outgoings;
• renewal notices; and
• retail tenancy dispute resolution.

If there is uncertainty about whether premises fall within the Act, this should be determined before the lease is entered into.

A Retail Lease Can Exist Even Before the Document Is Signed

Business owners should be particularly careful about taking possession or paying rent before their lease documentation has been finalised.

Under the RSL Act, a retail shop lease can be regarded as entered into when the tenant takes possession of the shop or begins paying rent, even if the formal lease has not yet been signed.

That is one reason legal advice should ideally be obtained before the tenant moves into the premises or starts paying rent.

Disclosure Before Entering a Retail Shop Lease

One of the significant features of Queensland's retail leasing legislation is the disclosure regime.

Under section 21B of the RSL Act, the landlord must generally provide the prospective tenant with:

• a draft of the proposed lease; and
• a lessor disclosure statement,

at least 7 days before the prospective tenant enters into the retail shop lease.

The disclosure statement provides information about the premises and proposed lease arrangements.

The Retail Shop Leases Regulation specifies information to be disclosed, including matters such as the parties, premises, lease term and options.

Disclosure should not be treated as a formality.

The tenant should compare the disclosure statement carefully against the proposed lease and the commercial deal that has been negotiated.

Can the 7-Day Disclosure Period Be Waived?

In certain circumstances, yes.

The Act provides a mechanism allowing the transaction to proceed where the lessor's disclosure statement is provided after the prescribed disclosure date but before the lease is entered into.

This requires the prospective tenant to provide the appropriate waiver notice and, unless the prospective tenant is a “major lessee” within the meaning of the Act, a legal advice report confirming that legal advice has been given about the meaning and effect of the waiver.

It should therefore not simply be assumed that the parties can informally agree to ignore the statutory disclosure period.

Tenants Also Have Disclosure Obligations

Disclosure is not solely the landlord's responsibility.

A prospective tenant, other than a prospective franchisee, must generally provide a lessee disclosure statement to the landlord at least 7 days before entering into the retail shop lease.

Further requirements apply to certain tenants concerning legal and financial advice reports.

A prospective tenant who is not a “major lessee” must generally provide the landlord with both a financial advice report and a legal advice report before entering into the lease.

These requirements reinforce the importance of dealing with the lease documentation early rather than immediately before occupation.

What Happens if the Landlord Does Not Properly Disclose?

Failure to comply with the statutory disclosure requirements can have significant consequences.

Under section 21F, a tenant may have a right to terminate a retail shop lease by written notice within 6 months after entering into the lease if the landlord failed to comply with the relevant disclosure obligations or provided a materially defective disclosure statement, subject to qualifications and exceptions in the legislation.

A disclosure statement may be defective if it is materially incomplete or contains information that is materially false or misleading.

Whether a termination right actually exists depends on the particular circumstances, so legal advice should be obtained before relying on such a provision.

The Lease Term and Options

The lease should clearly specify:

• the commencement date;
• initial term;
• any option periods;
• the deadline for exercising an option; and
• the procedure required to exercise it.

An option to renew gives the tenant a contractual right to extend the lease for another term if the conditions of the option are satisfied.

Options are not compulsory. If there is no option, the landlord will not ordinarily be required to grant a further lease when the existing lease expires, subject to particular statutory provisions that may apply.

For a tenant investing significantly in fit-out, equipment and goodwill associated with a location, the length of the lease and available options can be commercially important.

Disclosure When an Option Is Exercised

There are additional disclosure rules when a retail tenant exercises an option.

Where section 21E applies, the landlord must generally provide an updated disclosure statement within 7 days after receiving the tenant's notice exercising the option.

The tenant may then have 14 days after receiving that disclosure statement to withdraw its renewal notice. The Act also allows the tenant to waive the landlord's renewal disclosure obligation in the manner provided by the legislation.

This is an important difference between simply negotiating a commercial lease and dealing with a lease regulated by the RSL Act.

Rent and Rent Reviews

The lease should clearly state:

• the starting rent;
• whether GST applies;
• when rent is payable;
• how often rent is reviewed; and
• the method used for each review.

Common review methods include:

• fixed percentage increases;
• CPI-based increases; and
• market reviews.

Queensland's retail leasing legislation places restrictions on some rent review mechanisms.

For example, the RSL Act generally prohibits ratchet provisions that prevent rent from decreasing when the applicable review mechanism would otherwise result in a decrease, subject to particular provisions concerning major lessees.

