Retail lease or commercial lease: understanding the distinction in Victoria

A lease document may look the same whether the tenant runs a cafe, a design studio or a warehouse. The commercial reality is very different. The Retail Leases Act 2003 (Vic) applies to leases of premises "used or to be used" wholly or predominantly for the sale or hire of goods by retail or the retail provision of services. If it applies, it changes the deal.

Why the distinction matters

The Retail Leases Act imposes statutory protections on the tenant that override contrary terms in the lease. Chief among them:

• Disclosure statement. The landlord must give the tenant a disclosure statement at least 14 days before the tenant enters into the lease. A defective statement can allow the tenant to terminate.
• Minimum five-year term. Retail leases must have a term (including options) of at least five years, unless the tenant certifies otherwise after receiving legal advice.
• No land tax pass-through. A tenant under a retail lease cannot be required to pay land tax as an outgoing.
• No legal costs pass-through. The tenant is not responsible for the landlord's legal costs of negotiating and preparing the lease.
• Rent review controls. Only one method of review can apply in a single year, and rent reviews cannot include ratchet mechanisms preventing rent from falling on market review.
• Outgoings estimate. The landlord must provide an annual estimate of outgoings and audited statement of actuals.
• Dispute resolution. Disputes are resolved through the Victorian Small Business Commission and, if unresolved, VCAT — usually a faster and less expensive forum than the courts.

In a purely commercial (non-retail) lease, none of these applies as a matter of statute. The tenant's protections come entirely from what is negotiated into the lease.

What counts as "retail"

The Retail Leases Act applies to premises used wholly or predominantly for:

• The sale or hire of goods by retail.
• The retail provision of services.

"Retail provision of services" is broader than it may sound. It typically includes cafes, restaurants, hairdressers, beauty services, tutoring, real estate agencies, medical and allied health, and other services provided directly to end consumers.

Common exclusions

• Occupancy costs above a threshold. Premises where the tenant's occupancy costs exceed a prescribed amount are typically excluded. The threshold is set by the Minister.
• Certain building types. Premises located above the third storey of a building — subject to statutory carve-outs.
• Short-term leases. Leases of less than one year without an option to renew are generally outside the Act.
• Farming, industrial and manufacturing uses that do not involve retail sale or service.
• Some listed tenants. Leases to certain corporate tenants (for example, listed corporations) can be excluded by Ministerial determination.

The current thresholds and exclusions are set out in Ministerial determinations available from the Victorian Small Business Commission.

Grey areas

Some premises are genuinely difficult to classify. Examples:

• Mixed-use premises. A ground-floor cafe with upper-floor offices leased to the same tenant. The predominant use test governs.
• Wholesale with retail component. A tenant who sells mostly to businesses but also to walk-in customers.
• Online with pick-up. An online retailer whose premises operate as a warehouse and dispatch point but who also takes occasional walk-in customers.

The right classification depends on the facts. Where the position is uncertain, take legal advice before drafting or signing the lease.

Practical consequences for landlords

• Prepare a compliant disclosure statement at least 14 days before signing.
• Do not attempt to pass through land tax or legal costs to a retail tenant.
• Ensure the term (including options) meets the minimum, or obtain proper certification if it does not.
• Structure rent reviews within the statutory limits.

Practical consequences for tenants

• Confirm early whether the lease is retail — it changes what you can insist on.
• If the disclosure statement is inadequate, take advice before signing.
• Understand the statutory protections you have; do not sign them away without knowing what you are giving up.

For lease review and negotiation on either side, see our commercial and retail leasing service.

Application of the Retail Leases Act

Whether a lease is a retail lease under the Retail Leases Act 2003 (Vic) is a question of use rather than of address. Premises used wholly or predominantly for the sale or hire of goods by retail or the retail provision of services will generally fall within the Act, subject to defined exclusions. Some premises that would be retail on their face — for example, larger premises above a defined floor area, or premises let to certain corporate tenants — are excluded. The Small Business Commission publishes guidance for tenants and landlords about the application of the Act.

What changes when the Act applies

• A landlord must provide a disclosure statement in the prescribed form before the lease is entered into.
• Recovery of outgoings is regulated — only outgoings disclosed and permitted under the Act are recoverable, and estimates and reconciliations must be provided on the prescribed cycle.
• Landlord recovery of the legal costs of preparing the lease is prohibited, in contrast to non-retail commercial practice.
• The tenant is entitled to statutory minimum terms in defined circumstances, and any lease term below the minimum is deemed to be at the minimum.
• The tenant has statutory rights in relation to renewal and disclosure of market rent for market reviews.
• Dispute resolution is directed through the Victorian Small Business Commission and, if not resolved, to VCAT rather than the Supreme Court.

What happens in a non-retail commercial lease

Where the Act does not apply, the parties are free to allocate risk more broadly. Landlord recovery of outgoings, legal costs of the lease, and any incentive terms are matters for negotiation. Because the statutory backstops do not apply, careful drafting is if anything more important — a tenant who has not read the recovery clause of their outgoings provision does not have a statutory floor to fall back on.

Practical steps for tenants

Tenants entering a lease should ask early whether the Act applies, obtain and read the disclosure statement, take legal and financial advice, and treat every promise made in negotiation as needing to be captured in the lease document itself. Verbal assurances about signage, exclusivity, fit-out contribution or rent-free periods do not survive execution unless they are in the lease.

Practical steps for landlords

Landlords should confirm the retail or non-retail character of the premises at the outset, prepare disclosure documents that anticipate the tenant's questions, and adopt a lease template appropriate to the character of the tenancy. Landlords who treat every lease as retail, or every lease as non-retail, will over time find themselves offside on one or the other.