Many Asian families in Melbourne own a shop, factory or office as an investment, often in a family trust or company. Others run a restaurant, grocery or clinic from leased premises. Whether you are the landlord or the tenant, the lease is one of the most important documents in the investment or the business, and it is often signed quickly.
In Victoria, the rules depend first on whether the lease is a retail lease or a general commercial lease. This article outlines, in general terms, the issues landlords and tenants commonly raise. Other states have their own retail leasing laws, which differ in coverage and detail.
Retail lease or general commercial lease?
The Retail Leases Act 2003 (Vic) applies to leases of retail premises, broadly premises used wholly or mainly for selling or hiring goods by retail or providing retail services. What matters is how the premises are used, not what the lease calls itself. The Act does not apply in some cases, including where the tenant is a listed corporation or its subsidiary, where occupancy costs exceed a prescribed level, and in categories excluded by Ministerial determination. Borderline uses can turn on the facts.
The answer matters because the Act implies terms into retail leases and makes some lease terms void. A general commercial lease is governed mainly by its own terms and general property law.
Key retail lease protections
- Disclosure. The landlord must give the tenant the Victorian Small Business Commission (VSBC) information brochure, a disclosure statement and the proposed lease a set time before the lease is entered into. Late or missing disclosure can have consequences for the landlord, including rights for the tenant to withhold rent until it is provided.
- Minimum term. The Act sets a minimum term, counting options. A tenant who wants a shorter term can waive this with a certificate from the VSBC.
- Outgoings. The tenant pays only outgoings the lease specifies, and the landlord must give estimates and annual statements. Land tax, and the commercial and industrial property tax, generally cannot be passed on, nor can the landlord’s legal costs of preparing the lease.
- Rent reviews. The lease must state when and how rent is reviewed, from the bases the Act allows. Clauses preventing rent from going down are generally void unless the review is on a fixed basis. Market reviews are decided by a specialist retail valuer if the parties cannot agree.
- Other protections cover repairs, security deposits, key money, relocation and demolition, and notices the landlord must give before an option or the lease ends.
Key clauses for any commercial or retail lease
Term and options. Options to renew usually must be exercised within a strict window. Under a general commercial lease there may be no reminder from the landlord, so a missed date can cost the tenant the premises.
Rent and reviews. Issues include the starting rent, any incentives, and the review method and dates.
Outgoings. Under a general commercial lease, the tenant may pay a wide range of outgoings, sometimes including land tax. The definition and apportionment need reading closely.
Make good. Many leases require the tenant to restore the premises at the end, which can be costly after a substantial fit-out. A condition report and photographs at the start can reduce later disputes.
Assignment and subletting. Selling a business usually means assigning the lease. The Retail Leases Act limits the grounds on which a landlord may refuse consent and gives some protection to outgoing tenants and guarantors. Under a general commercial lease, the outgoing tenant and its guarantors may remain liable after assignment, depending on the lease.
Guarantees and bank guarantees. Landlords often require personal guarantees from directors, and sometimes from spouses or parents, plus a security deposit or bank guarantee. A personal guarantee can bind the guarantor’s estate. The bank guarantee’s amount, expiry and conditions for return also matter.
Default and termination. For breaches other than unpaid rent, the Property Law Act 1958 (Vic) generally requires the landlord to give notice before forfeiting the lease, and a tenant may seek relief from forfeiture. Landlords may also claim loss after termination, depending on the lease and the facts.
Family investors as landlords
Family landlords are bound by the same rules as institutional landlords. If the premises are retail, a family trust or company landlord must comply with the disclosure, outgoings and notice obligations. Questions include whether the landlord named in the lease is the registered owner, whether the trust deed permits leasing, and whether the signatory has authority.
Leasing to a related family business. Parents often lease a shop or factory to a business run by one child, sometimes on a handshake. A written lease can reduce uncertainty for everyone. Tax issues can arise in such arrangements:
- The ATO may look at whether rent between related parties reflects market value, which can affect deductions and GST.
- Where a private company is involved, Division 7A of the Income Tax Assessment Act 1936 can treat some benefits to shareholders or their associates as dividends, such as use of a company asset for less than arm’s length value, or amounts owed to the company by shareholders or associates.
- An SMSF landlord must lease to a related party on arm’s length terms.
- Whether the tenant is a connected entity or affiliate can affect eligibility for small business capital gains tax concessions on a later sale.
A below-market lease to one child may also cause disagreement between siblings when the parents step back or die. These issues need advice from your accountant together with your lawyer.
When disputes arise
Retail tenancy disputes generally must go first to the VSBC, which offers low-cost mediation. If mediation does not resolve the dispute, the VSBC can certify this, and the matter may then go to the Victorian Civil and Administrative Tribunal (VCAT). A certificate is not needed in some cases, such as a claim solely to recover rent or an application for an injunction. The VSBC also mediates general commercial lease disputes, and VCAT can hear commercial tenancy disputes, as can the courts. Time limits apply.
Questions to ask
- Is this a retail lease under the Act, and has the disclosure been given on time?
- Which outgoings will the tenant pay, and how are they apportioned?
- How and when is rent reviewed?
- When must options be exercised, and who will diarise the dates?
- What must be removed or restored at the end of the lease?
- Who is guaranteeing the lease, and what happens to that guarantee on assignment?
- If leasing to family, is the rent supportable as market rent, and what do the other children think?
How we work with landlords and tenants
We review and negotiate leases, prepare disclosure documents for landlords, advise on assignments when a business is sold, and help resolve lease disputes, including at VSBC mediation. With your consent, we coordinate with your leasing agent, accountant and business broker, and we advise in English, Mandarin and Cantonese.
Frequently asked questions
Does the Retail Leases Act apply to my lease?
It depends mainly on how the premises are used and whether an exclusion applies. Labels in the lease are not decisive, so the lease and the use should be reviewed together.
Can a landlord charge land tax to a retail tenant in Victoria?
Generally not. Under the Retail Leases Act, lease terms requiring a retail tenant to pay the landlord’s land tax are generally void. General commercial leases may differ.
Can I lease my property to my own family business?
Yes, but the terms, rent and documentation can have tax, family and estate consequences. It needs advice from your lawyer and accountant on your circumstances.
Every family’s situation is different, and the answer often turns on details. Book a consultation so we can review your documents and circumstances before you act.
How Chua Tan Associates can help
Chua Tan Associates has practised in Melbourne since 1990 and advises family investors, landlords and business tenants on retail and commercial leases, related-party leasing and lease disputes. Justin Chua trained in accounting (Bachelor of Commerce, accounting major) and advises on the legal and tax structure of family wealth together. As a Nationally Accredited Mediator and Accredited Family Business Advisor, he is familiar with disputes where business and family overlap. We work with your accountant and registered tax agent, and we advise in English, Mandarin and Cantonese.
Important: This article is general information only and must not be relied on. It is not legal, tax or financial advice, does not take your circumstances into account, and may not reflect changes in the law after publication. Laws of other countries may also apply. Do not act or refrain from acting on the basis of this article. Reading it or contacting us does not create a lawyer–client relationship. Please book a consultation for advice on your situation.
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Chua Tan Associates acts for families, executors, trustees and their professional advisers in estate planning, estate administration and estate disputes in Australia and across borders. To arrange a confidential consultation, please contact our Melbourne office on +61 3 9602 3988 or submit an enquiry. Advice is available in English, Mandarin and Cantonese.
Justin Chua (蔡智勋), lawyer and mediator, Chua Tan Associates, Melbourne. General information only, not legal or tax advice.
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