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Commercial Lease & Retail Lease: What’s Different?

There are so many different names for different types of leases that it can get confusing; this is why we have decided to help you understand the difference between a commercial lease vs retail lease. 

These are the two most common types of leases that businesses deal with. So, this article covers how the differences between retail and commercial leasing will affect your business.

Table of Contents

What is a Lease?

A lease is a contractual arrangement between a tenant (lessee) and a landowner (lessor). The purpose of this agreement is to set out the rights and obligations of both parties. 

Leases primarily state that the owner of the property will allow the use of that property by another entity for a specified time and payment. 

However, there are differences between types of leases depending on the purpose of your lease, especially between commercial and retail leases.

What is a Commercial Lease?

A commercial lease is an agreement for the leasing of commercial property with a specific business purpose. Typical commercial lease examples that fit within the scope of a relevant business premises include office space, warehouses or industrial sites. 

Commercial leases have negotiable terms and vary from one lease to another. This means you can decide what you would like to include and not include in the lease. They also provide longer terms to ensure business engagement.

Compared to other forms of leases, commercial leases offer less legal protection as the law assumes businesses and business people are more knowledgeable than consumers and lay people. It is always important to register your lease to legally protect your interest as well as your tenants. 

What does a Commercial Lease include?

The terms of the lease should be clearly outlined so all parties know the intended use of the premises. Commercial lease terms can include:

  • tenant conditions and permitted use;
  • length of the lease;
  • option to renew the lease or sublease;
  • rent amount, rent review and frequency of payments;
  • termination conditions; and 
  • rights after a breach.

What is a Retail Lease?

A retail lease is a type of commercial lease used for retail shop businesses. Unlike explicit commercial leases, retail leases attract additional protection under State-based legislation. To determine whether a lease is a retail lease it is imperative to look to the law. 

Generally, a lease will be governed by the relevant State Act if the retail premises is in a shopping centre. This means that there must be 5 or more premises predominantly carrying out retail activity.

When will a retail lease not apply?

 In NSW, the Retail Leasing Act (1994) will not apply to:

  • Shops that have a lettable area of 1,000 square metres or more;
  • Businesses managed by the lessee on behalf of the lessor;
  • Shops operated within a cinema, bowling alley or skating rink by the person who operates the cinema, bowling alley or skating rink;
  • Premises used only for an excluded use as defined by the Act, eg. vending machines, storage lockers, private post boxes, public telephone, public tables and seating, etc.
  • Leases with a term over 25 years.

Where can I find more about my State’s relevant legislation? 

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Commercial Lease vs Retail Lease Key Differences

There are a variety of differences between a commercial and retail lease. The main differences are outlined below.

Law

Even though retail leases are a form of commercial leases, the main point of differentiation is the law that governs their operation. Entering into a retail lease imposes additional obligations on the landlord covered by the Retail Leasing Act (1994) NSW, or corresponding State Acts. Conversely, commercial leases are governed by State-specific property and conveyancing laws. 

Negotiation

During the negotiation stage, a lessee of a retail lease must be supplied with a disclosure statement and a copy of the proposed lease. Failure to provide the lessee with such documentation will provide the lessee with a right to terminate the lease even after it has been agreed to. This does not usually occur in commercial leases until after negotiations have been finalised.

Preparation Costs

In a retail lease, as a lessor, you cannot pass the preparation costs to the lessee. Although, as a lessor in a commercial lease you may pass these preparation costs. Additionally, in commercial leases, tenants are usually responsible for the landlord’s legal costs.

Disputes

In cases of dispute, in a commercial lease, either party can initiate proceedings without mediation. However, retail leases require mediation before going to the NSW Civil and Administrative Tribunal to resolve the dispute.

Security Deposits

 In a commercial lease, the lessor’s real estate agent is usually responsible for holding onto the security deposit. However, in a retail lease, the NSW Fair Trading office holds all security deposits.

Lease Transfer

In a commercial lease, a lessee can transfer the lease to a third party as specified in the lease agreement. However, in a retail lease, the Retail Leasing Act 1994 governs third-party transfer. 

Key Takeaways

As seen in this post there are a variety of differences between a retail and commercial lease. They both, in practice have different implications. The primary difference between a retail vs commercial lease is the law that governs them. 

If you would like to ensure your leases are appropriately classified within the scope of relevant legislation Lawpath has a variety of specialised Lease Lawyers that an provide the best possible legal advice to help you understand how they apply to your business.

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