Beyond the Foot Traffic: 5 Red Flags to Watch for in Your Australian Retail Lease
In the dynamic and evolving Australian retail sector, securing the right lease is about more than just a prime location and high foot traffic. The conditions of your lease agreement can hide significant risks and costs that can cripple a business. As a tenant, being vigilant and understanding what to look for is your first line of defence. This article outlines five critical red flags to watch for in your Australian retail lease.
1. Ambiguous or Ratchet-Style Rent Review Clauses
A major red flag is a rent review clause that is unclear or heavily favours the landlord. A "ratchet" clause, for example, prevents the rent from ever decreasing, even if the market rate falls. Depending on the state of Australia ratchet clauses are illegal in most cases for retail leases. According to a recent analysis by the Australian Financial Review, tenants who signed leases with ratchet clauses before the pandemic found themselves paying significantly above market rates in 2023 and 2024.
What to do: Always push for a fair market rent review clause. This ensures that the rent is adjusted to reflect the current market value at the time of review. It's also wise to negotiate a cap on the percentage increase to avoid unexpectedly large hikes. For more information on your rights, refer to the relevant state-based retail tenancy legislation, such as the Retail Leases Act 1994 (NSW).
2. Vague or All-Encompassing Outgoings
Outgoings, the costs associated with running and maintaining the property, can be a significant financial burden. A red flag is a lease that has a vague definition of outgoings or allows the landlord to charge for a broad range of expenses, including capital works. A report by commercial real estate firm JLL highlighted that disputes over outgoings are one of the most common sources of conflict between landlords and tenants.
What to do: Demand a detailed and exhaustive list of all outgoings you will be responsible for. Negotiate to exclude capital expenditure and any items that are not directly related to your tenancy. Requesting a history of the property's outgoings for the past three years can also provide a realistic estimate of future costs.
3. Onerous 'Make Good' Obligations
The "make good" clause dictates the condition in which you must leave the premises at the end of the lease. An onerous clause can require you to return the property to a bare shell, even if you took it over with a previous tenant's fit-out in place. This can result in tens or even hundreds of thousands of dollars in unforeseen costs.
What to do: Negotiate the make-good clause before signing the lease. Aim to have it reflect the condition of the property when you took possession. Taking a comprehensive photographic record of the premises at the start of your lease is a simple yet effective way to avoid future disputes. For further reading, the Australian Property Institute provides valuable resources on this topic.
4. Lack of Flexibility and Subleasing Rights
The modern retail environment requires flexibility. A lease that locks you into a long-term agreement with no options for subleasing or assigning the lease is a major red flag. The COVID-19 pandemic served as a stark reminder of how quickly businesses need to be prepared to adapt to change.
What to do: Negotiate for a shorter lease term with options to renew. Insist on the right to sublease or assign your lease to a suitable replacement tenant, subject to the landlord's reasonable approval. This provides a crucial exit strategy if your business circumstances change.
5. Inadequate Details on Landlord's Responsibilities
A lease that heavily favours the tenant's obligations while being light on the landlord's responsibilities is a clear warning sign. The landlord should be responsible for the structural integrity of the building, maintenance of common areas, and ensuring the property is compliant with all relevant safety standards.
To ensure the lease clearly outlines the landlord's responsibilities for repairs and maintenance, take the following steps: This should include response times for addressing issues. Having these obligations clearly defined in the lease will save you considerable time and potential conflict down the track.
By being aware of these red flags, retail tenants can navigate the leasing process with greater confidence and secure a lease that supports, rather than hinders, their business success.
