7. Is the tenant’s proposed use lawful, what is the permitted use under the lease and does the tenant have exclusivity in relation to the use?
Leases often contain a clause that the landlord does not warrant that the tenant’s proposed use of the premises is lawful. For this reason, before entering into the lease, tenants should investigate whether their proposed use of the premises is permitted under the relevant town planning laws and whether there are any permits or licences required in order to operate the business.
It is important to check that the permitted use listed in the lease is broad enough to cover the tenant’s proposed use of the premises. For example, if a tenant proposes to open a kebab shop and the tenant intends to also sell cold drinks and Turkish-style dessert items, the permitted use should include a reference to the sale of cold drinks and Turkish-style desserts. Tenants should not assume that a landlord will allow the tenant to sell the additional items without those types of items being referred to in the permitted use listed in the lease.
Has the landlord made any representations about exclusivity? For example, if the tenant proposes to open a Chinese restaurant and the landlord made representations to the tenant that the landlord would not allow another Chinese restaurant to open in the centre, the exclusivity clause in the lease should reflect this. Tenants may need to obtain legal advice about the words used in the exclusivity clause, as it is a common source of conflict between landlords and tenants. For example, if the tenant is given exclusivity in relation to operating a “Chinese restaurant”, this may not necessarily preclude the landlord from allowing another tenant to open a Chinese buffet-style takeaway shop in the food court.
If the lease contains an option for a further term, it is important for tenants to check that the exclusivity clauses are drafted in a way that the tenant’s exclusivity rights will apply during the initial term and also during any option terms.
8. Are there minimum hours that the tenant must keep the shop open for trade?
It is common for leases to require tenants to trade during certain hours. Tenants should check the trading hour requirements carefully. Tenants should consider whether the trading hours that the landlord requires the tenant to stay open are appropriate for the tenant’s type of business. For example, if a tenant’s permitted use is “burger restaurant” and the tenant is not allowed to sell any breakfast burgers, the trading hour provisions of the lease may still require the tenant to open for trade from 9.30am, even though it is unlikely the tenant will receive many customers before the lunch period.
In this example, a tenant should seek to negotiate changes to the lease to only require the tenant to open for trade during hours that are appropriate for the tenant’s business. If the landlord refuses to change the trading hours for the tenant, the tenant will need to factor into the tenant’s business plan the additional costs of opening the premises outside the hours the tenant intended to operate (eg additional wages).
9. Is the tenant’s business part of a franchise?
If the tenant has entered into a franchise agreement and the business to be conducted from the premises is part of the franchise, it is common for a franchise agreement to require certain provisions to be inserted in the lease. The provisions are usually required to protect the franchisor’s rights under the franchise agreement. For example, the franchise agreement may require the lease to include provisions:
- requiring the landlord to notify the franchisor if the tenant defaults under the lease, and
- allowing the franchisor to step in and run the business from the premises if the tenant defaults under the lease or the franchise agreement.
It is important to bring the requirements under the franchise agreement to the landlord’s attention as early as possible and negotiate with the landlord so that lease reflects the requirements of the franchise agreement. If this is not done at the outset, the tenant, as the franchisee, may be in default of the franchise agreement.
10. Who will be fitting out the premises, who will pay for the fitout, who will own the fitout and what are the tenant’s obligations in relation to the fitout at the end of the lease?
It is important that the lease clarifies who will be carrying out the various fitout works, who will be paying for the fitout works, who has a responsibility to maintain and repair the fitout during the term of the lease (and to what standard the fitout is required to be maintained) and who owns the fitout, so that the landlord and tenant each know who will be depreciating the fitout.
If the landlord is paying a contribution towards the tenant’s fitout of the premises, the lease may require the landlord’s fitout contribution to be refunded in certain circumstances (for example if the tenant defaults under the lease and the lease is terminated). It is important for the tenant to understand the refund obligations, so that the tenant is aware of its potential liability if it defaults under the lease.
The tenant should ensure that the lease is clear about how the premises has to be left at the end of the lease and whether or not the tenant is required to remove the fitout and make good the damage caused in removing the fitout. There are many things for small business owners to consider before entering into a retail shop lease. Some of the issues are complex and have significant ongoing implications if they are not dealt with before entering into the lease. Small business owners are encouraged to seek appropriate legal and financial advice before entering into a retail shop lease.
Disclaimer
The legislation referred to in this article may have changed since the date this article was prepared. Tenants should obtain legal advice on the legislation that is current at the time the tenant proposes to enter into a new retail shop lease.
