difference between a retail and a commercial lease?

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What is the difference between a retail and a commercial lease?

February 4, 2022         Ava Akbarian

A lease is a legally binding contract between a lessor and a lessee, usually the landlord and tenant. It provides the tenant with exclusive possession of the premises and outlines the terms for the arrangement.

Commercial Lease vs Retail Lease

Business owners looking for a space to rent may be looking at a ‘commercial lease’ or a ‘retail lease’. The most suitable type of lease depends on the permitted use of the premises.

There are key differences between a retail lease and a commercial lease.

Retail Lease

Retail leases occur where there is a purchasing of goods or services. Common businesses using retail leases include restaurants, stores in a shopping centre or hairdressers. 

Retail leases have additional protection for tenants under legislation which varies from state to state. Additional protections may concern unconscionable or deceptive conduct of landlords.

Most states do not allow the landlord to charge a tenant for lease preparation or mortgagee consent expenses.

In NSW, retail leases are governed by the Retail Leases Act (1994). 

The Act will usually apply where the premises is within a shopping centre (a cluster of five or more shops). The acts also provide exceptions for what is considered a lease. 

For example, in NSW a premises with:

  • Shops that have a lettable area of 1,000 square metres or more; and
  • Shops operated within a cinema, bowling alley or skating rink by the person who operates the cinema, bowling alley or skating rink; 

do not fall under the act.

Retail leases should be provided with a disclosure statement during the negotiation phase. If a disclosure statement is not provided the lessee has a right to terminate an executed lease.

In commercial leases, the disclosure statement is provided after negotiations have been finalised.

Commercial Lease

Commercial leases apply to premises used for warehouse, industrial or office spaces. 

They are regulated by common law, state-specific property and conveyancing Acts.

A key difference between commercial and retail leases is negotiation. Commercial leases require the lessee to negotiate a lease that will not be unfair or onerous as it is not protected by legislation. 

Negotiation can reduce the extent of a tenant’s liability. 

Parties may also negotiate lease preparation fees which are usually covered by landlords in retail leases.

Key Takeaway differences:

  • A retail lease is used where there is a sale of goods or services, often in a shopping centre (cluster of 5 or more stores).
  • A commercial lease is used for warehouse, industrial or office space premises.
  • Commercial leases will require more negotiation from the lessee as they are not provided any protection under legislation.
  • Retail tenants are protected by state-based legislation. 
  • Retail legislation does not allow a lessor to pass lease preparation costs to the lessee. In commercial leases, tenants are not protected however they may negotiate who bears preparation costs with the landlord.
  • Retail legislation protects tenants from unconscionable or deceptive conduct of the lessor.
  • In a retail lease, a disclosure statement must be provided with the lease during negotiation. In a commercial lease, this is provided after.

About Ava Akbarian

Ava works in the legal content team at OpenLegal while studying in her fourth year of Bachelor of Laws and Communications (Journalism) at the University of Technology Sydney. Her interests are legal reporting, court reporting and medical law.