Legal and practical issues to consider when negotiating a licence agreement or a short term lease agreement for a pop up shop or a start up business, or if you want to rent a space in the common area of a shopping centre
Ratnadeep Hor specialises in retail and commercial property leases and license agreements, commercial contracts, and space sharing agreements.
We can prepare a license agreement for a pop up shop, or to rent a space in a shop or shopping centre at a very reasonable price. Feel free to contact Ratnadeep directly:
T (02) 8257 5710
Benefits of short term, pop up, and casual retail occupancy agreements
- If you own a retail space or a shop that is vacant or under-utilised, allowing a short term lease, casual leasing, or space sharing will enable you to maximise your income from your property with minimal risk.
- A popup shop can often be set up and operated quickly, at minimal cost, with minimal fitout or structural change required, and minimal make-good obligation when the occupancy ends. This can enable people to establish a startup business without initially making a risky commitment to a long-term retail lease agreement.
- Starting with a short term occupation agreement can enable a landlord to assess an occupant’s trading record before entering into a long term lease.
- Subject to negotiation of the short term occupation agreement, a landlord can arrange to recover possession of the premises quickly if a suitable long term tenant becomes available.
- A retailer who sells goods via the internet can rent a space in a shopping center, or establish a pop up store to provide customers with a feeling of safety from seeing that the retailer really exists, and to enable customers to try out and collect goods, and know that they can easily return unwanted or faulty purchases.
This convenience can be very appealing to customers who are not at home during the day to receive deliveries. If the arrangement initially works well, it can later be converted into a long term retail shop lease or sublease.
- People who sell goods at local markets, or who work from home, can initially use a pop up shop to test customer demand for their start up business with minimal capital outlay and minimal risk.
- A pop up store enables taking advantage of short, high-demand opportunities such as the Christmas and Easter seasons, school holidays, retail sale periods, popular community events such as Mothers’ and Fathers’ Days, and the end of financial year and tax return periods. They can also be effective in attracting new customers who don’t like missing out on trendy-looking, brief retail opportunities.
Differences between a retail lease agreement and an occupation license agreement
A retail shop lease agreement provides comprehensive security for a tenant. However, a licence agreement is generally used for short rental periods, and for situations in which premises or space are being shared rather than occupied exclusively. A licence agreement grants the occupant (the licensee) the right to occupy premises or space, but it gives no interest in the land.
Are you looking for inexpensive space for rent for your start up business?
Sharing a shop: A low cost way to establish a startup business is to initially rent either an existing shop when it would usually be closed (such as at night or on Sundays), or else to rent part of a shop’s space when it is open. This approach may enable you to arrange to use the existing business’s permits and development consent.
If you rent a space in a shop on a short term or casual leasing basis, you may become either a primary licensee who has a direct relationship with the landlord, or else a licensee of an existing tenant, if this is permitted by the tenant’s lease. In the latter situation, you will usually be required to honour the conditions in that lease (which you - or a lawyer - should inspect carefully).Using part of the common area of a shopping center: An inexpensive way to initially establish a business is to rent floor space or a kiosk in the common area of a shopping center. If you plan to enter into a license agreement to rent a space you should familiarise yourself with the Shopping Centre Council of Australia’s Casual Mall Licensing Code of Practice.
This provides protection for the long-term tenants by requiring the shopping centre’s landlord to prevent short-term occupants of common areas from (a) substantially interfering with access or sightlines to an existing tenant’s premises, (b) substantially reducing the flow of customers to an existing tenant’s premises, or (c) unreasonably being a competitor of an existing adjacent tenant.
The landlord also needs to ensure that:
- there are no covenants or retail lease terms applying to other occupants or tenants that would prohibit the proposed pop up store activity
- the prospective occupant has an acceptable policy regarding return of goods after the short-term rental period ends, to ensure that the reputation of the shopping centre will not be damaged by customers being unable to return unsatisfactory or unwanted goods.
Legislation that can affect a short term lease agreement or an occupation license agreement
You will need to be cautious regarding differing state and territory retail lease legislation, and you should obtain legal advice if you are in doubt. For example, the Retail Leases Act (NSW) potentially applies to any retail shop, and also to other commercial premises that are located among a group of retail shops which have a single owner.
Section 16 of the Retail Leases Act (NSW) states that a retail shop lease must have a term of no less than five years unless the tenant’s lawyer provides a “Section 16 certificate” confirming that the tenant understands that the lease will be for a shorter period.