The Act also restricts certain review mechanisms involving alternative methods of calculating rent.

Market Rent Reviews

Where a retail lease provides for a market rent review, the parties may agree on the market rent.

If they cannot agree within the statutory timeframe, the RSL Act provides a process involving determination by a specialist retail valuer.

The Queensland Small Business Commissioner notes that if the landlord and tenant cannot agree on market rent within one month after the review date, a specialist retail valuer can determine the rent, with QCAT able to appoint the valuer if the parties cannot agree on the appointment.

The cost of the valuation is generally shared equally between the parties.

Outgoings

Rent is only one component of the cost of occupying commercial premises.

A retail tenant may also be required to contribute towards outgoings, which could include items such as:

• council rates;
• water charges;
• insurance;
• cleaning;
• security;
• common area maintenance;
• management expenses; and
• other operating costs,

depending on the lease and what can lawfully be recovered.

Under section 37 of the RSL Act, a tenant is not liable to pay the landlord an amount for outgoings unless the lease specifies:

• the outgoings payable;
• how those outgoings will be determined and apportioned; and
• how the landlord may recover them.

The Act also restricts the proportion of apportionable outgoings that can be passed on to a retail tenant.

Estimates and Annual Statements of Outgoings

Retail landlords also have statutory obligations concerning information about outgoings.

The RSL Act requires estimates of apportionable outgoings and audited annual statements in circumstances prescribed by the legislation.'

The Queensland Small Business Commissioner explains that landlords must generally provide an estimate when the lease begins or at least one month before the relevant accounting period starts, and an audited annual statement is generally required following the end of the period.

For tenants, reviewing the likely outgoings before signing is important because the true cost of occupancy can be substantially higher than the advertised base rent.

Permitted Use

The permitted use clause determines what business activities the tenant can conduct from the premises.

It should be broad enough to accommodate the tenant's intended operations without creating unnecessary restrictions.

For example, a permitted use described very narrowly may cause problems if the tenant later expands its product range or modifies its business model.

The tenant should also investigate separately whether the intended use is permitted under:

• planning requirements;
• development approvals;
• licences;
• body corporate requirements, where relevant; and
• other regulatory requirements.

A landlord agreeing to a permitted use under a lease does not necessarily mean every regulatory approval required for that business has been obtained.

Fit-Out

Retail businesses often invest heavily in fitting out their premises.

Before committing to the lease, the parties should clearly establish:

• who is responsible for the fit-out;
• whether landlord approval is required;
• whether plans and specifications must be submitted;
• who owns the fit-out;
• whether there is a fit-out contribution;
• when the tenant can access the premises;
• whether rent is payable during fit-out;
• who bears approval costs; and
• what must happen to the fit-out when the lease ends.

These issues should ideally be resolved before substantial money is spent.

Lease Incentives

A landlord may offer an incentive to encourage a tenant to enter the lease.

Examples can include:

• a rent-free period;
• reduced rent for an initial period;
• a fit-out contribution; or
• another financial incentive.

The legal documentation should accurately record the incentive and any conditions attached to it.

Tenants should consider the overall financial commitment across the entire lease term, rather than focusing solely on the initial incentive.

Security and Personal Guarantees

Landlords commonly require security for a tenant's obligations.

This may include:

• a bank guarantee;
• security deposit; or
• personal guarantees from directors or other individuals.

A personal guarantee can be particularly significant.

Even where the tenant is a limited liability company, a director who personally guarantees the lease may become personally responsible for amounts owed by the company under the guarantee.

The amount, duration and circumstances in which security can be called should be reviewed carefully.

Repairs and Maintenance

The lease should clearly allocate responsibility for repairs and maintenance.

Depending on the premises and lease, issues may include:

• air-conditioning;
• plumbing;
• electrical systems;
• shopfronts;
• glass;
• fixtures;
• equipment;
• structural repairs; and
• common areas.

Tenants should not assume that every major repair is automatically the landlord's responsibility.

The actual lease terms and applicable legislation need to be considered.

Make-Good Obligations

A make-good clause deals with the condition in which the tenant must leave the premises at the end of the lease.

Depending on the drafting, a tenant may be required to:

• remove its fit-out;
• remove signage;
• repair damage;
• repaint;
• reinstate altered premises;
• remove cabling or equipment; and
• return the premises to a specified condition.

