Lec 6: Commercial Leases (Part 1)

Why commercial leases are important

For Lor: commercial prop is investment –

Return is impt for success of investment + value if later sell/Mg

Secure, good Lees for long terms  easy management

For Lee: L is asset of business

Security of tenure is usually of great importance to a business

Amounts of money involved may be considerable (rent, rent review, outgoings, fit out expenses, make good costs)

Lee may want to sell business and assign/sublet L to business purchaser.

Solicitor

Should not act for both Lee and Lor – inherent COI (diff bargaining positions)

If acting for Lee and Gors  need to send Gors for independent advice

Should take care to give correct/ clear explanations of the terms and their effects on the client and his/her business

Renewal provisions – sufficient for client’s business

Relocation provisions – any subsidy if Lee forced to relocate

If there are any competitors in shopping centre – which are allowed

Relevant legislation

Conveyancing Act 1919

Real Property Act 1900

Retail Leases Act 1994

Duties Act 1997

Points to consider:

Is the transaction a lease or a licence, or an agreement to lease?

License: Lcee does not get an interest in the land

Agt to L: deed with L attached which provides that upon certain event, parties will enter L

Eg land is not fully developed yet

Eg Lor is not owner of land yet (going to purchase soon)

Eg Existing Lee still in possession

Eg L conditional upon getting approval/consent (Council for development, buildilng, subdivision)

Does the Retail Leases Act 1994 apply?

Should the lease be registered?

Formal requirements

Is mortgagee’s consent required?

Costs

Common mistakes:

 Gave incorrect advise re whether C bound by Agt for L (or if it can get out): Hanflex Pty Ltd v N S Hope & Assoc (1990) ANZ Conv R.88

 Failed to explain meaning/effect of clase eg. (annual rent review cl): CountyPersonnel (Employment Agency) Ltd v Alan R Pulver & Co (1987) 1 WLR 916

 Assuming there is no L, because it is called a license

 Assuming L is ordinary commercial L rather than retail L

 Forgetting to get s16(3) cert under RLA

 Allowing Lee possession BEFORE entering L: Helou & Ors v Bong Bong P/L & anor trading as Regional Retail Properties (2006) NSWADT 128

RLA

Does the Retail Leases Act apply?

Consider:

Is it any of below:- defined s3

‘retail shop lease’ or ‘lease’: any agt where Lee is granted (for value) right of occupation to prem for purpose of use of prem as RS

Right doesn’t have to be exclusive occupation

Express/implied

Oral/writing

‘retail shop’:

Sch 1 business: prem used wholly/predominantly for carrying of 1+ of business in Sch 1 OR

prem used for carrying on any business in retail shopping centre

‘retail shopping centre’: cluster of premises with ALL 4 attributes:

At least 5+ prem used wholly/predom for carrying on Sch 1 business

Prem all owned by same Lor or lots in single strata plan

Prem located in 1 buildings or 2+ adjoining (or separated only by common areas) owned by owner of retail shops

Cluster promoted, generally regarded as shopping centre, shopping mall, shopping court, shopping arcade

Schedule 1:

Most shops, stores, supermarkets are covered.

Eating places/food outlets – covers almost all: restaurants, cafeterias, coffee lounges, food courts, snack bars, takeaway food shops

Service providers – art galleries, barbers, beauticians, beauty therapists, boot/shoe repairer, dry cleaner, engraver, fast photo processor, hairdresser, lottery, optometrist, photocopy

Does exception apply?

