When a retail lease comes to an end, it’s not as simple as handing back the keys and walking away. Both landlords and tenants have legal rights and obligations to consider, particularly in relation to how the premises must be returned. Disagreements at this stage are common, but most can be avoided with clear planning, good communication, and an understanding of the key legal issues involved.
This article outlines what typically happens at the end of a retail lease in Victoria, what the Retail Leases Act 2003 (Vic) says, and what landlords and tenants should do to ensure a smooth transition.
1. Lease Expiry or Early Termination
Retail leases can end in several ways:
- Natural expiry at the end of the agreed term;
- Termination by agreement between landlord and tenant;
- Early termination due to breach or default;
- Relocation or demolition by the landlord, if permitted by the lease.
Regardless of how the lease ends, the tenant will usually be required to vacate the premises by a set date and return them in a condition that complies with the lease.
2. Make-Good Obligations
At the end of the lease, tenants are often required to “make good” the premises. This means restoring the property to a defined condition, commonly
- The condition at the start of the lease.
- A bare-shell or base building condition;
- A condition that meets specific reinstatement terms.
These obligations should be set out in the lease, but if they are vague or ambiguous, disputes may arise. Under Victorian contract law, unclear make-good clauses may be read narrowly.
3. Condition of the Premises
Disputes often arise over the standard to which the premises must be returned. Common scenarios include:
- Removal of fit-out, signage and fixtures;
- Repair of damage from installation or occupation;
- Cleaning, painting or restoring finishes.
If the lease required the tenant to maintain the premises during the term, the landlord may argue that failure to do so is a breach. However, tenants are not usually responsible for wear and tear or age-related deterioration unless expressly stated.
To avoid confusion, some leases include a condition report or photographic record at the beginning of the lease. This provides a helpful benchmark for determining what must be rectified.
4. Final Inspection and Handover
A final inspection is usually carried out just before or after the tenant vacates. This allows both parties to:
- Confirm the condition of the premises.
- Identify outstanding make-good or cleaning items.
- Document any agreed cash settlements or offsets.
Where disputes arise, either party may seek assistance from the Victorian Small Business Commission (VSBC). Mediation is often a quicker and more cost-effective way to resolve end-of-lease disagreements than legal action.
5. Return of Security Deposit or Bank Guarantee
Most retail leases require the tenant to provide a security deposit or bank guarantee. At the end of the lease, this should be returned once:
- All rent and outgoings are paid.
- Any make-good work or costs are settled.
- No other breaches remain unresolved.
Landlords must act promptly in assessing any deductions and returning the balance. Unjustified withholding may give rise to a claim.
6. Communication and Negotiation
Clear communication in the lead-up to lease expiry is critical. Ideally, both parties should begin discussing:
- Vacate date and final inspection;
- Make-good expectations and timelines;
- Any agreement for the tenant to leave the fit-out in place;
- Cash settlement options.
Tenants may prefer to negotiate a make-good settlement amount rather than carrying out physical works, especially where the landlord plans to demolish, refurbish, or lease to a new tenant with different requirements.
7. Relocation or Redevelopment
In some cases, the lease may contain a relocation or demolition clause. These clauses allow the landlord to end the lease early, typically subject to:
- Providing a minimum notice period (e.g. 6 months);
- Offering alternative premises if relocation is involved;
- Complying with the conditions in the lease.
These provisions must be exercised in a lawful and good-faith manner. If not, the tenant may have grounds to challenge the landlord’s actions.
8. Know your obligations for a smooth exit
The end of a retail lease typically involves multiple steps, including vacating, reinstatement, inspection, return of the security bond, and more. Both landlords and tenants should know their obligations under the lease and under the Retail Leases Act 2003 (Vic).
Ambiguity often leads to dispute, so documenting expectations, maintaining communication, and seeking early legal advice is key.
Whether it’s a simple handover or a complex make-good negotiation, careful planning and fair dealings can ensure a smooth and commercially sensible conclusion to the leasing relationship.