For heavily fitted retail premises, make-good costs can be substantial.

The tenant should understand the obligation at the beginning of the lease, not discover it when preparing to vacate years later.

Assigning the Lease When Selling a Business

Lease assignment becomes particularly important when a tenant sells a business operated from leased premises.

A purchaser will commonly require the ability to continue operating from the existing location.

The seller therefore needs to determine:

• whether the lease can be assigned;
• whether landlord consent is required;
• what information the landlord requires about the purchaser;
• whether guarantees or security must be replaced; and
• what disclosure documents must be provided.

The RSL Act contains a specific disclosure regime for assignments.

For example, where the assignment relates to the sale of the business conducted from the premises, the outgoing tenant must generally give the prospective assignee a disclosure statement and copy of the current lease at least 7 days before the assignee enters into the business sale agreement, subject to the statutory waiver mechanism.

The landlord also has separate disclosure obligations to the prospective assignee, and the prospective assignee has disclosure obligations of its own.

This is why the lease assignment should be considered early in a business sale, rather than being left until settlement.

Related article: Selling a Business in Queensland: How to Prepare for a Successful Sale.

Relocation and Redevelopment

Retail leases, particularly within shopping centres, may contain provisions allowing a landlord to relocate a tenant or deal with the premises in connection with redevelopment.

These clauses can have significant commercial consequences.

A tenant should consider:

• when relocation can occur;
• notice requirements;
• the proposed alternative premises;
• relocation costs;
• fit-out implications;
• disruption to trade;
• signage;
• whether termination rights may arise; and
• any statutory protections or compensation provisions.

The RSL Act contains provisions dealing with compensation in specified circumstances, including certain actions by landlords affecting a tenant's business.

The lease and legislation need to be considered together.

What Happens if the Business Is Disturbed?

Retail tenants may have statutory rights to compensation in certain circumstances where the landlord's actions substantially interfere with access to, or trading from, the premises.

However, entitlement to compensation is fact-specific.

The circumstances, lease terms, statutory provisions and nature of the disruption all need to be considered.

Not every inconvenience or reduction in trade automatically creates a compensation entitlement.

What Happens if the Tenant Defaults?

A retail lease will generally contain provisions dealing with default.

Examples include:

• unpaid rent;
• unpaid outgoings;
• failure to maintain insurance;
• unauthorised use;
• failure to repair; or
• another breach of the lease.

Queensland's Property Law Act 2023 (Qld) now also needs to be considered in relation to lease breach and termination procedures.

The Queensland Small Business Commissioner notes that where a tenant fails to pay rent, the landlord may need to issue a statutory notice to remedy breach and comply with the applicable requirements before taking further action.

Both landlords and tenants should obtain advice before taking steps to terminate a lease or withhold rent.

Retail Lease Disputes

Queensland has a specific dispute resolution pathway for retail tenancy disputes.

The Queensland Small Business Commissioner provides mediation services for retail tenancy disputes under the RSL Act.

Where an eligible retail tenancy dispute is not resolved through the statutory mediation process, it may proceed to the Queensland Civil and Administrative Tribunal (QCAT), subject to jurisdictional requirements.

This is another reason why determining whether the lease is actually a retail shop lease is important.

A dispute concerning an ordinary commercial lease does not automatically follow the same QCAT pathway.

Retail Shop Lease vs Commercial Lease

A retail shop lease is still a commercial lease, but not every commercial lease is governed by the Retail Shop Leases Act.

That distinction can affect:

• disclosure;
• rent reviews;
• outgoings;
• assignment;
• compensation rights;
• renewal procedures; and
• dispute resolution.

For a broader discussion of business premises leases, see our article Commercial Leases in Queensland: What Business Owners Need to Know.

Before Signing a Retail Shop Lease

A tenant should understand the complete commercial commitment before entering the lease.

Important questions include:

Does the Retail Shop Leases Act apply?

How long is the lease and are there options?

What is the starting rent?

How will rent increase?

What outgoings are payable?

What security and guarantees are required?

Is the permitted use broad enough?

Who pays for the fit-out?

What happens to the fit-out when the lease ends?

Can the lease be assigned if the business is sold?

Are there relocation or redevelopment provisions?

What are the make-good obligations?

What is the total occupancy cost over the lease term?

The lease may affect the business for many years. Reviewing these matters before signing can be considerably easier than attempting to renegotiate them afterwards.