Changing the Permitted Use of a Retail Lease in NSW: What Tenants and Landlords Need to Know

Changing the way a retail or commercial premises is used can appear straightforward. A tenant may want to convert a shop into a medical clinic, establish a gym in a former retail tenancy, introduce food preparation into an existing shop, or take over a lease and operate a completely different business.

However, in NSW, changing the use of premises can involve two separate approval processes:

1. Approval under the lease, including landlord consent; and

2. Approval under the NSW planning and building framework.

Receiving approval from a landlord does not automatically mean that a business can legally operate from the premises.

Likewise, obtaining development approval does not necessarily give a tenant the contractual right to operate a particular business under its lease.

Understanding this distinction before committing to a lease, fit-out or business acquisition can prevent significant delays, additional costs and disputes.

1. Start With the Permitted Use Clause

Most commercial and retail leases contain a permitted use clause specifying the activities that can be conducted from the premises.

For example, the lease might describe the permitted use as:

• Retail shop;

• Restaurant or café;

• Medical or consulting premises;

• Professional office;

• Hairdresser or beauty salon; or

• Fitness studio.

The exact wording can be important.

If a tenant proposes to expand its services or introduce a substantially different business activity, the first question should be:

Does the proposed business still fall within the permitted use identified in the lease?

A business may evolve over time. A conventional retail store could add treatment rooms, a café could introduce licensed entertainment, or an office tenancy could become a training or education facility.

If the proposed activity falls outside the existing permitted use, the tenant may need the landlord's consent and a formal variation to the lease.

2. Landlord Consent Is Not Planning Approval

One of the most important issues for tenants to understand is that landlord approval and planning approval are completely separate matters.

A landlord may be comfortable allowing a particular business to operate from the property. That does not necessarily mean the use is permissible under the applicable planning controls.

Before commencing operations, the planning position should also be investigated.

Depending on the property and proposed use, this may involve reviewing:

• The applicable Local Environmental Plan (LEP);

• Land zoning;

• The legal definition of the proposed land use;

• Existing development approvals;

• Existing lawful use of the premises;

• Heritage restrictions;

• Applicable Development Control Plans;

• The NSW Exempt and Complying Development Codes;

• Building classification and NCC requirements;

• Fire safety and accessibility requirements; and

• Any additional licences or approvals.

NSW planning legislation provides several potential approval pathways. Some changes of use can potentially occur as exempt development, while others may qualify for a Complying Development Certificate (CDC). Where those pathways are unavailable, a Development Application (DA) may be required.

The NSW Planning Portal confirms that some changes between specified business and retail categories may occur without planning approval where all exempt development requirements are satisfied. Where exempt development is unavailable, certain proposals may instead qualify for complying development.

The appropriate pathway therefore needs to be determined for the individual property and proposed business.

3. Why Planning Due Diligence Should Happen Before Signing the Lease

One of the most expensive mistakes a new tenant can make is signing a lease first and investigating planning approval later.

Consider the following examples:

Retail shop → medical or cosmetic clinic

The zoning may permit the proposed activity, but the planning definition, building classification, accessibility arrangements, treatment rooms and fit-out requirements may still need investigation.

Warehouse → gym or indoor recreation facility

A warehouse may already have lawful approval for industrial or storage purposes. Converting it into a gym could create entirely different planning, parking, fire safety, accessibility and building-code considerations.

Retail premises → restaurant

A retail tenancy may physically appear suitable for food premises but require assessment of ventilation, grease arrestors, waste storage, mechanical exhaust, sanitary facilities, hours of operation and fire safety.

Office → education or tutoring premises

The commercial zoning may accommodate a range of activities, but the scale and nature of the operation can affect the appropriate land-use definition, building classification and approval pathway.

This is why a planning review should ideally occur before an unconditional lease is signed or significant fit-out expenditure is committed.

4. When a Lease Variation May Be Required

If the proposed business does not fit within the existing permitted-use provision, the landlord and tenant may agree to amend the lease.

This would ordinarily be formally documented rather than relying on an informal conversation or email.

A variation may also need to address related issues such as:

• Fit-out works;

• Structural alterations;

• Building services;

• Signage;

• Mechanical ventilation;

• Electrical capacity;

• Plumbing;

• Insurance;

• Operating hours;

• Noise;

• Waste management;

• Deliveries;

• Make-good requirements; and

• Responsibility for obtaining statutory approvals.

From a tenant's perspective, it can also be important to consider making the transaction conditional upon obtaining the necessary planning and regulatory approvals.

Legal advice should be obtained regarding the appropriate lease documentation and contractual protections.

5. Change of Use When Assigning a Retail Lease

Additional considerations arise when an existing tenant is assigning a retail lease to another business.

Section 39 of the Retail Leases Act 1994 (NSW) identifies specific circumstances in which a landlord may withhold consent to an assignment.

Importantly, one of those circumstances is where the proposed assignee intends to change the use to which the shop is put.

Other grounds can include matters relating to the proposed assignee's financial resources or retailing skills and failure to comply with the statutory assignment procedure.

This means someone buying an existing retail business or taking over a lease should not assume that the lease can automatically be transferred while simultaneously changing the nature of the business.

The proposed use should be investigated early.

6. The 28-Day Assignment Process

The Retail Leases Act also establishes a procedure for seeking landlord consent to an assignment.

