Although often a semi-standard document, a commercial lease can be full of traps. Professional advice from a commercial property lawyer is important for you to avoid these pitfalls in what is often a long-term commercial commitment.
If your lease is caught by the Retail Leases Act 1994 (NSW), even more considerations come into play and you are bound by certain procedural requirements in entering the lease. You need advice early in the process. Generally, the retail leases legislation is likely to apply if the premises being leased is in a retail shopping centre or if a prescribed business will be carried on in the premises pursuant to the lease.[1]
Registration
A lease for a term of 3 years or more (including any option period) is required to be registered at the NSW Lands Registry for the lessee to obtain an estate interest in the leased land. If you are the lessee, failing to register a lease can jeopardise your rights in the lease and your interest in the leased land, including in particular your right to exclusive possession (that is, your right to occupy and use the land or premises exclusively) and your right to continuation of the lease in the event the leased land is sold by the lessor during the lease term.
Rent and Rent Review
If you are a lessee, keep in mind that most lessors require rent in advance, together with a security deposit or bank guarantee.
Most leases will require a market rent review on the exercise of an option. The method of the market review should be thoroughly set out in the lease, to avoid dispute.
As a lessee, watch out for rachet clauses which prevents a rent review resulting in a rent reduction (even on a market review). Under the retail leases legislation in NSW, rachet clauses are deemed to be void (however they may still be valid if the retail leases legislation does not apply).
Outgoings
Lease disputes often arise in connection with the responsibility for payment of outgoings. Your lease should be carefully drafted to accurately describe which party is responsible for payment of which outgoings and in what proportion.
The definition of outgoings in a lease varies greatly. It often extends to rates, insurances, strata levies and land tax.
If you are a lessor, you will need to ensure the rent you agree to is adequate having regard to the lessee’s proportion of outgoings (that is, is your lease a gross lease or a net lease)?
Repairs and Maintenance or Structural Repair?
Many lease disputes arise in distinguishing between repairs and maintenance and structural repairs. In your lease, the interests of both parties should be balanced with any contributions towards capital works, fixtures and fittings and these contributions and obligations must be clearly documented.
Option Periods
Strict timeframes usually apply during which a lessee may exercise an option and specific requirements will need to be adhered to in order to ensure the option exercise is valid. The courts interpret compliance with option clauses very rigidly, so if you are a lessee you need to be careful that you understand when and how you can exercise and that you diarise important dates.
Adequately Identify the lease area and link car parking licence
The exact location and area of the lease premises must be carefully recorded in the lease document. This is particularly important where the lease is of part of a building or part of a lot (note that if it is part of a lot and the lease is for a term of 5 years or more, you will need to subdivide the lot).
The description in the lease of the leased premises should include the area (in square metres or hectares) leased and refer to an annexed plan showing the location of the premises and of common areas.
If there are carparking spaces included in your lease, make sure they are clearly described and identified. It is common for car parks to be included by way of a separate licence, which often the lessor can revoke at any time so as a lessee you should seek to link the car park licence to the term of the lease.
Permitted Use
As a lessor, you will want to control the sort of business activities carried out on your land. As a lessee, you need to ensure the description of the permitted use of the leased premises is sufficiently broad to encompass whatever activities you intend to carry on in your business. Also, a lease with a broad permitted use, will be more easily assigned to a replacement lessee.
Therefore, the description of the permitted use under a lease must be considered and drafted carefully.
Regardless of the described permitted use, as a lessee it will be your responsibility to ensure your intended use of the premises complies with Council zoning and other regulatory requirements.
Fit out and Make Good
As a lessee you will likely be required to fit out the lease premises to suit your business at your own cost and to make good the premises to its original condition at the end of the lease. Watch out for onerous make good provisions, requiring complete repainting and replacement of carpets and flooring.
Guarantee
If you are the director of a company lessee, most lessors will require you to personally guarantee the company lessee’s performance of the lease terms including rent payments.
Assignment
If you want the ability to assign or sublet the lease of the premises, make sure you check if the lease prohibits assignment or a change in control of the lessee company (that is, a significant shareholding change). Most leases permit assignment only with the lessor’s consent, which the lessor can withhold unless certain financial and other conditions are met by the proposed assignee.
Property and other enquiries
Finally (although the number of things to be aware of in entering a commercial lease is not exhaustive), in entering a lease you need to investigate the property title details and the lessor’s ASIC registration status and details.
If there is a mortgage over the land being leased, the mortgagee’s consent to the lease will be required. Without mortgagee’s consent, a mortgagee may not be required to recognise your lease if they take possession of the leased land.
More Information
If you have any queries in relation to this article or other matters relevant to commercial or retail leases, please contact KS Law.
The content of this article is intended to provide a general guide to the subject matter. Specialist individual advice should be sought about your specific circumstances.
[1] We recommend you seek individual professional advice to confirm if the Retail Leases Act 1994 (NSW) applies to your lease.
