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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