Among other things, the request needs to be made in writing and the tenant must provide information reasonably required regarding the proposed assignee.

Under section 41, the landlord generally has a 28-day decision period once the relevant statutory requirements have been met.

Where the tenant has complied with the procedure and the landlord does not provide written notice consenting to or withholding consent within the applicable decision period, consent may be deemed to have been provided.

Because assignment transactions can involve strict documentation requirements and timeframes, parties should obtain appropriate legal advice.

7. Don't Forget the Fit-Out

A change of use frequently involves much more than changing the business name above the door.

Different businesses place different demands on buildings.

A proposed use could require:

• New internal walls;

• Treatment or consultation rooms;

• Additional toilets;

• Accessible facilities;

• Mechanical ventilation;

• Kitchen exhaust;

• Grease arrestors;

• Increased electrical capacity;

• Fire safety upgrades;

• Emergency lighting;

• New plumbing;

• Acoustic treatment;

• Signage;

• Accessibility upgrades; or

• Changes to entrances and exits.

Landlord consent to the use does not necessarily constitute landlord approval for the building works.

Similarly, planning approval for the use does not automatically authorise every element of the fit-out.

Depending on the circumstances, the works may be exempt development, complying development or require development consent and subsequent construction certification.

Complying development provides a fast-track pathway for qualifying commercial, industrial and residential development, but the proposal must satisfy the prescribed development standards and site requirements.

8. Consider Make-Good Obligations Before Carrying Out Major Works

Tenants should also consider what happens at the end of the lease.

A specialised fit-out can create substantial make-good liabilities.

For example, converting a conventional retail tenancy into a restaurant could require extensive mechanical ventilation, plumbing, kitchen infrastructure and electrical upgrades.

If the lease requires the premises to be reinstated at expiry, removing these works could become a significant additional cost.

Before undertaking major works, the parties should clearly establish:

• Who pays for the fit-out;

• Who owns the improvements;

• What must remain when the lease expires;

• What must be removed; and

• Whether the premises must be returned to their original configuration.

These matters should be addressed as part of the lease and fit-out documentation.

9. What Happens If a Tenant Changes the Use Without Approval?

Operating a business outside the permitted use identified in a lease can expose the tenant to a potential lease breach.

There may also be planning consequences if the activity has commenced without the necessary development approval.

This can become particularly problematic where substantial money has already been invested in:

• Fit-out;

• Equipment;

• Signage;

• Staff recruitment;

• Marketing; and

• Opening the business.

A business may consequently find itself with a signed lease and completed fit-out but unable to lawfully operate as intended.

Landlords can also face difficulties where an unauthorised use creates issues involving building compliance, insurance, noise, fire safety, waste, customer traffic or council enforcement.

Early due diligence benefits both sides.

10. A Practical Seven-Step Check Before Changing Use

Before committing to a new business use, tenants should consider the following process:

Step 1 — Review the lease

Identify the existing permitted-use clause and determine whether the proposed business falls within it.

Step 2 — Confirm landlord requirements

Establish whether landlord consent or a formal lease variation is required.

Step 3 — Undertake a planning review

Confirm the zoning, applicable land-use definition, existing approvals and whether the proposed activity is permissible.

Step 4 — Determine the planning pathway

Establish whether the proposal can proceed as:

Exempt Development → Complying Development/CDC → Development Application/DA

depending on the relevant planning provisions and characteristics of the property.

Step 5 — Assess the proposed fit-out

Determine whether building, fire safety, accessibility, mechanical, hydraulic, acoustic or other specialist requirements will arise.

Step 6 — Coordinate the lease and planning processes

Where possible, avoid making major financial commitments until there is sufficient certainty around both landlord approval and statutory approval.

Step 7 — Document the outcome

Ensure lease variations, landlord approvals and statutory approvals are properly documented before commencing the new operation.

The Key Point: Check the Property Before Committing to the Business

When considering a new retail or commercial tenancy, there are effectively three questions that should be answered:

1. Does the lease allow the use?

2. Does the planning framework allow the use?

3. Can the building physically and legally accommodate the use?

A "yes" to only one of these questions is not enough.

The strongest approach is to investigate the lease, planning controls and building requirements together before committing substantial capital to the premises.

How Urbanismo Can Assist

Urbanismo assists businesses, landlords, commercial property agents and tenants in determining the planning pathway for proposed commercial and retail uses across NSW.

Before signing a new lease, varying an existing lease or committing to a commercial fit-out, we can undertake an initial Planning Pathway Review to assess matters including:

• Land zoning and permissibility;

• Existing approved use;

• Proposed change of use;

• LEP and planning controls;

• Exempt development opportunities;

• CDC eligibility;

• Development Application requirements;

• Heritage constraints;

• Fit-out planning considerations;

• Signage approvals;

• Council requirements; and

• Coordination with certifiers and other specialist consultants.

Early planning due diligence can help identify approval issues before they become expensive problems.

Considering a new commercial premises or changing the use of an existing tenancy?

Contact Urbanismo to discuss the property and determine the most appropriate planning and approval pathway before committing to the lease or fit-out.

This article provides general planning information only and should not be relied upon as legal advice. Parties should obtain independent legal advice regarding retail leases, lease variations, assignments and their rights and obligations under the Retail Leases Act 1994 (NSW).