Stop! Use this retail lease checklist before signing on the dotted line

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Disputes between landlords and tenants make up more than 50 per cent of the applications to the Victorian Small Business Commission, which equates to approximately 850 retail tenancy disputes per year. In October 2018, the Commission published the Retail Lease – Important facts for tenants a simple, plain English guide and checklist; designed to educate, inform and direct tenants to undergo due diligence before any retail lease agreement is entered in to, avoiding the risk of future conflict.

The retail lease checklist

This guide is to be given by the landlord and or commercial agent to all prospective tenants before any lease agreement is entered in to. Often prospective tenants are unaware of the implications of not completely understanding the finer details of a retail lease agreement. These details contain all the associated costs, limitations and other factors that could seriously hinder their business and potentially in some cases, result in detrimental financial loss. Unfortunately, such cases are familiar at the Victorian Small Business Commission (VSBC) where many businesses end up trying to resolve disputes, after communications with the landlord/agent have broken down.

Lease dispute gone wrong

One such case, involved a retail lease for an engineering business. The tenant was sent the lease and disclosure statement, however did not understand that he would have to pay for the utilities and water rates. Six months later he received an electricity and water bill for $12,500. When the tenant was unable to pay, the landlord evicted him without notice. The tenant then made a part payment toward the invoice under duress but by then the relationship between the two parties had broken down and the tenant tried to relocate the business. Sometime later the tenant was locked out of the premises for a period, and when they were granted access discovered that over $300,000 in stock and equipment was missing. The landlord refused to give back the security deposit and did not respond to the tenants claims. Unfortunately, the police were unable to intervene as there were no signs of forced entry and treated it as a civil matter.

This entire scenario could have been avoided had the tenant done their homework and read the Retail Leases Information Brochure that contains a simple checklist to ensure that key information is covered, before signing a lease agreement. Once a lease has been received it is necessary that it is read thoroughly, and that any items or clauses whose meaning is ambiguous, are highlighted.

The disclosure statement

Furthermore, it is vital to ensure that the lease has a disclosure statement attached. The disclosure statement is an appendix or a supporting document that outlines any outgoing costs such as body corporate fees, water, electricity etc. that are separate to the rental cost. The disclosure statement must be given to the tenant at least seven days before the lease agreement can be entered in to. It is this lack of knowledge by tenants, that often leads them into hot water. The VSBC mission is to educate small-business operators and owners to all the facts, to help them avoid any costly disputes.

The checklist also prompts you to note how the rent can be increased so that you are able to adjust your calculations over the term of the lease to determine your budget, as well as providing you with information on your entitlements, such as a five-year lease including options for a further lease term. It is also important to complete an inspection report and take photos of the premises so that there is evidence of its condition before taking possession of the premises. For most business owners entering in to a retail lease is a big decision, and the whole experience can be daunting and overwhelming.

“I hope that by reading the Retail Leases fact sheet and completing the checklist, small business retailers will be better informed and gain the confidence to engage in lease negotiations”

Judy O’Connell – Victorian Small Business Commissioner

The right advice

If you are in doubt, the VSBC recommends that you get a commercial lawyer to assist you. The small cost invested in obtaining legal advice at this stage, is insurance against any hidden liabilities that could cost your business severely in the future, should a dispute arise, as in the case of the engineering business.

And in the unfortunate case that you find yourself in a dispute with your landlord or agent, the Victorian Small Business Commission is here to assist you.

Common Mistakes made by tenants

•             Do not read the entire lease

•             Do not seek advice from a specialist lawyer

•             Do not ask questions or seek clarity on things they don’t understand

 

How the Checklist Helps Avoid these disputes

•             Ensures you read the disclosure statement and ask for one if you haven’t received it yet

•             Checking all outgoings (costs you must pay) and other occupancy costs

•             Obligations to reinstate the premises at the end of the lease

•             Permitted use of the premises and time frames for obtaining permits

 

Join us at our free, one-hour long event hosted by the Victorian Small Business Commission as part of Retail Week ’19 on Tuesday 26 February 2019 at 2 pm at Investment Centre Victoria, Level 46, 55 Collins Street, Melbourne – register for this free event here.

Brought to you by the Victorian Small Business Commission

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