Retail Shop Leases (NT)

A retail shop lease is a legally enforceable contract between a landlord and a retail business tenant. This type of lease must comply with the Business Tenancies (Fair Dealings) Act 2003.  The legislation aims to give small retailers a fairer bargaining position to negotiate leases with their landlords.

Requirements for retail shop leases

The Business Tenancies (Fair Dealings) Act only applies to businesses that provide retail goods or services. In addition, the legislation does not apply to tenants that are listed corporations, or businesses that lease more than 1000m2, or tenants that enter into particularly short or long leases (less than six months or more than 25 years).

A landlord must provide a prospective retail tenant with a copy of the proposed lease as soon as the tenant enters into lease negotiations. The draft of the retail lease should describe the shop premises in detail and specify:

• the formula for calculating the rent;
• whether the landlord will review the rent during the lease;
• options for lease renewal;
• contributions expected from the tenant towards the landlord’s expenses; and
• permitted use of the premises.

A tenant who is considering entering into a retail shop lease should also ask for a plan showing the specific lease premises.  

Legislative protections

The Business Tenancies (Fair Dealings) Act provides considerable protections for retail tenants. Due to the legislation, a shopping centre landlord must offer a retail lease of a minimum of five years, and a landlord cannot seek or accept “key money” or “goodwill” money to grant, renew, extend or assign a new lease.

Rent for Northern Territory retail shop leases

Retail shop leases typically state that the rent is subject to review at specific intervals. NT legislation requires that a lease specify the method of rental increase calculation. For instance, the landlord might assess the rent against current market rents. That is the rate that would be reasonably expected for vacant shop premises on the open market, given the permitted use and other lease conditions. This method of review should represent fair value and consider all advantages and disadvantages of the shop premises. If the tenant and landlord disagree over the current market rent and cannot agree to appoint a specialist retail valuer, the Commissioner of Business Tenancies can nominate a valuer. This valuer determines the current market rent, and the landlord and tenant each pay half of the valuer’s fee.

There are several other methods of rent review permitted under the legislation, including independently published index percentage (CPI), fixed percentage of base rent, or fixed annual amount. However, the legislation requires that the landlord only use one method to calculate an increase in the course of any one lease. The legislation also prohibits so-called “ratchet” clauses that have the potential to only increase a retail shop’s rent.

The legislation allows for the rate of rent on a retail shop lease to be determined as a percentage of the tenant’s turnover at the location. In that case, turnover may be gross takings, receipts or gross income. While such a calculation method is permitted, the lease must disclose the method of calculating turnover rent.

Outgoings

Legally, a tenant may be required to contribute to the landlord’s operating expenses (or outgoings). These expenses might include lighting, air-conditioning, cleaning, rates, and taxes on the premises. If the shop premises are situated in a shopping centre, the tenant may also have to contribute separately to the advertisement and promotion of the shopping centre. NT legislation requires that the landlord discloses in the lease information about outgoings, including the amount of charges or method of calculation.

Sinking fund

Some retail shop leases also require a tenant to contribute to a “sinking fund”. The landlord uses these funds for major maintenance and repairs to the building, fixtures or equipment in the shopping centre. Sinking funds in the Northern Territory are subject to strict auditing provisions and accountability. A landlord must disclose the method of calculation of each tenant’s rate of contribution.

Compensation

The landlord can further specify in the lease any costs that will be imposed for a breach of the lease, interest on rent arrears, reasonable expenses involved in the assignment of the lease, fit-out expenses, or indemnity for damage or loss suffered as the result of the tenant’s actions or omissions. Importantly, the legislation also makes provision for how retail tenants are compensated if the landlord disrupts their trading, such as during renovations.

Security deposit

Often a landlord requires a tenant to pay rent in advance, typically the cost of one rental period under the lease. Additionally, some retail leases require a tenant to lodge a security deposit or personal or bank guarantee. This is much like a bond that a tenant pays to rent a residential property. This deposit must be held by a reputable person, such as a real estate agent or solicitor. Otherwise, the funds must be deposited in an account that can only be accessed via the signature of both the tenant and landlord.

Permitted use

One of the most important elements of a retail shop lease is the permitted use clause. This clause determines the type of business that a tenant can conduct on the premises. The tenant must ensure that their proposed business activities are allowed under the lease. A permitted use clause does not mean that the tenant has an exclusive right to that activity within a shopping centre. This is a separate issue that the tenant should discuss with the landlord to ascertain how many competing businesses operate within the centre.

Go To Court Lawyers can review a retail shop lease for you or provide legal advice on any business issue. Please contact the team on 1300 636 846.