The Retail Leases Regulation 2022 (NSW), which commenced on 1 January 2023, has expanded the definition of 'retail shop' to now include gyms (and similar) and small bars. Landlords and tenants of such premises should consider whether they are impacted by this regulatory change.

By adding 'Gymnasiums and fitness centres, including yoga, barre, pilates and dance studios' and 'Small bars with a maximum patron capacity of 120' to Schedule 1 of the Retail Leases Regulation 2022 (NSW) (Regulation), the NSW legislature has included these businesses within the coverage of the Retail Leases Act 1994 (NSW) (Act).

The provisions of the Act now apply to such permitted uses under a lease entered into on or after 1 January 2023, irrespective of whether the premises are located within a retail shopping centre. Leases of premises for gyms and small bars are now retail leases under the Act (assuming no exclusion applies).

In addition, tenants operating gyms and small bars (even where the lease in question was entered into before 1 January 2023) now have access to the cost effective mediation dispute resolution mechanisms provided under the Act, regardless of whether their business is located within a retail shopping centre.

The changes to the Act appear to align with the increasing popularity of these types of businesses.

The Retail Leases Act 1994 (NSW) governs retail leases in New South Wales by imposing certain legal and financial requirements on parties to a retail lease. In the event of any inconsistency between the provisions of a lease and the Act, the Act will prevail. The Act also provides for a mandatory dispute resolution regime that prevents parties from taking a retail tenancy dispute to NSW Civil and Administrative Tribunal (NCAT) or court unless they have first attempted mediation. 

To be covered by the Act, a business must fall within the definition of 'retail shop' set out in section 3 of the Act (and not otherwise be excluded from the operation of the Act by certain other provisions).

'Retail shop' means premises that are:

• used for the carrying on of one or more of the businesses prescribed in Schedule 1 of the Regulation, or 

• located within a 'retail shopping centre' (as defined in the Act): section 3 of the Act.
   

Prior to 1 January 2023, small bars and businesses in the health and fitness industry were not included within the list of prescribed businesses in Schedule 1 to the Act.
This meant that if a small bar or health and fitness business was, for example, located in standalone premises outside of a 'retail shopping centre', the lease of such premises did not fall under the jurisdiction of the Act.

The Regulation has now included gyms and small bars within the coverage of the Act.

The Regulation made these changes by:

• repealing Schedule 1 of the Retail Leases Act 1994 (NSW) and replacing it with a new, slightly expanded Schedule 1 to the Regulation (being the list of designated 'retail shop businesses'; 

• amending Schedule 1 to include 'Gymnasiums and fitness centres, including yoga, barre, pilates and dance studios' and 'Small bars with a maximum patron capacity of 120'; and

• omitting the exclusion 'except where goods are for consumption on the premises', which had followed 'beer, wine and spirit shops' in the previous Schedule 1 list. 

The changes came into effect when the Regulation commenced on 1 January 2023. Assuming no other exclusion as provided for in the Act applies (such as the size of the premises, for example), a lease of premises to be used as a gym or small bar entered into on or after 1 January 2023 will fall under the Act. The parties must act in accordance with the Act when entering into the retail lease, the Act will override any inconsistent provisions in the lease and any dispute about the lease will be subject to the dispute resolution provisions set out in Part 8 of the Act.

Importantly, the Regulation also includes a transitional provision which provides that if premises become a 'retail shop' because of the start of the Regulation, the mediation provisions set out in Part 8, Division 2 of the Act will also apply to a:

1. lease of the premises entered into before the Regulation commenced; and 

2. lease of the premises entered into under an option or agreement made before the Regulation commenced.

This means that tenant operators of gyms and small bars are now able to make use of the mediation dispute resolution regime set out in Part 8, Division 2 of the Act (even if their lease commenced well before the Regulation came into effect and despite such pre-1 January 2023 leases not being retail leases). 

The key takeaway

Landlords and tenants of gyms and small bars should carefully consider the extent to which a lease of such premises is now regulated by the Act.