The Retail Leases Act (NSW) generally does not apply to occupation agreements (leases, subleases, or licenses) for less than six months. However, if an occupant remains in occupation for six months or longer (or 12 months or longer via a series of agreements that are each for less than six months, or via holding over provisions of a single agreement), and the landlord has not obtained a Section 16 certificate, the occupancy then becomes subject to the Retail Leases Act.
The occupant will then be entitled to obtain a five year lease, and the landlord will not be able to increase what may be a discounted short-term rent up to the normal market rent. The landlord will not be protected from requirements of retail leasing legislation even if the occupation agreement is described as a “license”, “casual leasing”, or a “popup shop lease”, or even if it is limited to a verbal agreement.
This aspect (and other aspects) of retail lease legislation varies between states. For example, in Victoria, the Retail Leases Act 2003 does not generally apply to a shop lease for a term of less than one year, whereas in South Australia the Retail and Commercial Leases Act does not apply to a shop lease with a term of one month or less.
A pop up shop lease, a short term lease or sublease, casual leasing, and a space sharing arrangement can become problematic for a startup business. It is important to address all relevant practical and legal issues, and record the details in writing. Do not rely on a verbal agreement.
Some legal and practical issues that you should consider in a short term lease agreement
- Record the legal date on which the license agreement or the short term lease agreement begins to operate. This may be the date of occupation, the date on which rent is first paid, the date on which both parties sign an agreement, or some other agreed or assumed date.
To avoid being classified as a retail lease, the timeframe for a short term retail occupancy agreement must be less than the period specified in relevant legislation.
- Specify the period of the license agreement. It can be for a fixed period, or it can be flexible, continuing until one party gives notice that it wants to terminate.
- Specify any rights that each party will have to prematurely terminate the rental period, and whether an initially fixed rental period can be extended.
- Specify the licence fee (rent) for the pop up store. If the license fee includes a turnover rent component in addition to base rent, specify how turnover rent will be calculated.
- Specify what you will be permitted to do in terms of modification, fitout, and signage. The proposed use of the pop up shop or shared space, and any building work, may require development approval from the local council, and the landlord will need to agree to the development application.
- Specify any limits on what the licence or sublease will permit you to do in the premises, and when you will be permitted to do so.
- Define any make-good and repair obligations that the occupant will need to satisfy when the rental period ends, and how any damage and cleaning costs will be assessed.
- If appropriate, prepare a condition report containing photographs as evidence of the agreed state of the premises at the start of the occupation period in order to avoid disputes regarding make-good obligations.
- If you are establishing a start up business, ensure that your proposed activity in the pop up store or shared space is adequately covered by all relevant types of insurance, which may include workers’ compensation, public liability, plate glass, and product liability insurance.
- Ensure that the occupant’s and the landlord’s obligations under work health and safety legislation will be satisfied. A landlord may seek to pass those obligations on to an occupant, but this can be ineffective if the landlord retains any control and management of the workplace and is aware that the occupant is acting contrary to those obligations.
Avoiding and managing problems and disputes
After the commercial terms of the arrangement have been negotiated and agreed, a Heads of Agreement document (also known as a letter of offer) can be prepared. The commercial terms in the Heads of Agreement are then inserted into a licence agreement or a short term lease agreement, together with other relevant terms and conditions.
Make no mistake! A lease, a sublease or a sub-license is a legally binding and often complex agreement. It is possible to make mistakes in the wording that can have serious consequences, and you may need to obtain legal advice when negotiating the agreement, and before signing anything.
TurksLegal is a specialist commercial law firm with 32 partners and over 90 lawyers in Sydney, Melbourne and Brisbane. Ratnadeep Hor specialises in retail and commercial leasing and commercial contracts.
Ratnadeep assists landlords, tenants and commercial property occupants throughout Australia with retail and commercial property rental, leasing, and space sharing arrangements by:
- Providing guidance regarding terms and conditions to consider and address in a Heads of Agreement
- Preparing an occupation license, a space-sharing agreement, a lease, or a sublease for a pop up shop or a start up business
- Transferring from a short term license agreement to a long term retail lease or a sublease if required
- Assisting resolution of disputes between landlords, property occupants, and tenants
- Accurately documenting commercial contract arrangements
We can prepare a license agreement to cover a pop up shop, or to rent a space in a shop or an arrangement to share space in a shop at a very reasonable price. Feel free to contact Ratnadeep directly:
T (02) 8257 5710
Disclaimer: This website is intended to provide general information only. It should not be regarded as comprehensive legal advice from a solicitor regarding your individual circumstances. TurksLegal accepts no responsibility for information that may be found on other websites that our website includes links to.