Buying Or Selling A Business Operating on Leased Premises?

Buying or selling a business often involves a lease transfer. And when those premises are used ‘wholly or predominantly for retail’, the lease may be governed by Victoria’s Retail Leases Act 2003. 

Under the Act, landlords face set obligations, and tenants are given greater protection, across matters such as disclosure, rent reviews, outgoings, lease renewals and the assignment of a lease. 

On top of this, the Retail Leases Amendment Act 2020 have introduced several important changes, giving tenants greater certainty around key stages of a lease. These include stronger disclosure requirements, clearer rules around security deposits and safety measure costs, as well as additional protections when tenants exercise an option to renew, including access to an early rent review and a cooling-off period.

It’s important to determine if the Act applies, as this affects how the parties negotiate, prepare and deliver the lease.

When does the Retail Leases Act apply?

Whether the Act applies will depend on:

The nature of the premises;
How it is used; and
The circumstances of the agreement, not just the title.

Even when a business sells no goods, the Act can still apply if it uses the premises to provide retail services.

This may look like:

A dentist consulting a patient.
A mechanic servicing someone’s personal car.
An accountant preparing an individual’s tax return.

Importantly, the Act may treat a document described as a ‘commercial lease’ as a retail lease. This matters when buying or selling a business, as it can affect the process of transferring the lease to the buyer as well as the rights and obligations the buyer takes on.

Identifying this early can help both parties understand the lease requirements and address potential issues before they delay the transaction.

When the Retail Leases Act doesn’t apply.

Even where premises appear to have a retail use, an exclusion may mean the Act does not apply.

Find a list of exclusions here.

This can include:

Certain listed companies and their subsidiaries.
Premises leased for certain community or charitable purposes.
Premises leased for certain farming or agricultural purposes.
Retail service premises located above the first three storeys of a building.

Specific conditions apply to each exclusion, so it’s important to check the relevant Ministerial Determination when determining whether the Act applies to a particular lease.

What’s changed under the Retail Leases Amendment Act (2020)?

Disclosure Before Entering Lease

Under the Act, landlords must provide prospective tenants with a disclosure statement, detailing rent, outgoings and other obligations, no later than 14 days before the lease is entered into. This gives tenants time to review costs and decide whether to proceed.

Safety Measures

Under the Act, certain essential safety measure costs can be recovered by the landlord, only where relevant requirements are met, and where the lease and disclosure documents permit doing so.

Security Deposits

Historically, the lease determined how you dealt with a security deposit at the end of the tenancy. Now, under the Act, the landlord must give the deposit back to their tenant within 30 days of the lease ending, provided the tenant has met their obligations.

The Minimum Five-Year Term

Under the Act, retail tenants are generally entitled to a lease term of at least five years. This includes the initial term and options to renew. This seeks to provide greater clarity for both parties on expectations, helping to avoid disputes.

Options to renew, early rent review and cooling off.

Some Victorian leases contain an ‘option’ to renew. This is a contractual right enabling the tenant to extend the lease for another term.

Where the Act applies, the landlord must notify their tenant at least three months before the last date at which the tenant can exercise the option.

The Act also adds further protections by requiring landlords to give tenants certain information before the deadline. For example, when the renewed rent is based on market rent.

Note: Rather than exercising the option without knowing what that market rent will be, you can now request an early rent review; generally, 28 days after receiving the landlord’s option notice.

Furthermore, if you didn’t request an early rent review, you then generally have 14 days to change your mind, giving the landlord written notice of this.

What happens if the classification is wrong?

Incorrectly determining whether the Retail Leases Act applies can have consequences for both landlords and tenants.

For example, if a lease is incorrectly classified, the tenant may not receive relevant documents, or may be charged irrelevant costs. The obligations of each party, from outgoings, repairs and maintenance, lease terms and renewal rights, may also be unclear.

What can these mistakes lead to?

These mistakes can lead to disputes, unexpected costs and delays, particularly when a business is being bought or sold and the lease needs to be transferred.

In certain cases, disputes may be escalated to the Victorian Small Business Commission (VSBC) or the Victorian Civil and Administrative Tribunal (VCAT).

Understanding whether the Act applies from the get-go can help to address potential issues before they snowball.

FAQs

Does the Retail Leases Act apply to premises on the fourth storey or above?

Premises located above the first three storeys of a building may be excluded from the Act where the building is wholly or predominantly used for the provision of retail services.

However, being located above the third storey does not automatically mean the Act will not apply. The building’s predominant use, the tenant’s activity and the terms of the relevant ministerial determination must all be considered.

Does the Retail Leases Act apply to office space?

Describing premises as an ‘office’ does not necessarily mean the Act will not apply. What matters is how the premises are used, including whether they are used to provide retail services.

Even where retail services are provided, the Act may not apply if an exclusion applies. This can depend on factors such as the premises’ location within a multi-storey building and applicable occupancy cost thresholds.

What are occupancy costs?

Occupancy costs are the costs associated with occupying the premises, including rent and certain outgoings payable under the lease. Where occupancy costs exceed the prescribed threshold, currently $1 million per annum exclusive of GST, the lease may be excluded from the Act.

Does the Retail Leases Act apply to listed companies?

Listed companies and certain subsidiaries are generally considered sophisticated commercial tenants with greater resources and bargaining power. As the Act is designed to protect smaller, vulnerable tenants, certain listed companies are excluded from the Act.

How Aintree Group Can Help

A lease can significantly affect the value, viability and continuity of a business. Have your lease and business sale documents reviewed by an experienced commercial or property lawyer, before committing to a transaction.

If you are buying or selling a business operating from leased premises, your Aintree Group Legal adviser can help. They are able to review the business sale documents and lease, and determine whether the Retail Leases Act applies. Following this, they can advise you on your consequent requirements, such as obtaining the landlord’s consent to transfer the lease. 

Begin Now

This is general advice only and has not been prepared with your individual situation or needs in mind. For personalised advice, we highly recommend that you seek professional guidance from a qualified adviser.

Are You Buying Or Selling A Business Operating  From Leased Premises?

When does the Retail Leases Act apply?

When the Retail Leases Act doesn’t apply.