Shops with lettable area (excl car park, storage area not attached to shop prem) of 1000sqm+: s5(a)

Shops used wholly/predom for carrying on business by Lee for Lor: s5(b)

Shops within cinema, bowling, skating rink operated by same person: s5(c)

Prem in office tower above retail shopping centre: s5(d)

Prems prescribed in regs: s5(e)

Leases less than 6mths and no renewal: s6A(1)

But applies where successive, extended, renewed L – Lee in continuous possession for 1 yr+: s6A(2)

Leases (incl option) of 25yrs+: s6(1)(b)

Leases entered before 1 Aug 1994: s6(1)(c)

If Retail Leases Act applies:

IF L inconsistent with RLA  provisions will be void: s7

Cannot advertise prem for L UNLESS Lor gives Lee (on start of neg): s9

Copy of L (avail on advertising)

Doesn’t need details of Lee, rent or L term: s9(a)

Retail tenancy guide

Lor disclosure statement: s11

Every neg, Lor must give DS min 7 days BEFORE L entered into: s11(1)

MUST include prescribed form for Lee’s DS: s11(1)

Contents: rent, rent review, outgoings, any reps made by Lor to Lee, future disturbance or refurbishment

If retail shopping centre: if Lor aware of any change to tenant mix

Prudent to get signed acknowledgement from Lee that they received DS

Prescribed form in Sch 2.

Failure is an OFFENCE!

Lee can get out of L within 6 mths if:

DS not given at least 7 days before L entered

DS incomplete

DS contained materially false/misleading info: s11(2)

Cannot terminate though if: (3)

Lor acted honestly, reasonably and ought reasonably be excused for failure; AND

Lee is in substantially as good position as if failure not occurred

If L by way of renewal – Lor can just give disclosure update (updates prov of earlier DS) + earlier DS : (4)

Lee disclosure statement: s11A

Must give to Lor within 7 days after Lee receives Lor’s DS: (1)

Failure to comply is offence of 50PU max: (3)

If L by way of renewal – Lee can just give disclosure update (as above): (2)

Minimum 5 year term (incl any option etc): s16

If agree < 5 yrs, get certificate under s16(3) (signed by sol or lic conveyancer) within 6 mths after L entered into: s16 (3)

Excludes any option or agt entered into AFTER L entered into: s16(1)

If <5yrs, L term will be taken to be 5 yrs: s16(2)

Retail Lease Bond Scheme: Pt2A

Bonds are not compulsory – can use bank guarantee or other security instead

But if Lor requests cash bond and gets it, must lodge bond it within 20 business days with Dir Gen of Dept of State and Reg Development

Of receiving bond; OR

When L becomes binding

Bond held (invested) until end of L

Any disputes referred to Retail Tenancy Disputes for mediation  ADT (Retail Leases Division)

FORMAL REQUIREMENTS

If Agt to L:

 Need concl agt with essential terms (parties, prem, rent, term, main L terms) AND

Need adequate written note/MEMO of agt: s54A CA

Capacity

18+ yrs old

If stat corp: examine their stat to see if they have power to grant lease/option

If liquidator: limited power to grant L (may req approval of Sup Ct or Creds)

If legal reps (Exec/Admin) and trustees: leasing powers depend on will, trust, statute (may restrict duration/option)

Company: has all the rights of real person and need to execute with s127 CA

Partnership: all partners need to enter into agt (but depend on PA)

Subdivision approval

S4B(1)(3) of EPA and s23F-I of CA

If L is of part of land (subdivision) and term+ option > 5 yrs 

Req local gov permission to subdivision and registration of subdivision plan BEFORE reg L

BUT this only applies to subdivision of land NOT building. Thus excludes:

L re whole/part of building, not land

L re whole land (incl improvements)

Foreign Acquisition:

Foreign Acquisitions and Takeovers Act 1975 (Cth)

Approval required IF:

Term + option > 5yrs OR

If reg 3(f) exemption does NOT apply:

Lee’s activities incl land acquisition/development or operation of hotels, motels, tourist facilities; OR

Prem cannot be used immediately and in its present state (being completed or requires fit out)

If approval req  Foreign Investment Review Board

If approval not obtained  Treasurer may prohibit tran or dispose of L

To register or not to register?

Term > 3 years reg to be effective at law: s41 and 53(1) RPA

Term < 3 years  reg not required BUT should be reg:

S42(1)(d): reg indefeasaibility EXCEPT for unreg L < 3 yrs

BUT exception does not apply:

If term+1st option > 3 yrs: s42(1)(d)(ii)

To protect 2nd option (eg. 2 yr term, 1 yr option, 1 yr option)

To protect tenancy if possession/commencement is far off: s42(1)(d) only applies on commencement/possession

Registration: LPMA req:

Original (will be returned)

1st/last pages of annexures signed: RP Reg 2008 Sch 2(11)(b)

If not reg, prudent for L to be form of Deed (to overcome formal problems): s23B(1), 23B(2)(d), s23D(2) CA

Commencement of the lease

Commence on fixed date or ascertainable event – need certainty otherwise void

Lease will be void if commencement date is not identifiable – Darling Point Securities v Industrial Equity Pty Ltd (1991) ANZ Conv R 537

Lor should NOT allow possession before execution of L

Duration of the lease

May be for a fixed term, or

Life of the lessee, or

Life of a specified person

If perpetual  void unless authorised by statute in particular circumstances

Commencement & termination date should be shown on the lease

Mortgagee’s consent

L will not be valid on Mgee UNLESS Mgee consents before reg of L: s53(4) RPA

If Mgee didn’t consent – Lor breaches Mg

Mgee can recover possession

Lee can sue Lor for breach of L covenants etc

‘Green’ lease provisions

Can put prov in L or green L schedule – deal with energy efficiency and sustainability issues

Eg. Energy efficiency use, water and waste reduction, sustainable building materials, recycling, sustainable fit outs and alterations, sustainable committees involving Lee and Lor

L COSTS

Costs

Costs arrangements should be set out in L – cover:

Which party responsible for costs of prepping L (what portions)

Should each party pay own legal costs

Should Lee be liable for rego fees

Who should be liable for costs of L neg and L drafting

Subsequent default by Lee

Any consents to L

In NEW L, Lor CANNOT seek/accept payment of L rep costs: s14(1)

L prep costs: legal or other expenses incurred by Lor in connection with preparation or entering into retail shop lease (excep for rego fees): s3

Any prov is void if it requires above

If so, offence max 100 PU: (2)

Lor CAN req Lee to pay reasonable sum for L prep costs incurred in amending L that Lee requested, EXCEPT for: s14(4)

Amendment re particulars of Lee, rent or term

Amendment to fix failure by Lor to include/delete a term which had been agreed to by Lor/Lee

Amendment requested before Lor is given Lee DS

Lee is not obliged to pay unless Lor provides copy of any acct re expenses: s14(5)

S45 applies similarly where renewal/extension of L.

Duty: the Duties Act

Duty abolished on leases (new L) executed after 1 Jan 2008: s164(2)

Duty may be payable on leases executed before 1 Jan 2008

Duty still payable on: Ch 2

Premium: amt paid to Lor to get L – ad valorem duty: s53A

L entered into pursuant to option (which Lee paid money to be granted)

Transfer /assignment of L – nominal duty if part of business trans

Surrender of L – nominal duty if part of business trans

Finding the ‘cost’ of a lease

S166 – the cost is the aggregate of:

Rent payable during the term of the lease

Any premium payable

Any rates & taxes paid or payable on behalf of the lessor

The value of any improvements & additions to the leased premises

Any royalties payable under the lease

Calculation of stamp duty

CPI method: once & for all assessment: s174

An example – where CPI is 5%

Rent year 1 = $10,000

Rent year 2 = $10,000 x 105% = $10,500

Rent year 3 = $10.500 x 105% = $11,025

Total rent = $31,525

Stamp duty calculation - $31,600 x 35 divided by 10,000 = $110.60 duty payable

Under s173 Duties Act: estimate & subsequent adjustment -

Example:

Annual rent = $20,001

Term = 3 years

3 x $20,001 = $60,003 (round up to $60.100)

$60,100 x 35/10,000 = $210.35 s.d.

Registration and service on Lee: s15

Not reg: after duty paid, Lor must give Lee stamped copy within 1 mth of duty paid

Reg: after duty paid, must reg within 1 mth and give Lee reg/stamped copy within 1 mth of reg.

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